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Old 07-02-2018, 02:04 AM
 
Location: Silicon Valley
2,747 posts, read 1,209,866 times
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Awhile ago, I worked at company that considers themselves a Netflix rival in the overseas market. Even internally they knew once a customer got to a point that they would spend $10 a month on content, they were gone, but they were making inroads in capturing the market at $5 and less.

So I did my projects, but the place was of course hemorrhaging cash, but kept going by old school broadcasters looking for a way to migrate to a new market the monetize their content.

It's truly a golden age for those making content at the moment, but the distribution company was never going to make money. In their longest range business plan they were never going to make money. They couldn't even figure out in truth when it would start losing less money. All they knew is that top line growth was sexy and to get that they needed breakout content.

Now we here Netflix is putting out $12B a year in content creation. To put that in perspective, that's basically the size of the entire US box office for movies....at theatre level revenue, not all you can eat for $10 a month. Why the move to produce their own? Amortization.

If Netflix buys rights to show....Thor. It really has no choice but to amortize it over the timeline in which it has rights to show Thor. So if it signs a 3 year deal, it amortizes it over the three years. If they sign longer...it might be longer.

But if they produced the show, then the show is amortized over...10 years...and that's after the final show has been released on the platform.

Or how they put it:

"Based on factors including historical and estimated viewing patterns, we amortize the content assets (licensed and produced) in “Cost of revenues” on the Consolidated Statements of Operations, over the shorter of each title's contractual window of availability or estimated period of use or ten years, beginning with the month of first availability. The amortization is on an accelerated basis as we typically expect more upfront viewing, for instance due to additional merchandising and marketing efforts. We review factors that impact the amortization of the content assets on a regular basis. Our estimates related to these factors require considerable management judgment."

Management judgement...as in...we think about it an make a call as what our expense should be?

At the end of 2017, of their $19B in assets, approximately $15B of this was in unamortized content costs. Further, $7.4B of their liabilities were related to content that had not been paid for yet. Their accounting isn't necessarily wrong, but that management judgement is essentially what will decide if the company is profitable or not.

So long as they keep growing, it won't matter. They can keep growing so long as they have money (or credit) to amass an ever larger war chest of content.

They've truly been a dominant company in terms of changing the landscape permanently....but can they do it and turn a positive cash flow (and forget that free cash flow bs number...go with the Cash Flow Statement.)
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Old 07-02-2018, 04:47 AM
 
2,240 posts, read 1,386,969 times
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Financial statements are full of management estimates. That doesn’t mean those estimates are open to unfettered manipulation to decide your profit. They will have to have an accounting policy strictly outlined of their treatments. It’s not like they’ll be able to pick and choose positive outcomes every time. ALL book depreciation and amortization is a management estimate. They will have to provide support for why they chose the amortization timeline. The Big Four auditing firm that has Netflix as a client will no doubt hammer management’s interpretation if it strays away from the accepted industry standard. They most certainly have in-house national experts specializing in the entertainment business. The firm will have access to what other companies are doing for similar intellectual properties.

For example, it’s no different than management estimating the useful life of tooling and other PPE as it relates to a particular vehicle model in the automotive industry. Those fixed assets generally have a 2 or 3 year accelerated book depreciation since once the production run is over for that particular make and model the assets have lost their value. Netflix outright states they’re doing something similar with its amortization. Ie taking a higher hit earlier on with an accelerated schedule because their revenue is frontloaded, and so should the expense against those revenues.

Last edited by Thatsright19; 07-02-2018 at 05:28 AM..
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