Much has been made of the off-balance-sheet streaming obligations at Netflix, Inc. (NASDAQ:NFLX). Many critics see this growing pile of future content costs as a Sword of Damocles, ready to fall at any time and kill Netflix, Inc. (NASDAQ:NFLX)’s business model. The grand total is up to $6.4 billion now, for crying out loud! There’s no way Netflix will be able to pay these bills!
Call me crazy, but I don’t see it that way. Rather than an insurmountable heap of crushing costs, I see an earnest attempt to give investors some visibility into future plans. And I like what I see.
This is the chart that scares Netflix, Inc. (NASDAQ:NFLX) critics:
Yes, the top of these mountainous columns do overshadow the company’s annual sales in recent quarters. But you know what? That’s five years of future content arrangements we’re looking at.
That includes the long-term blockbuster deal with The Walt Disney Company (NYSE:DIS), which will give Netflix, Inc. (NASDAQ:NFLX) exclusive streaming rights to everything the House of Mouse produces. That includes the Star Wars franchise, the Marvel steamroller centered around the Avengers, anything Pixar touches, and, yes, Mickey Mouse, too. That deal kicks in by 2016, placing the obligations in the “1-3 years” category and beyond.
You should see the total column rising significantly in Q4 of 2012, as the The Walt Disney Company (NYSE:DIS) deal was announced during that quarter.
You’ll also note that the short-term piece of the pie, where bills are due within one year, is staying far below annual revenues. And that’s not even apples to apples — it’s trailing revenues vs. forward costs for a fast-growing company. A very conservative view, for sure.
How do these one-year obligations compare to actual costs and revenues one year later, then?