How Netflix Funded Its Content Production — With The Help Of Junk Bonds

Mar 5, 2020
Originally published on March 6, 2020 1:59 pm
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Netflix started as a DVD library for subscribers before it started licensing films and shows for streaming, but now TV and movie studios want to keep their creative properties and sell access on their own streaming platforms. That's forced Netflix to change its business model and to push deep into the world of junk bonds. Stacey Vanek Smith and Cardiff Garcia of Planet Money's daily economic podcast The Indicator explain why.

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STACEY VANEK SMITH: In 2019 alone, Netflix lost "Friends," "The Sixth Sense," "Coco," "Star Wars," "Pulp Fiction." The reason? Competition - that is the answer. The movie studios and networks that own these shows and movies are taking them back because they are launching their own streaming services - Disney, CBS, HBO, ESPN, NBC, Warner. Richard Cooper is the research director at Ampere Analysis, which specializes in media research. He says Netflix realized if it was going to survive, it was going to have to make a big pivot.

RICHARD COOPER: They are changing, really, who they are, from a streamer of other people's content to a studio in their own right.

VANEK SMITH: Netflix has been doing just that. They've made big-budget, lavish shows, Oscar bait-type stuff like "The Irishman" and "Marriage Story." They also made "The Crown," the series "When They See Us."

CARDIFF GARCIA: But here's the thing about all of this content - it costs a lot of money to make; I mean, a lot, a lot.

COOPER: We've calculated that they've spent just over sort of $10 billion.

GARCIA: And when a company wants to borrow money fast, one way they can do it is by issuing bonds. A bond is like a little loan. So an investor will buy a bond, and just like a loan, after a certain period of time, the investor gets that money back, plus some interest.

VANEK SMITH: But Netflix has taken on so much debt compared to what it's earning its bonds are considered risky; that is why they're called junk bonds. Generally, those bonds have to pay out a little more than other bonds because of that risk. You have to kind of sweeten the pot to entice people.

GARCIA: Not that Netflix has any issues with that. Richard Cooper says that in the last few months of 2019, Netflix issued more than $2 billion worth of bonds, and investors went crazy for them, snapped them right up.

COOPER: A lot of investors thought it was worth the risk.

GARCIA: Yeah, "Stranger Things" - junk bonds.

VANEK SMITH: "The Crown" - junk bonds.

GARCIA: Stacey's favorite movie, "The Irishman" - junk bonds.

VANEK SMITH: (Laughter) It is like a house of cards.

GARCIA: That was junk bonds, too, by the way.

VANEK SMITH: (Laughter) Still, Richard says, Netflix is showing that it can hold its own in the content creation arena. They've made a bunch of big hits in all these different genres. And he says they have no choice; Netflix is in a debt-or-death situation. So they're going with debt.

GARCIA: Really going with debt. Right now, says Richard, they're basically buying everything that moves - books, video games, even podcasts.

VANEK SMITH: Whew. And this is a formula that has been working for Netflix. They had great success with a show called "The Witcher." "The Witcher" was a series of bestselling books that Netflix adapted last year into a TV series.

COOPER: One of the reasons that they bought into "The Witcher" is that the books themselves have quite a substantial following, where you're effectively guaranteeing that people will subscribe to Netflix just to watch "The Witcher."

GARCIA: And it worked. "The Witcher" was reportedly the most popular show on any platform for months, like, anywhere on Earth - it was that popular. But for all of the billions it's spending on making shows, only about 10% of Netflix's content is made by Netflix. The remaining 90% is owned by other studios and networks, so it could still get yanked away.

VANEK SMITH: You know what won't get yanked away?

GARCIA: "The Witcher?"

VANEK SMITH: "The Witcher" - Netflix has announced it's making a "Witcher" Season 2, coming soon to a junk bond market near you.

Stacey Vanek Smith.

GARCIA: Cardiff Garcia, NPR News.

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