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A report from independent analyst and consultancy firm Ovum claims that Netflix’s current business model is unsustainable and its spending on content can’t carry on.
Ovum’s Angel Dobardziev said: “Netflix’s current business model burns massive and increasing amounts of cash, which we think is not sustainable.”
Ovum’s report identifies issue with how Netflix accounts for its content spend, stating it had “adopted a host of very aggressive content accounting assumptions that seek to paper over the deteriorating business economics and flatter its weakening profitability, both of which are the result of its spending beyond its means”.
“It recognises too small a proportion of these expenses right now, pushes more of these expenses into the future, and as a result flatters its earnings,” the report continues.
“We think Netflix will find it near impossible to maintain its subscriber growth while at the same time keeping tight control of the costs that are driving its cash burn,” Dobardziev further commented. “The exuberance surrounding Netflix has parallels with the dot.com boom, when tech companies with lots of users – ‘eyeballs’ – and no profits were reaching stratospheric valuations.”
“It has to spend vastly increasing amounts of cash on producing original content amid a very competitive content production and licensing market, but is unable to raise prices sufficiently to make meaningful profits due to intensifying competition,” he concluded.
Netflix announced last month that it was raising an additional $1 billion to spend on original content – such as Stranger Things, House Of Cards and Marvel’s Luke Cage – as its annual content spend he closes in on $6 billion. The streaming giant said earlier in the year that it intended for its online catalogue to contain 50 per cent original content within the next few years.