Netflix Doubles Down on Original Content, Accelerates Amortization
NEW YORK ( TheStreet) -- Netflix
In better-than-expected third quarter earnings released on Monday, Netflix said it will accelerate its amortization of upfront expenses the firm incurs for its original series. The accounting change, which Netflix said it would consider in the second quarter, did not tip the company's overall cash flow negative for the quarter.
Initially, Netflix used straight line amortization accounting to reflect the expenses it incurs to invest in original content. Now, the company will be accelerating that amortization, given heavy initial user consumption of new shows that are released on the streaming site.
"When we started with original content we didn't have specific data about viewing patterns over time for content that premieres on Netflix. We decided to use straight line amortization based on our experience with TV series from other networks," Netflix said in its third quarter earnings release.
"Now we have more specific viewing data for original content which shows more viewing in the early months of a show's debut, so we are accelerating the amortization of such content commensurately," the company added.
Previously, Netflix capitalized spending on original series, and then amortized those costs on a straight-line basis over the shorter of four-years, or the show's license period.
Netflix said on Monday the faster amortization of original content is small enough that it won't change the firm's profitability and margin targets. Earnings results also indicate the firm was able to continue generating free cash flow for the second straight quarter. Netflix generated $7 million in free cash flow (FCF), reversing year-ago negative free cash flow of $20 million.
When Netflix first embarked on its original content strategy, it made heavy cash payments to create series such as House of Cards , Hemlock Grove , Orange is the New Black and new seasons of Arrested Development, which tipped the firm's cash flow negative for three out of the last five quarters .
TheStreet first explained Netflix consideration of accounting changes in July.
Netflix said it was still judging how to recognize costs that the over 30 million member streaming service incurs to produce its original shows in the second quarter. The company also disclosed it had amortized about $150 million in spending on such original series through the first half of 2013. "In terms of relative size, of the approximately $3 billion in content library net book value we are amortizing, currently around 5% is for Originals," Netflix said in July.
Now, the company expects to double its overall investment in original content spending. "In 2014, we expect to double our investment in original content (though still representing less than 10% of our overall global content expense)," Netflix said in the letter to shareholders.