While you spent the holidays streaming \u201cBird Box,\u201d \u201cBlack Mirror: Bandersnatch\u201d and\/or re-watching \u201cThe Office\u201d for the hundredth time, Netflix Inc. was playing out a corporate drama of its own\u2014poaching Activision Blizzard Inc. Chief Financial Officer Spencer Neumann to be its new CFO.<\/p>\n
Just before the\u00a0news emerged, Activision abruptly announced that it would\u00a0fire Neumann, who had agreed to a provision that barred him from negotiating for a new job until the last six months of his contract. It was a clear sign that Neumann wasn\u2019t willing to pass up a chance to work at Netflix, this era\u2019s preeminent high-flying, money-burning media company.<\/p>\n
Neumann\u2019s mandate at the company is clear. A Wall Street Journal\u00a0headline\u00a0put it this way: \u201cNew Netflix CFO to Tackle Cash Flow Conundrum.\u201d<\/p>\n
Buzzy original thrillers like \u201cBird Box,\u201d or choose-your-own-adventure gambits like \u201cBandersnatch\u201d aren\u2019t cheap. And as Netflix\u2019s public profile has climbed, so have its losses. Analysts predict that the company will report about $3 billion in negative cash flow for 2018, up from $2 billion in the previous year.<\/p>\n
Fans of wildly expensive, high-quality television should hope the company can figure\u00a0out its balance sheet.<\/p>\n
The most obvious solution is for Netflix to just continue to increase the number of people who subscribe to its video-streaming service. Its core growth strategy has paid off so far. And recently, the company has taken on a more global focus, creating content for countries all over the world. As part of this approach, it could also further increase the price of a subscription.<\/p>\n
Another, more untested path would be to cater more to active users over less engaged ones. This is where the company has a lot to learn from Disney and Activision, Neumann\u2019s former employers. Both of those companies\u2014in very different ways\u2014do a great job of charging different customers vastly disparate amounts of money for consuming their content.<\/p>\n
Disney doesn\u2019t just charge you for a ticket to see Star Wars. If you\u2019re a superfan, you can buy action figures, go to a Disney theme park or watch \u201cThe Clone Wars\u201d on Netflix. There are endless ways to upsell customers based on their affection for a particular piece of intellectual property.<\/p>\n
The video game industry has a term for this\u2014whales. Many companies make the bulk of their revenue from a relatively small group of people, and modern games are built to extract the maximum amount from those willing to pay. That means selling in-game loot boxes, virtual items and special game editions. Activision is also exploring esports to further monetize its popular titles.<\/p>\n
Right now, Netflix charges most people the same amount, no matter how much they consume. Sure, you can pay slightly more for Netflix Ultra HD, but as the Disney and Activision examples illustrate, there are plenty of way to charge more without metering content.<\/p>\n
Think elite movie packages akin to WarnerMedia\u2019s HBO, merchandise tied to shows or some other version of in-app purchases.<\/p>\n
A third path for improving cash flow would be to simply spend less money. This might seem like an appealing tactic for a new CFO, but I\u2019d argue the levers here are partly out of Netflix\u2019s control. If you take for granted, as Netflix does, that it wants to be a once-in-a-generation global media company, then you need to work backwards from there. Netflix needs to pay what it costs to hire talent.<\/p>\n
Last year, there were media reports that Netflix\u00a0paid at least $150 million\u00a0to \u201clure\u201d showrunner Shonda Rhimes to its staff. Rhimes,\u00a0on Twitter, broke it down this way: \u201cWhy do reporters always say writers were \u2018lured\u2019? Like we’re children following a trail of candy. I created a $2B+ revenue stream for a major Corp with my imagination. I do not follow trails of candy. I am the candy.\u201d<\/p>\n