Netflix’s original content costs are ballooning

Netflix today once again showed that its subscriber growth is on a tear — especially its growth internationally — but a note in the report may indicate one of the biggest challenges the company faces going forward.

Netflix took home 20 Emmy awards this year, and that’s thanks to its enormous investments in original content. Shows like “Stranger Things,” “The Crown,” and “Master of None” are critical to getting new users to sign up to the service. But in today’s earnings report, the company said it’ll spend between $7 billion and $8 billion on original content next year. In short, making those shows and snapping up those awards is expensive — and vital to Netflix’s growth.

In August, Netflix’s Ted Sarandos said in an interview with Variety that he anticipates the company spending $7 billion on content in 2018. This spend is an escalating arms race, and while so far it’s turned out well for Netflix, it has to keep churning out those Emmy awards and keep users happy with its original shows. Netflix’s costs, in sum, have continued to rise over several quarters.

In the first quarter this year, Netflix said it would spend more than $1 billion on marketing in 2017. And in the fourth quarter last year, the company said it would spend $6 billion on original content in 2016, up from $5 billion in 2015. As the war for eyeballs continues to heat up and more and more companies start spending on original content, like Apple reportedly looking to spend $1 billion on original content in 2018, these costs are likely only going to escalate.

Here’s the chart for the company’s costs of revenue — which probably includes more than just the original content costs, but it’s a good example of what’s going on:

“Investors often ask us about continued access to content from diversified media companies,” the company said in its earnings report. “While we have multi-year deals in place preventing any sudden reduction in content licensing, the long-term trends are clear. Our future largely lies in exclusive original content that drives both excitement around Netflix and enormous viewing satisfaction for our global membership and its wide variety of tastes. Our investment in Netflix originals is over a quarter of our total P&L content budget in 2017 and will continue to grow. With $17 billion in content commitments over the next several years and a growing library of owned content ($2.5 billion net book value at the end of the quarter), we remain quite comfortable with our ability to please our members around the world. We’ll spend $7-8 billion on content (on a P&L basis) in 2018.”

So, it’s not super surprising to see some of those numbers go up over time. Great original content is expensive, and as the company continues to expand internationally, it’s going to have to consider what kind of original content will do well internationally. There are some examples like Netflix’s “3%,” and it looks like the content it’s already produced is helping buoy its growth abroad.

All this being said, those green bars for the company’s revenue keep getting bigger and bigger. So, too, have the company’s subscribers in both the U.S. and abroad. If those subscribers keep outpacing those costs, Netflix will probably be fine.

You can check out our full report on Netflix’s Q3 earnings here.