Is Netflix Really Going To Spend $13 Billion On Content In 2018? Yes. And No.

If you are a journalist who covers the streaming media service Netflix on a regular basis, one of the metrics you pay very close attention to is the company's annual costs for content. The company has been steadily increasing the amount it spends on acquired and original content each year, and in April of this year Netflix estimated 2018 content costs would be in the range of $8 billion.

The content cost number is closely watched in the media industry because of its size and scope, which made a June 28 piece in The Economist so perplexing. Like most pieces in The Economist, there is no byline, although it does show reporting came from three locations. The article offhandedly estimates Netflix's 2018 content costs as in the range of $12-13 billion, which is substantially higher than the most recent public estimate from the company. So is it an accurate estimate?

The article doesn't directly reference a source for the 2018 estimate, although several paragraphs later it mentions Goldman Sachs research as the source for a 2022 estimated content cost of $22.5 billion. But regardless of the source, plenty of media and entertainment reporters quickly cranked out stories hyping the higher 2018 number, with some variation of "OMG, Look How Much Netflix Is Spending Now!" The implication is that the higher figure is a previously undisclosed increase.

As it turns out, the estimate did originate at Goldman Sachs, and Heath Terry, Goldman Sachs Managing Director and Internet Equity Research Analyst & Technology Business Unit Leader explained the two differing numbers this way: "The $12-$13 billion refers to the cash they will spend on content this year. The $8 billion number the company cites refers to the amount of content spend they will amortize through their income statement."

The thing to remember when you see numbers that discuss how much money Netflix is spending on content is that there are two different numbers to consider. The number most often used by Netflix is the amortized number. That is the number on their income statement and it is essentially the money Netflix is spending on content that will be available in 2018. But because of long-term content contracts and its increase in original programming - which forces the company to spend money for production way ahead of its availability - Netflix will spend a much higher amount for content in 2018 if you include the costs of programming that won't be available to customers this year.

This distinction leads to the real important number to consider when trying to accurately judge Netflix's spending habits. While the company is continuing to increase the amount it spends on content each year, the big increase year-to-year has been the difference between the cash spend and amortized spend number. In 2012, Netflix spent about 10 percent more in cash spend than in amortized costs. That percentage is likely to be in the range of 40 percent in 2018.

And that's what to keep in mind when discussing how much money Netflix is spending on content each year. The cash spend costs and amortized costs are increasingly different. And they are both technically correct.