Content Spending

Content spending refers to the capital a company—typically in the media, tech, or entertainment industries—invests to acquire, license, or produce content. Think of it as the fuel for the modern entertainment engine. For companies like Netflix, Amazon, and Disney, this means pouring billions of dollars into creating original series, blockbuster movies, and licensing beloved classics to attract and retain subscribers. For video game companies like Electronic Arts or Take-Two Interactive, it's the budget for developing the next best-selling game. This isn't just a line item on a spreadsheet; it's a primary form of capital expenditure that directly drives a company's growth, brand identity, and competitive advantage. Unlike building a factory, however, the return on a new TV show or video game can be wildly unpredictable, making the analysis of content spending a crucial skill for any value investor.

Welcome to the content battlefield! In the last decade, the shift from traditional cable to on-demand streaming has ignited a fierce “content arms race.” The biggest players are in a constant battle for your eyeballs and subscription dollars, and their primary weapon is a massive and ever-growing library of exclusive content. The logic is simple: a must-see show like Stranger Things or The Mandalorian can attract millions of new subscribers. A deep catalog of films and series helps prevent existing customers from leaving, a key metric known as the churn rate. This competitive pressure forces companies to spend colossal sums year after year just to stay in the game. An investor must ask: is this spending building a sustainable fortress (a “moat”) of valuable intellectual property, or is it just a frantic, money-burning sprint on a treadmill?

For a value investor, the headline “Company X to Spend $20 Billion on Content!” is not automatically good or bad news. It's a call to dig deeper. The raw number is meaningless without context. The critical task is to assess the quality and profitability of that spending.

One of the trickiest parts of analyzing content spending is how it's accounted for. When a company produces a movie, it doesn't treat the entire cost as an expense in one go. Instead, it capitalizes the cost—turning it into an asset on the balance sheet—and then gradually expenses it over the content's expected useful life. This process is called amortization. For example, if Netflix spends $100 million on a series it expects will attract viewers for four years, it might recognize $25 million in costs against its earnings each year. This makes profits look smoother, but it can also hide problems. A value investor must scrutinize the company's amortization schedule. Is it realistic? If a company is too optimistic about how long its content will be valuable, it might be understating its current expenses and overstating its profits. The real question is whether the spending generates a return, regardless of the accounting tricks.

So, how do you measure the bang for the buck? While there's no single magic formula, you can look for clues to determine the Return on Invested Capital (ROIC) from content.

• Subscriber Growth and Engagement: Is the spending translating into more paying customers? Are people watching the new content? Companies sometimes release data on viewing hours, which can be a useful, if imperfect, proxy for success.
• Profitability and Free Cash Flow: The ultimate test. Is the company's operating income and, more importantly, its free cash flow growing over time in relation to its content budget? If a company spends an extra billion on content but its profits are flat, that spending isn't creating value.
• Franchise Building: Is the spending creating lasting intellectual property (IP)? A one-off reality show has a short shelf life. A universe like the Marvel Cinematic Universe or a franchise like Star Wars is an asset that can be monetized for decades through sequels, merchandise, and theme park attractions. Durable IP generates far higher returns than disposable content.

Be wary of companies that exhibit these warning signs:

• Spending is growing much faster than revenue for a prolonged period.
• The company is taking on significant debt to fund content without a clear path to generating cash.
• Management focuses on the quantity of content produced rather than its quality and cultural impact.
• The business model relies on constantly producing one-off “hits” rather than building a library of lasting assets.

In the world of media and entertainment, content is king. But for an investor, smart capital allocation is the emperor. Don't be dazzled by the multi-billion-dollar spending announcements. The key is to look past the headline number and analyze the strategy behind it. Is the company a disciplined investor building a treasure chest of valuable, long-lasting stories? Or is it a reckless gambler throwing money at a wall, hoping something sticks? A successful value investor knows the difference lies not in how much is spent, but in how wisely it is invested.