Is Netflix Breaking Hollywood, Or Will Its Mounting Debt Break the Bank?

Another big day at Netflix, another big quarter, another big debt deal. What's happening here?Is the company, as some Hollywood insiders charge, "a big Ponzi scheme" of locked-in, long-term costs masquerading as a massively popular online-streaming powerhouse? After the company's latest debt deal, those skeptics might even claim that Netflix is, ahem, a "House of Cards."Or are the old-fashioned types missing the point? Is Netflix truly transforming Hollywood's business with a sustainable, data-driven business model that, despite current debt loads, really is more durable than, say, MoviePass, or even traditional Hollywood?Last week, the streaming giant reported a record quarter, surprising even its own executives (along with plenty of analysts) as it announced $3.7 billion in Q1 revenues while adding 7.4 million subscribers to a global total that now stands at 125 million. Most impressive.And in the last couple of weeks, the company has been tied to a series of other ambitious initiatives, including the possible $300 million acquisition of Regency, an outdoor billboard company. Regency happens to control strategically placed signs in areas that might help Netflix with its Oscar and Emmy campaigns.Netflix also reportedly flirted with buying the Landmark specialty theater chain before dropping the idea over the weekend. The chain remains on the market as partners Mark Cuban and Todd Wagner investigate possibilities.As with Regency, part of Landmark's appeal is its theaters in neighborhoods where lots of Oscar and Emmy voters live. The Landmark in West Los Angeles' Westside Pavilion routinely hosts awards and showcase events featuring directors, writers and actors.And with Netflix planning to spend $2 billion this year on marketing, buying a strategically placed theater or billboard company might even be cost efficient. It's no different than Amazon starting its own shipping company, because it's already spending $20 billion a year on that cost center. Might as well pay yourself.Both possible acquisitions also might improve the complicated relationship between Netflix and talent. Directors, producers and stars like to see their films promoted, pushed for awards and available for their mom to go see.The company also just announced a plan to spend $1 billion on foreign-language acquisitions in Europe. That's part of the 700 features and episodic series Netflix said it would offer this year, part of a planned $7.5 billion to $8 billion in content spending.Given the roughly 5 million international subscribers Netflix added last quarter, buying more non-English content sure makes sense. Overseas almost certainly will be the engine of much of further growth, just as it is for traditional Hollywood these days, where 75 percent of theatrical box office comes from international markets.All these initiatives are eye-catching.  Even more attention-grabbing, to me at least, was the announcement that the company is taking out another $1.5 billion in debt for "general corporate purposes." It's the fifth such long-term debt deal the company has done in three years.(UPDATE: Hours after announcing it would issue $1.5 billion in debt, Netflix changed the total to $1.9 billion in what are colloquially known as junk bonds, or more delicately, high-yield, non-investment-grade instruments. Company share prices drooped 2.8 percent Tuesday in response.)Netflix already had $6.5 billion in long-term debt, and another $3.4 billion in long-term obligations for content payments, along with a $750 million line of credit. That's $10 billion in combined long-term loads on a company likely to top out below $17 billion in revenue this year. And it didn't foreclose the possibility of still more debt to fund its content acquisitions.Netflix argues that taking on more debt is cheaper than raising money by issuing new stock, especially given the company's enterprise value. True enough. And Netflix is in a death race with other major media and tech companies for subscriber mindshare in the hyper-competitive online-video business looming just ahead. Locking up content and subscriber love are crucial.And the company's market cap is $145 billion, dwarfing its closest comp, Hulu, now valued at $8.7 billion. And Hulu's value is up a lot from 2016, when Time Warner's purchase of 10 percent of the privately held company pegged it at less than $6 billion.To be fair, Netflix is hardly the only Silicon Valley superstar spending big money on unlikely projects.Alphabet, as the Financial Times pointed out this week, has lots of pricey moon shots with dicey prospects for success. Even Google's AI-powered digital assistant initiative is reportedly "bleeding cash" trying to keep up with Amazon's market-leading Alexa.One crucial difference, of course, is that Alphabet has a completely different and hugely profitable business that continues to pay for everything while generating billions in profits every quarter.Netflix does one thing: show video. Buying a billboard company and movie chain would actually diversify Netflix's revenue base. But the company already enjoys a sky-high valuation of more than $1,200 per subscriber, the equivalent of nine years of subscription revenue from that customer.Even modest diversification brings a thornier question: would Wall Street still give Netflix that massive valuation if it owned theaters and billboards and looked slightly more like a traditional studio?Might the massive multiple be divided? And if so, how does that debt load look at a lower stock price? Perhaps not as bad as a "House of Cards," but maybe far less "Bright."