Streaming TV or Movie? Why It Matters to Amazon's Profits

Date : 07/08/2018 @ 8:29AM
Source : Dow Jones News
Stock : Netflix, Inc. (NFLX)
Quote : 379.48  0.0 (0.00%) @ 4:18AM

Streaming TV or Movie? Why It Matters to Amazon's Profits

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By Michael Rapoport 

Is it a TV show or a really long movie? In the streaming, binge-watching era, the line between the two has gotten blurry -- and that could eventually help nudge earnings upward at companies like Amazon.com Inc. and 21st Century Fox Inc.

Accounting rule makers have tentatively agreed that companies should account for their costs of producing TV shows in the same way that movie production costs are already handled. Right now, TV producers have to immediately expense many of those costs, cutting into profits; moviemakers can bleed them into results over time.

The difference between shows and movies "is no longer as relevant" for purposes of gauging companies' finances, said Jason Bond, coordinator of the Emerging Issues Task Force, a part of the Financial Accounting Standards Board. The group decided upon the change last month.

If the change is ultimately enacted by the full FASB, TV producers could record profits more quickly than they do now.

Mr. Bond said the impact will vary among companies. But in a market where TV producers are in an arms race, spending billions of dollars on original content, any additional lift to their profits could be important.

Under current rules, companies that make movies can fully "capitalize" their production costs -- they are placed on the balance sheet and filtered into earnings over time instead of being recognized in earnings all at once.

That isn't always the case for companies that make TV shows -- often housed within companies that also have units making movies. TV show makers can only capitalize a portion of their expenses, while the rest are charged to current earnings. The only production costs they can capitalize are those they can show are matched by revenue they have contracted for, or by future revenue from other markets like syndication or DVD sales.

The arrangement made sense when the current rules were formulated back in 2000. Back then, all TV shows were released one episode at a time, often on platforms that the producing company didn't control, and there was a big risk a show could flop and be canceled quickly, making it harder for the producer to make back what it had spent. So limiting the degree to which companies could capitalize their costs seemed appropriate.

Today, streaming-TV companies often put out all episodes of a show at once, like a movie, on their own platform. There are new TV business models, like subscriptions. The avenues for distributing TV shows have mushroomed.

All that made TV production less of a crapshoot. It also left accounting rule-makers questioning whether there was any point to continue drawing a distinction between TV and movie production, Mr. Bond said.

Last month, the FASB task force, which handles new and specialized accounting issues, tentatively decided all production costs could be capitalized, whether for movies or TV shows. For companies that currently expense some of their costs, that could mean they will record lower current expenses, boosting earnings, although the capitalized costs will ultimately be reflected in earnings down the line.

The proposed changes will ultimately have to be approved by the full FASB, and wouldn't take effect until some point in the future.

Not all TV producers will necessarily benefit. Netflix Inc., for one, said in its annual report that it already capitalizes production costs for its original productions. Netflix couldn't be reached for comment.

Amazon, which has become a major force in streaming original TV shows, has indicated it does count some of its production costs against current earnings. The company said in its annual report its capitalization of those costs is limited, and so some of them are expensed as they are incurred. An Amazon spokeswoman declined to comment.

Similarly, 21st Century Fox said in its annual report that TV production costs "incurred in excess of the amount of revenue contracted for each episode in the initial market are expensed as incurred on an episode-by-episode basis." A Fox spokeswoman declined to comment. 21st Century Fox shares common ownership with News Corp., the parent company of The Wall Street Journal.

Write to Michael Rapoport at Michael.Rapoport@wsj.com

 

(END) Dow Jones Newswires

July 08, 2018 08:14 ET (12:14 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.

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