Digital entertainment has been attracting a lot of attention from investors lately, because of the potential to generate regular cash flow through subscriptions.

The theory is that subscriptions to services like Netflix (NASDAQ: NFLX) will generate a large amount of extra cash or float. Taking advantage of float is a strategy long employed by value investors. Its most famous practitioner is Warren Buffett; whose Berkshire Hathaway (NYSE: BRK.A) empire was built with float-generating businesses like insurers and newspapers. Insurance companies collect float from the premiums, while newspapers generate float through subscriptions.

Theoretically digital entertainment has the potential to generate a float. Netflix had 83.18 million subscribers worldwide in third quarter 2016, Statista reported. Yet some of the financial numbers from companies that rely on digital entertainment cast a lot of doubt on that thesis.

Netflix has No Float

Netflix reported $7.625 billion (€6.82 billion) in revenue, $141.02 million (€126.21 million) in income and a profit margin of 1.94% on June 30, 2016, ycharts data indicates. Yet it also reported a free cash flow of -$237.11 million (-€212.22 million); and a loss of -$895.6 million (-€801.58 million) in cash from operations on the same day.

The popular streaming video service seems to have no float. It did report $1.843 billion (€1.65 billion) in cash and short-term investments on June 30, 2016. Yet it is not apparent how long that money can last given the losses in cash from operations. In June 2015, Netflix reported $2.797 billion (€2.5 billion) in cash and short-term investments; that number fell to $2.61 billion (€2.34 billion) in September 2015, $2.311 billion (€2.07 billion) in December 2015, $2.072 billion (€1.85 billion) in March 2016 and $1.834 billion (€1.64 billion) in June 2016.

The obvious conclusion we can make here is that Netflix has no real float. It simply is not making enough money from its subscriptions to sustain the company’s operations. That calls the whole business model of streaming subscriptions into serious doubt.

Many investors will wonder if other business models such as relying on advertising might work. One digital entertainment provider that relies on advertising is the American internet radio service Pandora (NYSE: P).

Digital Music is Not Profitable

Pandora reported revenues of $1.288 billion (€1.288 billion) June 30, 2016. Yet it also reported a negative net income of -$296.77 million (-€265.61 million), a profit margin of -22.25%, a free cash flow of -$72.8 million (-€65.16 million) and -$117.72 million (-€105.36 million) in cash from operations on the same day.

Like Netflix, Pandora pays for most of the entertainment it distributes; in Pandora’s case the product is songs. Pandora pays music publishers for the right to broadcast songs. Since it does not charge subscriptions, Pandora’s business model is based on the hope that it will someday generate enough advertising revenue to make a profit on the broadcasts.

That clearly is not working in spite of Pandora’s incredible success. Statista reported that the digital radio service had 81.1 million users in the United States in December 2015. If Pandora cannot make money from that user base the whole business of digital entertainment is called into question.

Can Digital Entertainment Succeed as a Standalone Business?

The numbers at Pandora and Netflix indicate such services are effective distribution platforms for digital content. Yet the same numbers show us that these services are losing money.

What this tells us is that the probable future of such services is as distribution channels for content produced by others. A larger organization will end up financing the digital entertainment provider’s operations; simply to provide a means of distribution for content. At some point Netflix will probably end up as part of a large entertainment or communications conglomerate such as Verizon (NYSE: VZ) or The Walt Disney Company (NYSE: DIS).

Such consolidation is already beginning in the sector. Amazon (NASDAQ: AMZN) has become a major distributor of streaming video through its Amazon Prime service; and Verizon has agreed to buy Yahoo for $4.5 billion (€4.03 billion).

Surprise a Digital Entertainment Company that Makes Money

Another American digital radio service Sirius XM Holdings (NASDAQ: SIRI); which distributes talk, sports, music and comedy programming through satellite and internet channels, is controlled by Liberty Media Corporation (NASDAQ: LMCA). Liberty Media; owned by Colorado billionaire John Malone, controls a variety of digital and video properties including the Starz network.

Unlike Pandora and Netflix, Sirius makes money. It reported a net income of $645.54 million (€577.77 million), revenues of $4.802 billion (€4.3 billion), $476.45 million (€426.43 million) in (cash and short-term investments, $1.3426 billion (€1.2 billion) in cash from operations and a free cash flow of $395.10 million (€353.62 million) on June 30, 2016.

These numbers show us that Sirius is actually generating float from digital subscriptions. Sirius makes its money by selling subscriptions to its satellite radio service which is marketing to car owners in the United States. Most vehicles sold in the US are equipped with a satellite radio giving Sirius a captive audience.

The experience at Sirius shows us that digital entertainment companies can make money if they have the backing of a larger organization and market to a niche audience. Sirius struggled for years as an independent company before Malone bought control of it.

The Future of Digital Entertainment

The future for digital entertainment companies like Netflix and Pandora is clear. Since they have large numbers of users but struggle to make money, these services will end up as part of larger organizations. Expect Netflix to collapse; much like Yahoo did, and end up as an acquisition target. Pandora will probably end up in the hands of an investor like John Malone at some point.

Digital entertainment certainly has a bright future but it will need a new business model to become a viable enterprise. John Malone may have created that business model at Sirius XM.