While traditional media is racing to catch up, Netflix CEO Reed Hastings is not looking back at the runners he’s passed.

See also: Reed Hastings won by studying Amazon — then running in the opposite direction

Hastings has never really feared legacy media, said Neil Goldstein, who worked at Netflix from 2001 to 2012 and eventually ran digital global advertising for the company. That’s because Hastings bought into the fundamental principle of “The Innovator’s Dilemma,” the 1997 business strategy book by Harvard Business School professor Clayton Christensen.

That book, often cited in tech circles, explains how disruptive businesses often start off as cheaper alternatives with lesser functionality, making it difficult for big incumbents to respond without cannibalizing their cash-rich businesses. Over time, the newcomer adds features and builds customer loyalty until it’s just as good or better than the incumbent’s product. By the time the old guard wakes up, it’s too late.

“Reed brought 25 or 30 of us together, and we discussed the book,” Goldstein said of an executive retreat he remembered nearly a decade ago. “We studied AOL and Blockbuster as cautionary tales. We knew we had to disrupt, including disrupting ourselves, or someone else would do it.”

There’s no guarantee Netflix can keep up its big spending without seeing its stock fall back to Earth. But the media giants can no longer afford to wait and find out.

Let’s say you’re a carpenter, and you make furniture out of mahogany. You pay for mahogany wood and sell a finished product for a profit. You’ve been doing this for years, and you’ve made a good living from it.

One day, a new guy — let’s call him Reed Hastings — moves in next door. At first, Reed seems awesome. After looking through your store, he buys a bunch of the dusty pieces in the back no one else wanted.

But after a while, Reed decides to get into the furniture manufacturing business, too. And now he’s telling your mahogany supplier that he’ll pay 50 percent more for the same wood. Then another competitor, a rich fellow named Jeff Bezos, shows up across the street. He wants the mahogany, too, and he’s bidding 75 percent more.

This is crazy, you think. How are these guys able to afford to pay so much more for the same stuff? They’ve got to be passing along the costs to their customers, right?

But they’re not. You walk in their store, and they’re selling the same quality furniture you make for less than you sell it. And cash from investors is pouring in.

You say, what the hell? I’ll up my spending, too. This is the new world, I guess. So you bid 100 percent more for mahogany. Instantly, your stock falls. “Boo!” say your investors. “Your business model is dying!”

This sounds like a Franz Kafka novel. But this allegory explains the current plight of legacy media.

Imagine Lionsgate is the mahogany carpenter. Lionsgate develops original and licensed movies and TV shows; it pays for the talent and the production costs and receives money in return from cable channels, digital outlets, TV networks and so on. It owns the “Hunger Games” franchise, “Mad Men” and “Orange is the New Black.” That last one, of course, runs on Netflix.

For years, Netflix was a welcome addition to the media landscape because it bought a lot of library content that was old or not that popular. Plus, Netflix didn’t get in the way of the two main ways content providers make money — signing deals with pay-TV operators like Comcast, Charter, AT&T and Dish Network, and taking cash from advertisers. Working with Netflix was like finding free money.

But the programmers kept asking for higher fees, especially on costly sports rights, and that pushed cable bills higher. Meanwhile, Netflix customers loved the low price — originally less than $8 a month compared with $80 or $100 for cable. When Netflix started offering a handful of original shows, such as “House of Cards” and “Orange Is The New Black,” viewers kept coming, and the company’s valuation swelled.

Five years ago, Netflix was trading at about $32 per share. Today, Netflix trades at about $370 a share. That’s a gain of 1,050 percent.

Over the same period, Lionsgate is down about 15 percent.

A lot of media CEOs believe Netflix is winning because the game is rigged in its favor. Their complaints focus on how companies are valued by investors.

Lionsgate’s enterprise value (EV), a good measure of a company’s worth, is about $7.5 billion. Its earnings before interest, taxes, depreciation and amortization (EBITDA) over the last 12 months was $520 million. So, Lionsgate trades at a trailing EV/EBITDA multiple of about 14. Discovery, Disney and Viacom all trade at trailing multiples lower than 14.

Netflix has an enterprise value of $165 billion and EBITDA of $1.1 billion, giving it a multiple of about 150.

That’s the equivalent of a huge cheering section, throwing money at the company to keep spending.

Indeed, Netflix is now the number one spender on media content outside of sports rights, according to consulting firm SNL Kagan.

Some traditional media execs and analysts are skeptical that Netflix can keep it up.

“To be worth $150 billion, someday you’ve got to make at least $10 billion in EBITDA,” Steve Burke, CEO of CNBC parent company NBCUniversal, said in an interview. “There’s at least a chance Netflix never makes that.”

Netflix spends more money than it takes in each year, funding the gaps with debt. Last year, it posted free cash flow of almost negative $2 billion and has forecast that it could be negative $4 billion in 2018. Netflix’s path forward is tied to massive international growth, which will require spending billions more on original programming.

If you think Netflix should trade like a traditional media company, Burke’s got a pretty good case Netflix is insanely overvalued. Even Hastings acknowledges Netflix looks more like a media company than a technology company, which tend to trade at much higher multiples.

“We’ll spend over $10 billion on content and marketing and $1.3 billion on tech,” Hastings said in his April 16 quarterly earnings conference call. “So just objectively, we’re much more of a media company in that way than pure tech.”

The music will stop for Netflix if it can’t quit burning money, said Wedbush Securities analyst Michael Pachter, who has a sell rating on the stock and a price target of $140 per share.

“Netflix has burned more cash every year since 2013,” Pachter said.

As of the end of the first quarter, Netflix had $6.54 billion in long-term debt and $17.9 billion in streaming content payment obligations, with only $2.6 billion in cash and equivalents on hand. In April, Netflix raised $1.9 billion of 5.875 percent senior notes.

“What happens when they need to keep increasing their spending and suddenly they have $10 billion of debt? People are going to start asking, ‘can this company pay us back?’ If that happens, their lending rate will spike. If Netflix needs to raise capital, they’ll issue stock. And that’s when investors will get spooked,” Pachter said.

Even if his logic is sound, Pachter has been wrong for years on Netflix. Its stock has just kept rising.

Netflix executives even posted a 2005 comment of his on a wall at their Los Gatos, California, headquarters and would chuckle at it as they walked by. It read: “Netflix is a worthless piece of crap with really nice people running it.”

Netflix’s use of cash is strategic, even though it’s not a typical corporate practice, according to Hastings.

“It’s horrible how mismanaged most Silicon Valley companies are in capital,” Hastings said in a 2015 interview with venture capitalist John Doerr, a partner at Kleiner Perkins Caufield & Byers and early backer of tech giants like Google and Amazon.

“Microsoft always wanted to have a lot of cash on hand. Apple had no cash 15 years ago in 2000. Who did the most innovation? The cash does not help. The cash insolates you in a bad way. It’s a bad thing that companies store cash.”

From October 2016: Reed Hastings on AT&T-Time Warner, acquisition speculation:

The long-term bull case for Netflix is that its subscriber growth, coupled with incremental price increases, will eventually propel earnings and cash flow.

BTIG’s Greenfield predicts Netflix will increase its global subscribers from 125 million to 200 million by 2020. Bank of America analyst Nat Schindler estimates Netflix will have 360 million subscribers by 2030. Netflix estimates the total addressable market of subscribers, not including China, could be about 800 million.

Meanwhile, the number of traditional cable and satellite pay-TV households falls each year, and the declines are accelerating. Research firm Statista predicts there will be 95 million U.S. pay-TV households by 2020, down from 100 million in 2015.

The bigger Netflix gets, the more A+ talent will want to sign exclusive deals with Netflix instead of traditional media companies. It’s a virtuous cycle, as top talent then accelerates subscriber growth. It’s also a death spiral for the weakest traditional media players.

Netflix has another edge in the content wars. While networks make decisions on TV ratings, Netflix plays a different game. Its barometer for success is based on how much it spent on a show rather than hoping every show is a blowout hit, said Barry Enderwick, who worked in Netflix’s marketing department from 2001 to 2012 and who was director of global marketing and subscriber acquisition. Since Netflix is not beholden to advertisers, niche shows can be successful, as long as Netflix controls spending. That also gives Netflix the luxury of being able to order full seasons of shows, which appeals to talent.

“If you’re a typical studio, you raise money for a pilot, and if it tests well, you pick up the show, maybe you make a few more episodes, and you wait for the ratings,” said Enderwick.

“At Netflix, our data made our decisions for us, so we’d just order two seasons. Show creators would ask us, ‘do you want to see notes? Don’t you want to see a pilot?’ We’d respond, ‘If you want us to.’ Creators were gobsmacked.”

That dynamic has led some content makers to decide they’re better off working directly for Netflix, which now spends more on content than many TV networks.

Last year, Netflix signed Shonda Rhimes, creator of “Grey’s Anatomy” and “Scandal,” to a multiyear contract after more than a decade at ABC Studios. Earlier this year, Netflix signed a deal with Ryan Murphy, creator of “Nip/Tuck,” “American Horror Story” and “Glee,” to a deal that could reach $300 million, according to Deadline Hollywood. He left Fox TV for the Netflix offer and spurned a counteroffer from Disney. And Jenji Kohan, who created “Orange is The New Black” for Lionsgate? She left for Netflix, too.