Why Netflix’s $100m content investment wasn’t optional

Or: The Story of the Gift that Keeps on Giving

At the beginning of the month, the Atlantic came out with an informative article discussing the economics of Netflix’s $100 Million new show.  It is a good write-up and I suggest a read.

To paraphrase, they cited:

  1.  $100 million really ain’t that much when you’ve got a user base of 33 million subs
  2. HBO can do it and they only get $7 per sub (and this number is actually far higher than most other “premium” networks despite similarly expensive content)
  3. It saves Netflix from having to repurchase from content owners each year
  4. Exclusive content is an excellent acquisition and retention tactic

gotta catch 'em all...

 

Although they skirt the topic in #3, the heart of the matter is that:

Netflix must begin to produce and control its own content.  

Period.

At nearly any cost this is a no-brainer.

Imagine fighting a war where your enemy and your arms dealer happen to be twin brothers.  Now imagine if you start winning the war, what happens? Prices go up.  And up.  And up.  Until either you stop winning or you bankrupt yourself.  This is exactly the situation in which Netflix found itself about a year and a half ago. The problem is that ancient alliances take time to dissolve. And in this game, there are losers – namely, the cable companies, which are sitting nervously on a $100B/year industry in the US.

But to Netflix, $100B is peanuts… only the beginning… since the total addressable market throughout the rest of the world is many times that.

And in the old paradigm, Netflix had to negotiate rights to stream every show with every owner in every corner of the world in which they wanted to offer it.  And renegotiate when the contract expires.  Which holds Netflix hostage to whatever “new and improved” prices the owners choose to impose (c.f., the Starz debacle). And let’s be clear- there is little that users hate more, by the way, than selling them one thing and then changing the terms on them.

Having worked with practically every large cable and media conglomerate, I say, way to go Netflix! Controlling the streaming rights to your content is absolutely critical to effectively enter new international markets without delays for negotiations and pricing squabbles (which, by the way, is a favorite pastime of the cable industry). This content is furthermore a fixed cost renewable revenue stream (think amazon, itunes, potentially even licensing to other networks outside the US).  And last, and not least, it sets a valuable precedent for the content owners and producers to think twice next time they jack the prices up.

Owners better play nice, or in a few years, you may find yourself licensing your best content from Netflix.  And it won’t be pretty.

All your video would belong to Netflix…

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