The Economics of Netflix: How to Make a $100 Million Show

Economics of Netflix

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The Economics of Netflix: How to Make a $100 Million Show

How buying content is a sinking ship, especially when you make such good shows yourself.

Netflix Plans to Make 5 Original Shows Per Year
Such as:
House of Cards
Orange is the New Black
Lilyhammer

The Economics of Content Creation
$100 million = 2 13 episode seasons of House of Cards
To pay for this…
520,834 people need to subscribe for two years.
Or 1/600 of all Americans.

For five shows…
2.6 million new subscribers are needed.
Or 1/115 of all Americans

But is that possible?

That includes:
Grandma–”without a computer”
Children–”without bank accounts”
Everyday people–”without the extra cash”

Turns Out, Netflix Doesn’t Really Have a Choice.

Streaming content obligations:
[#economic quarter, current obligations, long term obligations]
(Money is in $billions)
Q4 2010: $.5, $.7
Q1 2011: $.7, $1.2
Q2 2011: $1.1, $1.8
Q3 2011: $1.4,$2.7
Q4 2011: $1.7, $3.1
Q1 2012: $1.9, $3
Q2 2012: $2.1, $3
Q3 2012: $2.1, $2.9
— Or, over a 4x increase in two years.–

Streaming content obligations increase:
When more content is created.
When networks know Netflix can pay more.
Ex: 2008: $30 million for Starz content
2011: $300 million not enough for Starz content

HBO’s Business Model Incoming

Once a month, when you see your bill…
“Why am I paying $7.99 for that?”

What comes to your mind?
For HBO: Games of Thrones?
For Amazon: Downton Abbey?
For Netflix: House of Cards?

With great overlap between cable and streaming services, you want something only available by stream to come to mind.

But is $4 million+ an episode too expensive?
Cost per episode:
Hemlock Grove: $4 million
Orange is the New Black: $4 million
House of Cards: $4.5 million before David Fincher (executive producer)

Netflix is Making a Gamble in an Attempt to Beat Out Long Term Quality Content Leader HBO

2013:
HBO–28 million domestic subscribers[6]
Revenue= +4%
Revenue Amount–$4.9 billion
Operating Income–$1.7 billion
HBO raises price to increase profit

Netflix–33 million domestic subscribers
Revenue=+21%[7]
Revenue Amount–$4.4 billion
Operating Income–$228 million
Free cash flow: -$16 million
Netflix is gaining subscribers to increase profit

Market capitalization:[6]
Netflix: $24 billion
Time Warner as a whole: $56 billion

HBO spends $1 billion a year on original content.
But Time Warner owns them…
So there’s lots of cash on hand.

Netflix is continuing to grow,
but they’re having to borrow through bonds to keep expanding.[6]

Perhaps Big Data Can Make Netflix’s Huge Spending a Safe Investment.

Netflix uses big data about it’s viewers preferences to ensure their shows are hits.[3][5]

Informed by 30 million plays a day –
Including:
What you watch
When you pause
When you fast forward
When you rewind
When you rate movies
Your scrolling behavior
What you search for
What device you’re watching the show on
What time of day you’re watching
Series completion rate
Where people typically stop watching series
How long between series watching sessions

Even Trailers were Crafted by Big Data:
10 trailers–
For those who watch Kevin Spacey Movies… he’s in the trailer
For those who watch movies with strong females… show females are in the trailer
For those who are David Fincher fans… fine cinematic points in the trailer

And remember, the rights to quality shows can be sold at a premium once they’re done airing.

Economics of Netflix

Citations:

  1. http://www.thewire.com/technology/2013/02/economics-netflixs-100-million-new-show/61692/
  2. http://en.wikipedia.org/wiki/List_of_original_programs_distributed_by_Netflix
  3. http://www.nytimes.com/2013/02/25/business/media/for-house-of-cards-using-big-data-to-guarantee-its-popularity.html?pagewanted=all&_r=0
  4. http://variety.com/2013/digital/news/caa-agent-discloses-netflix-series-spending-1200006100/
  5. http://blog.kissmetrics.com/how-netflix-uses-analytics/
  6. http://www.cnbc.com/id/101392947
  7. http://www.marketwatch.com/investing/stock/nflx/financials