Netflix, Inc. (NFLX) is one of the largest providers of streaming television and movie content on the Internet. As of February 2020, Netflix has 167 million subscribers worldwide and 60 million in the U.S. The company is currently leading the charge over competitors such as Hulu and Amazon Prime Instant Video.
While other streaming services implement a combination of member subscriptions and the sale of advertising space to outside companies, Netflix stands out from the crowd in its approach toward generating revenue. The company does not offer advertising space to marketers, nor does it offer differently priced tiers of content to subscribers. Rather, each Netflix customer pays a set monthly fee that allows them access to exclusive and non-exclusive TV shows and movies for which the company has purchased licensing from the content owners.
Fees collected from subscribers, coupled with the raising of capital through new debt issues, allow Netflix to acquire and maintain licensing agreements for the content the company delivers to its users.
- Netflix, the number one streaming service worldwide, has a unique revenue-generating approach: Each subscriber pays a set monthly fee for access to licensed content.
- Netflix is constantly negotiating new licensing deals with TV shows, networks, and filmmakers.
- Securing these licensing agreements is Netflix's greatest expense, totaling $15.3 billion in 2019.
- Netflix uses consumer data mining to determine which content viewers pay to see and relies heavily on this information to determine the total cost of each licensing agreement.
How Netflix Finances Its Content
To keep subscribers satisfied with the number of choices available for streaming online, Netflix is constantly negotiating new licensing deals with TV shows, networks, and filmmakers. Licensing in the realm of online streaming content is defined as the process of obtaining permission from the owner of a TV show or movie to stream its content through a service such as Netflix. A licensing agreement is established under the terms of a legally binding contract between the content owners and Netflix, and each agreement varies based on the needs of the content owner and Netflix.
For instance, the owner of a TV show could agree to allow Netflix to stream all seasons of that show in full through its online platform for one, three or five years. The licensing agreement can be renegotiated after the set time period ends, or Netflix could drop the show from its library if viewer interest is not high enough to warrant the cost.
A content owner may offer a similar deal on the same TV show to a competing streaming service, such as Hulu or Amazon Prime Video, making the licensing agreement between each company and the owner non-exclusive. Licensing agreements that are not exclusive to a single streaming platform are less expensive to obtain.
As competition continues to saturate the streaming television and movie marketplace, content owners and streaming services recognize the importance of exclusive content to viewers. Under an exclusive licensing agreement, content is only available through a single streaming service such as Netflix for a set period or into perpetuity. Exclusive licensing agreements are far more expensive for Netflix than non-exclusive agreements, but they have the potential to bring in a greater number of subscribers over time.
The Cost of the Content Business
Securing licensing agreements with TV networks, filmmakers and other content owners is the greatest expense for Netflix. For example, the company spent nearly $13 billion in 2018 on content licensing and production. It spent $2.37 billion on marketing, the most in the history of the business.
The growth of internet-based television has made it more difficult to purchase licensing inexpensively, and the company's current content licensing budget reflects this fact. In a statement to shareholders, Netflix indicated that its budget for content would exceed $7.5 billion in 2018. It ended up being nearly double that, that year. And in 2019, the budget jumped to $15.3 billion.
The amount Netflix is projected to spend on content in 2020, according to a BMO Capital Markets forecast
Chief Content Officer Ted Sarandos made remarks at MoffettNathanson’s Media & Communications Summit 2018, saying that the company has 470 originals scheduled to premiere by the end of 2019, bringing the total up to around 1,000. (The company in fact released around 400 originals , but that still represented a 54.6% increase over 2018's releases). He also estimated that the company will devote 85% of new spending on original shows and movies—a trend that continues into 2020.
Netflix uses consumer data mining to determine which content viewers pay to see and relies heavily on this information to determine the total cost of each licensing agreement. According to Netflix officials, data is compiled to determine the expected hours of viewing each TV show or movie generates over the course of a licensing agreement—establishing a cost per hour viewed. It compares this metric to similar content arrangements, and it bases final pricing on exclusivity, as well as the time frame of the contract.