Netflix, Inc. (NFLX) is one of the largest providers of streaming television and movie content on the Internet. As of April 2018, Netflix has 125 million subscribers. 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 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.

How Netflix Finances Its Content for Licensing

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 Instant 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 used to be the greatest expense for Netflix. For example, the company spent nearly $200 million in 2011 for access to Disney films and TV programming for a one-year period. The full series of Lost cost the company $45 million, Scrubs came in at $26 million and Desperate Housewives totaled $12 million for a single year.

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 truth. In a statement to shareholders, Netflix revealed that its budget for content would exceed $7.5 billion in 2018.

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 the year, bringing the total up to around 1,000. He also estimated that the company will spend 85% of new spending on original shows and movies.

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.