How Much Is Netflix Paying to Produce Original Shows?

Netflix (NASDAQ: NFLX  ) is notoriously tight-lipped when it comes to the costs of producing fresh content for its own exclusive use. But third parties are spilling the beans.

A self-described "super agent" at a major Hollywood talent agency just provided detailed estimates on what Netflix pays per episode of this year's new in-house shows. And the company isn't skimping on budgets: The "cheapest" show on deck would be prison dramedy Orange Is the New Black, which costs about $3.8 million per episode.

The numbers, please
Here's the cost per show, according to Creative Artists Agency agent Peter Micelli, by way of a report in Variety :

Show

Genre

Cost Per Episode

Cost Per Season

House of Cards

Political drama

"Way above" $4.5 million

More than $60 million

Hemlock Grove

Werewolf horror

About $4 million

$52 million

Orange Is the New Black

Prison drama/comedy

Just under $4 million

$49 million

These are not hard numbers straight from the source, but Micelli's estimates presumably based on discussions with Netflix and other stakeholders. CAA is one of the "big four" talent agencies, and even though Netflix seems to have chosen actors from other agencies in most cases, you can safely assume that CAA sat at every show's negotiating table.

Agents certainly have a clue what the going rate for acting services is, and you can't consider a 13-episode role without knowing something about the production values surrounding the cast as well. Moreover, CAA knows plenty about the television industry, managing big names such as David Letterman and Ryan Seacrest when it isn't busy launching the Oprah Winfrey Network or hit shows such as House and American Idol. That's why I think Micelli should have a better view of Netflix's production budgets than most of us mere mortals.

Whoa, doggie! Will production costs eat Netflix alive?

Isn't that a bit high, though?
These figures are a bit higher than the rumors you've seen elsewhere. House of Cards was supposed to be the big-ticket title at roughly $100 million for two seasons, but Micelli's figure is at least 20% higher. And all three of the shows he discussed broadly match the oft-guessed figures for House of Cards. If this agent is anywhere near the real figures, Netflix is spending way more on these shows that analysts and pundits have been assuming so far.

Micelli reminded his audience -- about 500 entertainment lawyers at a symposium hosted by UCLA -- that the costs are much higher than your regular, run-of-the-mill hour of serialized TV drama. HBO flagship Game of Thrones reportedly plays in the same budget ZIP code. That show is a huge selling point when Time Warner (NYSE: TWX  ) peddles its premium HBO service and has collected eight Emmy Awards in just two seasons. Quality production pays off. Sometimes you get what you paid for.

Micelli also noted that a significant chunk of these costs would account for global licensing rights. Netflix pays for the production but actually outsources the real work to companies that already know how to do it. Lionsgate (NYSE: LGF  ) develops and films Orange, for example. Netflix provides the budget; Lionsgate pockets a profit and provides the show-making expertise. Smaller studios handle the other current titles.

This structure typically gives Netflix four years of exclusive distribution rights, the world over. After that, production partners can turn around and syndicate the shows to premium cable channels, standard broadcast networks, and other outlets. That lengthy exclusivity doesn't come cheap.

The agent even put Netflix budgets into context with the original shows Amazon.com (NASDAQ: AMZN  ) is doing. The online giant could theoretically outspend Netflix in every way, given its $11 billion in cash reserves and $1.2 billion of annual free cash flows. But Amazon seems to be taking the opposite route, carving out a lower-end niche in sitcoms priced at $1 million per episode. Maybe Amazon isn't out to kill Netflix at any cost after all.

But wait -- there's this hidden discount, too
Finally, Micelli said Netflix saves a ton of money by taking a new approach to marketing. TV-based channels may spend up to $40 million per season just to promote their weekly episodes, and it's a never-ending fight for attentive eyeballs where you can never take a break.

By contrast, Netflix lets word of mouth and random walks around its user interface do most of the marketing work. There's no need to remind viewers that House of Cards is on the air every Thursday, because the entire season was presented all at once. And it's a lot cheaper to analyze viewer behavior and tailor your shows to specific audiences rather than making a show and beating every viewer over the head with advertising messages. That leaves more cash to pay for broader and longer exclusive licenses, which is totally fine by Netflix.

The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2013, at 1:49 PM, Frequentviewer wrote:

    It is not original shows that the people want from NetFlix.I am a 4 year customer of NetFlix (both streaming and a 3 DVD contract) and what we want has been said many times before.We want to watch current big ticket productions and the classics.I have been waiting over a year to recieve the classic "Run Silent Run Deep" (submarine movie).NetFlix must also allow gpu hardware acceleration on the user end (this means if you are watching on a PC some of the load is put on your graphics card)Silverligh is not living up to expectations in this area.NetFlix can then drop the required bandwidth for stutter free viewing.With Blockbuster all you need is 1mbps down for perfect viewing,why is the minimum 3.0mbps for NetFlix?

  • Report this Comment On April 22, 2013, at 9:08 PM, MotleyMovie wrote:

    The numbers seem to indicate that people are looking for something that is fresh and exciting, and Netflix is providing just that. Sure many movie enthusiasts enjoy having a broad range of content available at their fingertips for streaming, but at the end of the day Netflix is acting as a substitute for television. According to BusinessInsider there has been a 50% decline in TV audience ratings since 2002. Now that does not mean that big ticket shows like 2.5 men are not making any money, because believe me they are. However, considering that content is still being produced at an extremely high level, it does mean that the medium for accessing entertainment is expanding. Today, many viewers are watching content on phones, video game consoles, and computers. This means that the client is seeking out exactly what they want to see, and subscribing directly to those channels. Once Netflix captures those viewers it begins to establish itself as not only a T.V. and film streaming site, but also as a channel in order to increase it's revolving monthly subscriptions. Furthermore, as the client list continues to expand, Netflix can capitalize on the traffic that is coming into it's website and push content towards it's viewers that they want. So to break it down, I don't believe that a viewer like yourself represent's the larger demographic that Netflix is going for. However, I think it is unfortunate that you had to wait over a year for that submarine movie. I suppose that is the downside of losing your local movie store. However, I think the cards are in Netflix's hand on this one. They know their viewers, and what they want. Netflix has a massive amount of tracking software built into their platform that can target their audiences better than the nielson ratings systems on cable, and the risk that they took was a well calculated one.

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