The price of streaming video content has skyrocketed as new competitors enter the market. AT&T's (NYSE:T) WarnerMedia is spending billions for the rights to old shows including Friends, South Park, and The Big Bang Theory for its upcoming HBO Max service. Comcast (NASDAQ:CMCSA) spent $500 million for the rights to The Office for its Peacock streaming service. Even Netflix (NASDAQ:NFLX) isn't immune to spending big bucks on old shows: It bought the global streaming rights to Seinfeld for $500 million.

But Netflix content chief Ted Sarandos believes the prices those media companies are paying are too high. "The value of those shows -- viewing value -- was going down and the cost of them was going up pretty dramatically in the opposite direction," he said at a recent investor conference. "So that creates a massive opportunity cost to cling onto things that were radically overpriced relative to their viewing contribution."

Exterior of Netflix's headquarters in LA.

Image source: Netflix.

High price, low value

It's a rare person that'll sign up for and pay $15 per month for HBO Max to watch Friends. It's been a long time since Netflix promoted the opportunity to watch old seasons of The Office as a benefit of signing up for its service.

Executives at AT&T and Comcast justify the high prices they pay for old series by saying shows like Friends or The Office present a unique opportunity. It's practically impossible to capture an audience the size Friends did when it was on the air. Combine a large fan base for those shows with hundreds of episodes, and it's a recipe for a lot of viewing time. Even Netflix's CEO has said the amount of time people spend watching each service will be the best way to judge their success.

"If we get too bogged down in trying to keep everything on at any price, we'll never get into trying to create the next Office and Friends," Sarandos argues. "And that's really what we're trying to do."

There's a lot more value in creating something new that can appeal to a wide audience. Indeed, Netflix notices much more lumpiness in net additions around the releases of its original series even if old shows account for a large percentage of its viewing time.

Ultimately, net additions are how investors need to judge content spending. While time spent streaming might be a strong indicator of whether a subscriber is likely to stick with the service long-term, it's not the only thing driving net additions. Sarandos says old series with lots of episodes don't produce the same impact on net additions as other potential content investments.

Why is Seinfeld different?

Sarandos didn't let himself off the hook with his recent decision to pay more than $500 million for the global streaming rights to Seinfeld.

"My view was that it's been hugely underexploited up until now on on-demand platforms," he said. "And we'd have an opportunity at the price paid to see the viewing value the way we valued everything else and came to the conclusion that that wasn't worth that price point and this one was worth that price point. And it's very rare."

Indeed, Netflix has some unique advantages with Seinfeld that most old shows don't present. Most importantly, Netflix is currently producing new content with Jerry Seinfeld -- Comedians in Cars Getting Coffee. It can use old episodes of Seinfeld to grow the audience for Seinfeld's new show, which ought to help keep subscribers engaged and paying month after month.

Netflix's competitors don't see any similar advantages with their old series.

The future of Netflix content spending

It's very likely that as new competitors enter the market, Netflix will let more and more of its old licensed shows with long series runs leave the service. Series like The Walking Dead might rack up a lot of viewing time, but they might not be worth the price when it comes time to renegotiate the licensing contract.

That's not to say Netflix is going to take its foot off the pedal in ramping up its content spending. Hastings said the company plans on increasing spend past the $15 billion in cash it's outlaying this year. Sarandos echoed that at the investors conference. That's especially important in light of the amount AT&T, Comcast, and other new competitors spend on content overall.

Netflix will shift toward even more originals. Meanwhile, older originals like Orange Is the New Black, Stranger Things, and The Crown may step up to take the place of old licensed series with the advantage that there's no ongoing licensing fee. Ultimately, however, Netflix is still searching for a hit sitcom of its own which can produce hundreds of subscription-supporting episodes.