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How Much Is Netflix Paying to Produce Original Shows?

By Anders Bylund – Mar 10, 2013 at 12:00PM

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If this talent agent's estimates are anywhere near the right ballpark, Netflix is pouring big bucks into this year's original content. Will the company get what it paid for?

Netflix (NFLX 1.53%) 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 (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 (LGF-A 4.31%) 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 (AMZN 2.55%) 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.

Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+.

The Motley Fool recommends and owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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