Funding Golden Age

Against the backdrop of new streaming competition, Netflix is significantly increasing the amount it invests in producing, licensing, and acquiring films and shows.

Not only is streaming competition heating up, but Netflix must also prepare for when the libraries of Disney, Fox, WarnerMedia, NBCUniversal, and possibly ViacomCBS are no longer available.

Facing this upcoming exodus from its service, Netflix is eager to capture new subscribers with more original films. In the past year, Netflix has started production on at least 55 feature films.

Funding Golden Age

Media financiers say there hasn’t been this much money in the industry since the mid-2000s when private equity firms were betting big on independent films.

The opportunity to build a direct-to-consumer relationship with audiences around the world was too tempting for traditional media companies to ignore. Notwithstanding, they did wait until Netflix had 150 million subscribers before giving it a shot.

RELATED: After years of declining production activity for Made-For-TV movies, Netflix is accelerating the rate it licenses and produces lower-budgeted Made-For-Streaming movies.

Netflix is meeting the challenge from Hollywood head-on, the company has indicated it will respond to accelerating content costs by ramping up its own content spending to maintain subscriber growth.

In many cases, Netflix offers between 30% and 50% higher rates for content than several competitors, including HBO, Showtime, and Starz. However, while most networks typically payout on delivery, Netflix often extends payments over a specific time period, which is usually accepted by the other party, because the premium is worth it.

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Netflix’s Deep Pockets

After a down quarter, Netflix is expecting to add seven million more global subscribers from July through September fueled by a shotgun approach to content licensing and production. For the last decade, Netflix has doubled its content spending every couple of years.

For every dollar Netflix receives in revenue, 70 cents is used to produce original content and acquire films and shows from an ever-shrinking number of sources.

Netflix’s insatiable appetite for streaming titles presents enormous opportunities for independent distributors, filmmakers, and producers.

Netflix has a content budget exceeding $15 billion this year – more than any other media company. This astronomical sum is 66% more than the $9 billion spent last year producing and acquiring films and series content around the world. 

Netflix is slated to produce or co-produce 225 television shows and films in just Europe this year, at a cost exceeding $1.7 billion. This massive production output is a 57% increase from 2018.

Enter Apple

Apple raised its commitment from $2 billion to $6 billion this year to fund original shows and films for its new subscription video service, Apple+.

Apple is incentivizing content creators by paying earlier in the production process than Netflix, which often pays creators over several years.

Like all newcomers making a foray into Hollywood, Apple is not immune to overpaying for content. The company spent more per episode for its drama The Morning Show than the $15 million per episode HBO spent on the last season of Game of Thrones. Apple shelled out $300 million for two seasons of the news-drama starring Aniston and Witherspoon after a contentious bidding war with Netflix.

To illustrate how prices for prestige projects have skyrocketed, Netflix made waves when it spent $100 million for two ten-episode seasons of House of Cards six years ago.

FilmTake Away

Netflix might need to change its funding model if it wants to beat out Apple, Amazon, Hulu, and a host of new network streaming services that payout for content on delivery.

If Netflix accelerates its payout structure while continuing to pay a premium, they will likely continue to gain new subscribers in the face of all out competition from Hollywood and elsewhere in Silicon Valley.

However, through the first six months of 2019, Netflix’s customer acquisition costs have ballooned to $292 per subscriber. Based on the standard service fee of $12.99, a subscriber would have to remain a paying customer for nearly two years in order for Netflix to breakeven just on the acquisition costs, which does not include content production, licensing or operations.

Even at 2018’s acquisition rate of $180 per subscriber, it would take nearly 14 months to recoup marketing expenses. Eventually Netflix’s debt-holders and investors will tire of the company spending double the amount to acquire half the number of subscribers.