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 Inc (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, Inc. (NASDAQ:NFLX)pays for the production but actually outsources the real work to companies that already know how to do it. Lionsgate 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, Inc. (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 article How Much Is Netflix Paying to Produce Original Shows? originally appeared on Fool.com.
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.
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