How Much Netflix Spends on Instant Streaming Licenses

By Wesley Fenlon

Mo money, mo problems for Netflix as the streaming company faces millions in licensing fees for hit programs. Good thing it has millions to spend.

Ever wondered why episodes of your favorite show are available one day on Netflix Instant Streaming and suddenly gone the next? The answer lies in difficult negotiations and millions of dollars--hundreds of millions of dollars, actually--that Netflix pays to film and television studios to license their back catalogs of movies and programming for digital distribution.

Some of those companies absolutely love Netflix. The movie rental colossus is shelling out close to $200 million for a year’s worth of Disney content, with Lost eating up a good $45 million all by itself. Others aren’t so keen on the evolving landscape of web video. Turner Broadcasting Systems CEO Phil Kent, for example, said that “We’ve been telling our suppliers--the various studios that we buy from--that in the future, [Netflix streaming deals are] going to have a significant impact on what we’re going to be willing to pay for programming or even bid at all.”

But things are changing for Netflix. That Disney deal is the first example of the new Netflix, which is reaching out for more and more content and paying a hefty price for it. Analysts estimate that Netflix will spend $700 million in 2011 for content licensing, and crest $1.2 billion in 2012. When Netflix has to renegotiate its Starz deal at the end of 2011, the new agreement will likely make $30 million look like child’s play--$300 million is what analysts are betting on. Netflix is in the big leagues now.

Modern Family because it had too much of an online presence.

So far that approach hasn’t been fatal: pay TV rates still far outstrip online offerings. But it’s only a matter of time until more consumers adopt the cheaper alternatives of Netflix and Hulu over the bloated $100 bundles of cable. Once Hollywood figures that one out, you can bet they’ll be more than willing to sell to Netflix. The surge of online video will be good for Netflix, too--the bandwidth for a movie costs only 5 cents, while sending a DVD through the mail racks up a whole dollar in postage.

The biggest threat for Netflix may not come from studios anxious to secure more cash for their hot commodities, but rather other companies eager to get in on the streaming business. If Amazon or Google launch their own services, Netflix may feel the heat when it starts negotiating for multi-million dollar licensing deals. Since 2002, the company’s stock value has risen from $3 to $193; looks like they’ve done all right for themselves so far.