Netflix pays more up-front for TV shows to become king of content (Copy)
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Netflix pays more up-front for TV shows to become king of content (Copy)

Streaming video on demand (SVOD) kingpin Netflix is desperate to get its hands on the best content out there. To accomplish that goal, it’s testing a different model when it comes to paying TV shows. The company is offering far more money up front than traditional TV networks – but, on the off chance those shows become hits, it’s offering fewer payouts down the line. This guaranteed income for creators is having the desired effect: few TV networks are able to compete with it.

Netflix’s share price has almost doubled in the last 12 months

graph 1608 netflix

SOURCE: Yahoo Finance

Netflix’s hyper-competitiveness when it comes to content is the driving force behind its success. Exclusive access to its own original programming, including hits like Orange is the New Black and Stranger Things, is a strong incentive for viewers to keep paying subscription fees – as long, that is, as they can’t get access to the same stuff somewhere else.

According to CNBC, five anonymous sources have come forward to describe the deals Netflix is offering. They refer to the standard model as “cost plus”. That is, Netflix pays the entire production cost, then a percentage of that figure in addition. The “standard” payment is, apparently, 30% on top – although bigger outfits have been able to negotiate bigger cuts.

Given that traditional networks only offer up-front sums of around 60% to 70% of production costs, Netflix’s offer is a big draw: sell your show to a TV network, you could make a loss. Sell it to Netflix, you’re guaranteed to make a profit.

The reason Netflix pays less down the line is that show runners are not in a position to pursue things like syndication, licensing deals, and more. But there is an additional upside: not having to worry about advertisers’ sensibilities, creators on Netflix have way more freedom than their stuck-in-TV peers.

Will the model push Netflix to even higher levels of success? Well, it’s done well so far. But Netflix isn’t the only company using the “cost plus” model. HBO invented it. Apple, Amazon, and other big names are beginning to catch on. Still, for now, Netflix’s aggressive championing of this model has put it in a great position to take the lead over other streaming services when it comes to content.


Dominion holds Netflix in its Global Trends Ecommerce Fund.

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