Unpacking the Netflix-EPIX deal

Deals The received wisdom on Netflix’s deal with EPIX is that Netflix is paying upwards of $1 billion over five years for subscription streaming rights to films from Paramount, Lionsgate and MGM. The figure was unsourced at the time it was first reported and it has not been confirmed since. But that hasn’t stopped people from speculating about whether Netflix overpaid in the deal. Here’s a sampling:

Did Netflix Pay Too Much for EPIX Content?

Netflix’s Billion Dollar Bet

Netflix-Epix Deal ‘Expensive’

Netflix’s Achilles Heel: Content Costs?

Some things to keep in mind when thinking about this one:

  • Putting a finite value to Netflix on a single piece of content or single library is not a straight forward exercise. Netflix is a service. None of its content is proprietary or exclusive; all of it is available from multiple providers in multiple windows at multiple price points. The value of a particular piece of content is not related to how much revenue Netflix can derive directly from that piece of content but to what its availability means to the value of the service over all. Trying to parse which pieces Netflix paid too much for and which it didn’t doesn’t get you very far.
  • We know from Bob Iger’s comments on Disney’s earnings call on Tuesday that the Starz streaming deal with Netflix has escalators built in. If Netflix hits certain subscriber thresholds, more money flows through to Disney. The goal, according to Iger, is to let Disney benefit from Netflix’s growth. It would not be a surprise (I have no direct knowledge) if there were similar escalators in the Epix deal, so the $1 billion figure, to the extent it may be accurate, is probably based on Netflix hitting all its growth targets and all the escalators kicking in. Given Epix’ late start and limited distribution through MSOs, latching onto Netflix’s growth coattails would be a smart way to structure a deal. But it also means the actual figure could end up being far lower.
  • Netflix may be poised for more rapid growth in its streaming business than it’s letting on in its guidance for the Street. The fourth quarter is going to bring a flood of new Internet-capable TVs and Blu-ray players to the market, and virtually every one of them will have Netflix’s streaming app pre-installed. More than half of all TVs shipped will be Internet-enabled within five years and nearly all will have the Netflix app. That doesn’t count the non-connected TVs outfitted with a Roku box or other set-top with the Netflix app. That’s a huge base of potential new streaming customers created at virtually no cost to Netflix.
  • A bigger long-term issue for Netflix than what it’s paying for content is what it’s charging customers. Right now, the name of the game is subscriber growth, and Netflix is buying that growth in part by offering very attractive pricing, like $8.99 a month for unlimited streaming and DVDs. So long as it can manage its content costs relative to its subscriber growth it should be fine on that front. But the law of large numbers says at some point subscriber growth will slow. At that point, Netflix will have to start raising prices to drive future revenue growth, with currently unknowable implications for churn, customer satisfaction and other metrics.
  • It’s nowhere near that point yet.