Will Netflix go completely hog-wild and spend upwards of $20 million per hour of content for an original TV series?
CFO David Wells, noting that the internet video subscription now has 104 million customers worldwide, said that the economics of Netflix’s model could support such unheard-of production budgets given its global audience base in perhaps five years from now.
“If you have the numbers of people watching it, we certainly can support that level of quality in terms of TV,” said Wells, speaking Tuesday at Goldman Sachs’ Communacopia conference in New York City. He noted the “secular shift to global internet entertainment that is becoming increasingly a foregone conclusion… that’s helping drive the momentum for Netflix.”
Wells, it should be pointed out, was speaking entirely hypothetically. But he said as Netflix looks to capture potentially billions of global customers, such sky-high TV productions are in the realm of possibility. “Content is becoming more global,” he said. “People are becoming more connected through these stories that we tell, so we’re going to have more and more content, we’re going to have more and global subscribers.”
For 2016, Netflix has said it expects to spend about $6 billion on content (including original productions), with that rising to about $7 billion next year. Much of that spending has been funded by debt and is accounted for in future payment obligations, which Netflix amortizes over a multiyear period.
Wells acknowledged that at some point, spending on content will hit “diminishing returns,” once Netflix has built up a sizable library of original content or if it’s in danger of over-saturating the service with original programming. But, he said, “if we’re able to continue to grow into increasingly a global provider with that global addressable market then you should expect [Netflix] to continue to make content investments that sort of follow that,” with an eye on the efficiency of that spending on content based on viewing.
In citing the $20-million-per-hour figure, Wells was referring to Netflix CEO Reed Hastings’ past musings on the topic. At the New Yorker’s TechFest conference last fall, Hastings cited $150 million budgets for blockbuster Hollywood films, or about $100 million per hour of content, and compared that with TV shows like HBO’s “Game of Thrones” or Netflix’s “The Crown,” in the neighborhood of about $10 million per hour in production budget. “What we’re all interested in is, how do we expand… and figure out what $20 million-an-hour television looks like,” Hastings said at the time.
Asked at the Communacopia conference whether Netflix’s recent deal with Shonda Rhimes, who previously had a long-term deal at ABC Studios, was somehow retaliation for Disney pulling its movie-output deal from Netflix starting with 2019 releases, Wells said that wasn’t the case at all. “Business is business,” he said. “Disney continues to be a great partner.”
With Netflix, Amazon Prime Video and others jockeying with TV networks in the marketplace, competition for top television projects has gotten intense. Wells compared the situation to sports teams engaged in bidding wars for pro athletes — for the very top stars, prices have gone through the roof. But, he said, for TV shows outside the upper echelons, “you might have price stagnation or you might even have price reductions at the lower tier.”
Netflix, relative to traditional TV networks, has an advantage in attracting talent because it offers a truly global platform — letting creators reach a worldwide stage, Wells said. “The benefits of having the conversation about a particular piece of content are quite large on a platform like Netlfix,” he said. “And so I think artists are starting to increasingly appreciate that.”
However, for all its content-spending plans, Netflix isn’t interested in reinventing the TV bundle. At the Communacopia conference, Wells reiterated that the company doesn’t have any interest in pursuing rights for live sports — a question that comes up regularly from investors and analysts. “I don’t think we have to have sports,” Wells said in answering a question from a conference attendee.