Coming Soon To Netflix: Honey, You Shrunk My Profits (By Raising My Content Costs)
Netflix (NFLX) has to pay studios so that subscribers can watch TV shows and movies like Mad Men and Mission: Impossible 3. And it appears the amount it pays is growing.
The latest Bloomberg Businessweek describes how Hollywood studios are making more money licensing their content. The loser is Netflix, which is competing with the likes of Amazon.com (AMZN), Verizon Communications (VZ) and Coinstar’s Redbox (CSTR) for content deals.
For its part, Netflix says it's watching content costs closely. It’s paying less to Epix – co-owned by several studios. It’s also developing its own shows, including new episodes of cult hit Arrested Development.
But that shows it's under pressure. Last year a Wedbush Securities analyst predicted that Netflix’s costs to acquire content would rise from $800 million last year to up to $2 billion this year. For context, Wedbush estimates Netflix’s streaming content costs were $30 million in 2007, $80 million in 2008, $130 million in 2009, $200 million in 2010, and $800 million in 2011.
And Wedbush’s latest research out this summer estimates Netflix’s “cost of subscription” line, which includes acquisition and licensing costs, will rise from $1.8 billion last year to $2.5 billion this year.
That’s bound to put a dent in Netflix’s bottom line, which was already badly dented when net income in the second quarter dropped 91%.