Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

How Much Is Netflix, Inc. (NFLX) Paying to Produce Original Shows?

Netflix, Inc. (NASDAQ:NFLX) is notoriously tight-lipped when it comes to the costs of producing fresh content for its own exclusive use. But third parties are spilling the beans.

A self-described “super agent” at a major Hollywood talent agency just provided detailed estimates on what Netflix, Inc. (NASDAQ:NFLX) pays per episode of this year’s new in-house shows. And the company isn’t skimping on budgets: The “cheapest” show on deck would be prison dramedy Orange Is the New Black, which costs about $3.8 million per episode.

The numbers, please
Here’s the cost per show, according to Creative Artists Agency agent Peter Micelli, by way of a report in Variety :

Show Genre Cost Per Episode Cost Per Season
House of Cards Political drama “Way above” $4.5 million More than $60 million
Hemlock Grove Werewolf horror About $4 million $52 million
Orange Is the New Black Prison drama/comedy Just under $4 million $49 million

These are not hard numbers straight from the source, but Micelli’s estimates presumably based on discussions with Netflix, Inc. (NASDAQ:NFLX) and other stakeholders. CAA is one of the “big four” talent agencies, and even though Netflix, Inc. (NASDAQ:NFLX) seems to have chosen actors from other agencies in most cases, you can safely assume that CAA sat at every show’s negotiating table.

Agents certainly have a clue what the going rate for acting services is, and you can’t consider a 13-episode role without knowing something about the production values surrounding the cast as well. Moreover, CAA knows plenty about the television industry, managing big names such as David Letterman and Ryan Seacrest when it isn’t busy launching the Oprah Winfrey Network or hit shows such as House and American Idol. That’s why I think Micelli should have a better view of Netflix, Inc. (NASDAQ:NFLX)’s production budgets than most of us mere mortals.

Whoa, doggie! Will production costs eat Netflix, Inc. (NASDAQ:NFLX) alive?

Isn’t that a bit high, though?
These figures are a bit higher than the rumors you’ve seen elsewhere. House of Cards was supposed to be the big-ticket title at roughly $100 million for two seasons, but Micelli’s figure is at least 20% higher. And all three of the shows he discussed broadly match the oft-guessed figures for House of Cards. If this agent is anywhere near the real figures, Netflix, Inc. (NASDAQ:NFLX) is spending way more on these shows that analysts and pundits have been assuming so far.

Micelli reminded his audience — about 500 entertainment lawyers at a symposium hosted by UCLA — that the costs are much higher than your regular, run-of-the-mill hour of serialized TV drama. HBO flagship Game of Thrones reportedly plays in the same budget ZIP code. That show is a huge selling point when Time Warner Inc (NYSE:TWX) peddles its premium HBO service and has collected eight Emmy Awards in just two seasons. Quality production pays off. Sometimes you get what you paid for.

Micelli also noted that a significant chunk of these costs would account for global licensing rights. Netflix, Inc. (NASDAQ:NFLX)pays for the production but actually outsources the real work to companies that already know how to do it. Lionsgate develops and films Orange, for example. Netflix provides the budget; Lionsgate pockets a profit and provides the show-making expertise. Smaller studios handle the other current titles.

This structure typically gives Netflix four years of exclusive distribution rights, the world over. After that, production partners can turn around and syndicate the shows to premium cable channels, standard broadcast networks, and other outlets. That lengthy exclusivity doesn’t come cheap.

The agent even put Netflix budgets into context with the original shows Amazon.com, Inc. (NASDAQ:AMZN) is doing. The online giant could theoretically outspend Netflix in every way, given its $11 billion in cash reserves and $1.2 billion of annual free cash flows. But Amazon seems to be taking the opposite route, carving out a lower-end niche in sitcoms priced at $1 million per episode. Maybe Amazon isn’t out to kill Netflix at any cost after all.

But wait — there’s this hidden discount, too
Finally, Micelli said Netflix saves a ton of money by taking a new approach to marketing. TV-based channels may spend up to $40 million per season just to promote their weekly episodes, and it’s a never-ending fight for attentive eyeballs where you can never take a break.

By contrast, Netflix lets word of mouth and random walks around its user interface do most of the marketing work. There’s no need to remind viewers that House of Cards is on the air every Thursday, because the entire season was presented all at once. And it’s a lot cheaper to analyze viewer behavior and tailor your shows to specific audiences rather than making a show and beating every viewer over the head with advertising messages. That leaves more cash to pay for broader and longer exclusive licenses, which is totally fine by Netflix.

The article How Much Is Netflix Paying to Produce Original Shows? originally appeared on Fool.com.

Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any company mentioned. Check out Anders’ bio and holdings or follow him on Twitter and Google+.The Motley Fool recommends and owns shares of Amazon.com and Netflix.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.