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Question: Why does Netflix produce original content?
Answer: The costs of producing original content offset Netflix’s licensing fees.

Netflix’s Costs

When a Netflix user watches a video Netflix has two costs:

  1. Internet: When people watch a video on Netflix, they’re downloading data from Netflix’s servers. Netflix has to pay a fee proportional to the number of bytes its viewers download. (This is why Netflix’s fees progressively increase based on the video resolution.)
  2. Licensing: when Netflix viewers stream a video whose license is owned by, say, MGM, Netflix pays MGM a fee.

Note that Netflix pays no licensing fee when it owns the content.

These two simple points give us our answer. We can ignore (1) since it is a constant — data is billed in bytes transmitted not on the quality of the content.

Estimation

Let’s suppose the following
Production cost = $10 million
Number of viewers = 10 million
∴ Cost per view = $1

If Netflix’s licensing costs exceed $1 per view they are better off producing original content.

Reality Check

In theory, there is no difference between theory and practice. — anon.

According to the website whats-on-netflix.com, the 2020 movie, Extraction, had an estimated 90M views in its first 4 weeks. Wikipedia says its budget was $65M. That works out to cost of $0.72 per view.

Further, remember that Netflix original content, once produced, is forever. Netflix has no recurring licensing costs to pay, no licensing renewals or negotiations.

Unlike Netflix and allied services, radio stations do not produce their own songs. Why is this? See “Why don’t radio stations produce their own songs?”

Costs Matter is a series that asks different questions all of which have the same answer: to keep down costs. The series focuses narrowly on the impact of costs. It does not claim costs are the only reason things are as they are. To read more stories in the series, visit https://medium.com/galileo-onwards/costs/home/.