Netflix cost-plus model for TV shows gives it a huge revenue upside 

Netflix’s contracts also generally require the production company to pay residuals, or fees to actors and crew when episodes air. Those costs have risen about 300 percent according to one industry executive, as the structure changed to account for replays on streaming networks as well as TV.

In addition, production companies can lose out on significant upside if the show becomes a big hit. The production company typically cedes the majority of worldwide licensing rights to Netflix if another country wants to make a version of that show, for example.

Also, Netflix will typically earn the majority of money from any advertisements, which are mainly restricted to product placement,. The production company also gives up most merchandising rights, which have proven fruitful for franchises like “Star Wars” or shows like “South Park.”

Netflix does guarantee additional bonuses for production companies if the show makes it to a second season and beyond, but it’s not as lucrative as if the production company retained the rights.

For example, a producer on a hit Netflix show may earn an additional $2 million if the show gets to the second season, while it could have earned as much as $20 million if that same show were licensed to a network, one industry executive estimated.

Still, for a lot of creators, the Netflix deal is great because they get much closer to full budget to make their shows. On top of that, Netflix has a reputation of being hands-off because it has fewer advertiser demands, and the company is known for treating show creators well.

In other words, show creators get to make the show they envision with less up-front risk, even if that means a lower payday in the future. For many of them, that’s enough to choose Netflix.

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