Investors are cheering on Netflix as it moves from DVDs to streaming video, and keeps adding customers along the way. But "digital" doesn't equal "cheap" for Reed Hastings' company. In fact, the online move has cost Netflix at least $1.2 billion.
That's the amount Netflix has committed to paying Hollywood studios for the rights to stream their movies and TV shows. And it's up from $229 million three months ago, the company disclosed in an SEC filing yesterday.
Most of that leap comes from a five-year deal that Netflix previously announced with the Epix pay channel, which is thought to be in the $900 million to $1 billion range. But that number could jump again within the next year, when Netflix's deal with the Starz pay channel expires.
The Starz deal gives Netflix access to Sony and Disney titles, so it's crucial that Hastings hangs on to it. And that will make a new Starz deal about as expensive as the Epix deal, says Barclays analyst Douglas Anmuth: He figures Netflix will have a total streaming commitment of $2 billion by the end of 2011.
The magic of the Netflix Web model, though, is that as people consume more on the Web, they cut back on discs--"You're replacing the postal cost with content cost," in Hastings' words.
For more details on Netflix's streaming plans and costs, I highly recommend nerding out with this transcript from its Q3 earnings call (PDF). It's a fascinating peek into a company on the leading edge of the digital transition.