Detailing Netflix's Streaming Costs: Average Movie Costs Five Cents To Deliver

While Netflix is not yet giving out a lot of details on their costs associated with their streaming video service, they have given out enough data for us to have a pretty good idea of their costs when it comes to their streaming delivery costs for the Xbox 360 and other devices. Here's what we do and don't know and how it all breaks down.

We know that the average encoding rate for video streamed to the Xbox 360 is about 2000Kbps. That means one person watching a two hour movie would transfer roughly 1.8GB of data. For high definition movies, the average encoding bitrate is around 3200Kbps and one user would transfer about 3GB of data. Based on the high volume of movies Netflix is doing each month, they are getting a very good rate in the market. I estimate they are paying on average about $0.03 per GB delivered across Limelight and Level 3 and potentially have even a slightly lower rate.

Based on the three cents per GB assumption, that means it would cost Netflix about $0.06 to deliver one SD movie and $0.09 to deliver one HD movie. Those numbers would be about 25% lower if the length of the movie were ninety minutes instead of two hours. It would also be a little lower or higher depending on the exact bitrate since some movies are streamed higher and some lower and Netflix only has about 400 movies available in HD. Taking all that into consideration the average cost to Netflix to stream to the XBOX 360 is about five cents per movie. Streaming to the PC is a lot cheaper, about half that cost, as the bitrates are much lower.

Based on those numbers, their streaming offering looks like it would save them tons of money and make them a lot more profitable since Netflix spends about 78 cents out and back for standard pre-sort first class mailing of their DVDs. But the one problem is that these streaming costs do not yet include the licensing costs from the content owners. It's the costs associated with licensing the content that really makes or breaks their streaming service, not the cost of bandwidth.

I don't know what Netflix is paying to license content and many of their licensing deals are all at different prices. In other online video offerings I have seen content owners charge a one-time flat fee per video, a fee each time the video has been watched, a one time licensing charge for a specific number of plays or many various other licensing models. I've seen licensing costs as high as $4 per movie, per play, and I've seen pricing on the other end of the spectrum at a few pennies per play. That's why many of the content licensing deals Netflix has in place are a one time cost no matter how many movies are watched. While that works great for Netflix today, most of those licensing deals are not with major studios for first-run content. It's also interesting to note that Netflix's recommendation algorithm takes into account which movies have a cheaper licensing cost and makes those movies show up as recommendations more often.

One of the major reasons that Netflix does not have a lot of new content in their streaming offering is the fact that the licensing costs for new content is so high. Studios are still greedy and Netflix simply can't afford to pay the costs associated with first run movies.  Netflix's CEO had said many times that they are going to spend a lot of money this year to license content where the costs are "reasonable". That comment goes to show that much of the newer content is simply out of reach for Netflix, as well as others and that studios simply want too much cash. Over time, you would think the studios would get on board with this and license some newer content faster, but so far, they don't seem to want to. At some point, one of the major studios is going to break from the pack and give it a shot and test the waters, making it affordable for Netflix to offer some newer, first-run content. But right now, the studios think they don't need Netflix.

I would not agree with that, but looking at the penetration rate Netflix has, it is very small. Netflix has ten million subscribers and while they and Microsoft said last month that "1 million Xbox LIVE Gold members have downloaded and activated the groundbreaking Xbox LIVE application from Netflix", they didn't say if those are paying Netflix members. With 48 hours free trail cards showing up in Xbox 360 games, we don't truly know how many paying customers are using the service. And as of January of this year, Microsoft had sold 11.2 million Xbox 360 consoles in North America. (Source: NPD) So if the penetration rate is only one million today, it's going to take years before it truly scales. And that's really what the movie studios care about, a large audience. I think it is short-sided thinking on the studios part, but I don't think anyone would disagree with me if I said it's not the first time the studios didn't get it.

But the question remains, what is the total cost to Netflix to stream a movie? For some content Netflix has today, it's clearly cheaper than mailing out a DVD, but for other content, it's still more expensive based on the licensing costs. And with all the talk lately of Netflix wanting to some day offer a streaming only service, probably this year, running the numbers for such a service does not make a lot of economical sense. Lets say the average cost to stream and license a movie is $0.50. All it takes is one user streaming ten movies a month and Netflix's cost is five bucks. And with their cheapest DVD offering with unlimited streaming being $8.99 a month, how much can Netflix realistically charge for a streaming only service? Maybe $5.99? So far, the economics of a streaming only service don't work unless Netflix can get very good licensing terms and hope that users who don't stream a ton of movies each month make up for the ones that do. At this point it's a guessing game, although Netflix is already compiling some great data on what users are doing with streaming and what their consumption habits are.

For now and some time to come, Netflix's streaming service is not going to generate revenue. Yes, Netflix does expect it to help retain customers and if that is all it does, that alone is worth the cost. With Netflix's churn being 4% last quarter, anything that helps keep churn down from their core business is very valuable and can generate a return. While Netflix said it spent around $40M for their online video offering in 2007 and most folks I spoke to said they thought Netflix spent twice that last year, clearly it appears as if Netflix is ramping up to spend close to $100M in 2009.

The key thing I think people are missing is that Netflix's streaming service is not a substitute for their DVD business; it's a complement to it. Over time, many years from now when broadband enabled TVs and Blu-ray players get some install base, things may change. But for the next few years, Netflix is not going to make money from their streaming service unless the financial benefit comes as a result to their core business.

That said, what Netflix is doing is exciting and I love the streaming service on my Xbox 360. Netflix is laying the ground work for the future and it's going to be really fun to see where they take this service a few years from now. We're all keeping a close eye on the financial impact streaming movies could have on their overall business. Studios, give them a chance! License some decent content already.

Image Credit: Soft-Co.com

Comments

[Christopher Levy]

Dan,

Great piece of writing. One thing is for sure. NetFlix is pioneering the use of Silverlight DRM in the marketplace and definitely clearly demonstrating the value of the product on both the PC and Mac platforms.

[Sam Ratha]

Dan, this is exactly why I read your stuff. I don't see anyone else trying to figure out the business side of these offerings like you are. Thanks for not just re-hashing what everyone else is writing about and actually giving us something to think about. Keep them coming.

[Fagin]

Dan, What would the operating profits be for Netflix if they had ad support?

[Dan Rayburn]

No idea on the ad support. We don't have any details yet on the consumption of the service, other than the one data point from Netflix and Microsoft on the first three months of streaming on the XBOX 360.

[Christopher Levy]

Ad support? No way NetFlix is going to take a 10 year step backwards. They _sell_ access to content. Not access to bad ads that don't return anything but data about web users that don't click out and don't buy. The time for ad-supported media has past.

[HmmConvenient]

Why wouldn't Netflix go ad supported? If they do it behind a subscription gateway, they look at *lot* more like an MSO (Subscription + ad supported).

[Tim]

Wonderful post, I personally had netflix for a couple of years and when they started using the idea of streaming, it is an excellent addition to their snail mail service and yes they may not make money right away, but I think they see the future and are on their way.

[Fagin]

Netflix could possibly tier the Ad support with the basic sub, Ad revs could go direct to the licensor for first release content,
Netflix could also shave a cut for themselves.

The Ads will need to be a set-format though, once you start mixing the Ad times and aspect ratios then you start down a slippery road.

They will need to man-up soon though, befor diffusion sets in.

[Suds]

Dan, In your estimation have you used streaming rates or HTTP rates for content delivery?

As you know Netflix is using adaptive streaming over HTTP. If they did traditional streaming would their cost have been higher?

[Dan Rayburn]

I have not seen any CDN vendor charge more for HTTP versus RTSP or RTMP other than Akamai who charges on average, about a 15% premium over HTTP for streaming protocols. Why they do that, I don't know, can't get them to explain it. You can read more about that here: http://blog.streamingmedia.com/the_business_of_online_vi/2008/10/akamai-charging.html

[Suds]

Hmmm, Thanks for the clarification. But it raises another question for me.

From what I have heard, CDN's need to have a separate network for streaming since the streaming servers sit at the edge & they need a different set of operations folks compared to the HTTP network.

So do you think most CDN's are absorbing the additional operational cost of streaming compared to deliverig video over HTTP which can get cached & uses the same operations folks?

[Dan Rayburn]

They don't need a separate network, but do use separate servers. While some say they need different support folks, I don't buy it. Any company who offers multiple products and services has product managers and support people who focus on specific products. That's the cost of doing business if you want to offer the service.

Also keep in mind that most video is not "cached" on lots of HTTP based servers. Yes, CDNs can leverage the wider footprint they have for HTTP over streaming, but most of the HTTP boxes for caching are setup for small objects, not large ones. The idea that every customer on a CDN has all of their video content cached, on all of that CDNs infrastructure is not the case.

[Raghu Srinivasan]

This is very interesting analysis. I run http://feedflix.com and so far this year, Instant Streams from Netflix have outpaced traditional DVD shipments (Graph @ http://feedflix.com/dvd-vs-instant). For instance, we're less than a quarter of our way into 2009 but already, total titles streamed is already more than half of what it was in all of 2008.

[Dan Rayburn]

Hi Raghu, it's interesting data, but I don't think we can use it to confirm any trend. As you say on the site the data "is based on a small sample of the Netflix subscriber base" and you could not stream Netflix content to the XBOX 360 until 11/08 so there is no historical data to review from prior years when the service is only five months old.

[Christopher Levy]

Why would NetFlix go backwards in their business and take a product they sell and charge people to view and suddenly just give it away with Ads?

Look around.... Ad-supported movie plays... how many of those do you see in the marketplace???

Subscription may not work because of the littany of royalty issues and the fact it probably just isn't a profitable business model as it relates to movie content.

[lazespud]

Does netflix pay a licensing to studios to rent DVDs? If I remember right, they do. I wonder how that licensing fee stacks up to the the streaming fee...

Also, here's another financial costs perspective to parse out: what's the average end user cost for the convenience of getting streamed netflix?

I have an Xbox, which I had regardless... but I'd say at this point about 60 percent of it's life has been dedicated to netflix. I have zero interest in online gameplay, so essentially all of my 50 dollars a year of my gold membership is for netflix.

I have a 20 mps fios fiber optic connection, but if I DIDN'T have netflix, I'd probably go down to the next tier; 5 mps. So the additonal is like 20 extra buck a month. (I'm sure the brave new world of metered bandwidth is really going to play havoc).

So anyway, for me, my expense to have a decent netflix streaming option is basically about 400 dollars a year (I'm sort of pro-rating and amortizing the cost of the xbox). I actually watch a lot of stuff on netflix, but I'll bet it averages to about 7 hours a week, which means that I'm spending about 1.30 a day on netflix (including the 8.99 to netflix).

Which actually sounds like a pretty good deal when I look at it this way, but it actually sounds terrible when I look at it long term and say I'm spending 400 dollars a year, especially when I get frustrated about the lack of premium content.

[Brian]

Great article. I was wondering how much it costs them to stream to us. As far as a comment or two above, definitely the first-run movies aren't there, but I'm getting to watch all the MI-5, Law & Order:Criminal Intent, Doctor, Who, etc. television series I want. I also just noticed the 3rd season of The Tudors is available right now. Not new as in just out in the last couple of weeks, but pretty darn new to me. I enjoy the online gaming with Xbox Gold, so honestly, the low cost of Netflix for me almost makes me feel like I'm stealing something from them.

[mark cuban]

Great insight as always dan. The other thing issue with streaming is that there isnt a queue. Netflix gets breathing room since most people have a finite number of DVDs available to them at any one time.

When a DVD isnt available, the user waits or substitutes something available. Both of which buy time and reduce content licensing costs.

With unlimited streaming, particularly if they pay per use, and that use is defined as some number of minutes per movie/tv show, then the costs per user per day can sky rocket.

They could be paying a licensing fee for 3,4,5, X number of shows per DAY. Particularly if someone is using this as a replacement for cable. Thats when and how they get killed on this.

They still have to do it and its a great service, but as you say, they REALLY have to hope that people who are light users balance the heavy users because heavy streamers will cost them much more than heavy DVD users.

[Tom]

As Rodney said in "Back to School", you left out a lot of stuff. What about fixed overhead costs that Netflix has that must be added to each stream? Rents, equipment leases, utilities, and salaries must be added to the cost of downloading. What about amortizing R&D for this streaming? This is all business 101.

[additup]

Do you mind sharing your math on the $.03 distribution cost? I can't get to that # even with the cheapest wholesale guys....

[Dan Rayburn]

I didn't say their distribution cost was $0.03 so not sure where you came up with that number? If you mean the $0.03 per GB cost I listed, that cost is for transfer per GB, not per movie. Each movie takes up a couple of GB.

[additup]

Sorry transfer across packet is what I meant - $.03 per GB seems awfully low.

[Dan Rayburn]

It is awfully low, but you have to look at the volume. In the first 3 months, they delivered 25 MILLION GB. That's serious traffic. The lowest price point I have seen in the market on contracts with huge volume is about two and a half cents.
http://blog.streamingmedia.com/the_business_of_online_vi/2009/02/netflix-streams-15-billion-minutes-worth-of-movies-to-microsofts-xbox-360.html

[DueryRumssymn]

Great site this blog.streamingmedia.com and I am really pleased to see you have what I am actually looking for here and this this post is exactly what I am interested in. I shall be pleased to become a regular visitor :)

[Allan]

Dan, I have troubles with repeating your math. 2 hours full-length movie is 7200 seconds. 2000-3200 kbs equals to ~14 GB of data which is 10 times more than indicated by you. If this is correct then the cost calculations will also be thrown out of window. Where did I make the mistake?