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

[Dan Rayburn]

Hi Allan, a 120 minute movie encoded at 2000Kbps would transfer a total of 1.77GB. I rounded it off to 1.8GB. An easy way to do the math on things like this is to use one of the many streaming calculators on the web. Just go a Google search on "streaming calculator". I have an Excel spreadsheet I use, but many of the calculators online work just as well.

[Amit]

Dan, I am still not clear on the licensing front. You said that average cost of licesning and streaming movie is 0.50$. Can you throw more light on the licensing the content streaming and how is it shaping up in this digital entertainment industry ?

[Jake]

While it may seem like a step backwards, ad supported streaming content probably isn't totally out of the question with Netflix. Ads appear in their DVD mailers, which although is quite a different animal, movie-goers are now quite used to seeing ads even after paying $8 and up for a movie ticket.

However, I believe you are right in that streaming will most likely remain as a method to augment their core business. Fantastic article.

[C]

I have seen a contract that suggests netflix does profit sharing with the studios

[Hamida Nafaa]

Hi Dan, all. Thanks for the insightful post and comments.

Any ideas who is the technology provider for Netflix? I mean who does the CDN integration for them?

Looks like they are using Silverlight as streaming platform and Level3 as CDN provider, but I couldn't figure out who is developing the solution for them, is it an RTSP over HTTP solution, etc,

[Dan Rayburn]

Netflix streams with both Level 3 and Limelight. If you do a search of the word "Netflix" on my blog you will find other posts that talk about the details around their encoding and delivery.

[Dedee]

Well, interesting article indeed.

[Netflix]

Thanks for sharing this, I am new to netflix and your post provided me a lot info about your netflix.

[joe]

Not sure you properly understand studio windows and contractual limitations associated with existing pay TV deals. It will be a long time, if ever, before studios are able to distrbute first run content in a subscription service digtitally. Physical only works because of the first sale doctrine associated with physical products (i.e., after I buy a DVD, I can resell or rent it). Digital subscription is a later window than pay TV. Only exception is Netflix's deal with Starz that allows them to offer movies in the Starz windows (Sony Pictures content, etc.), but that's still during the Starz window and no guarantee that deal stays in place. Netflix is unfortunatley not the future unless it gets acquired and can offer the studios gigantic advances that match the pay tv deal guarantees. Sorry, Netflix lovers.

[Michael]

Dan;

When you say!!

"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."

What exactly are you referring to? The overall cost for their streaming side of the business.. or licensing rights to their current film offering?

Thanks in advance!!! & Great site BTW!

[Dan Rayburn]

Hi Michael, yes, those numbers I quote include both the costs to deliver the content AND license the content.

[vicki]

Dan, just one question. Can you please tell me what to do to stop this buffering problem with Netflix? I have narrowed it down to what is NOT causing this problem. It is NOT my service provider, it is NOT my computer, it is NOT running multiple programs while trying to watch a netflix movie. The only reason I ask you is because I stumbled upon this blog trying to research what is wrong wtih movie watching instantly on netflix and I though the answer would have something to do with money and streaming.

Thank you for your help

[picsunion]

I stumbled upon this article from google search after so many clicks of links which have no use to me.... I read everything of this article including all comments. I have got all what I was searching for in this article... I will spend some more time reading some of the other articles available in this web site.

Even though I am not paying for this article I offer you many thanks and my appreciation. Thank you

[Jack]

Your math is absolutely incorrect and so is your GB price for delivery. The best anyone is going to do is $10/mbps of bandwidth. Which equates to about $.30 per GB delivered. That does not take into consideration the cost to serve that stream, which is often 2x the bandwidth cost on a monthly basis.

3.2Mbps streaming HD movie uses 11,500MB per hour. or $35.40 at $.03 per Gb. Realistically they are streaming at 800k which would cost $8.64 per hour.

YouTube, HULU and Netflix all have the same losing $ fate when it comes to delivering video until they take out the CDN who are making all the $$$$.

[Dan Rayburn]

Jack, about six months after I wrote this post, the CEO of Netflix said on an earnings call that it cost them "about five cents" to deliver a movie. So the math is not wrong and the numbers are not wrong. Also, I gave out pricing based on a per GB delivered model. You are talking about pricing on a per Mbps sustained model, which is not the same thing.

And Netflix has given out all of their encoding specs on their own blog, in detail. So the 800Kbps number you list is incorrect. You mention Hulu, yet they just announced a few weeks ago that they were profitable.

[Christopher Cooper]

Hey, I just came across this site while doing some research and I love it. THANKS FOR ALL THE INFORMATION. I can't even tell you how useful this will be... You made me a very rich man. Thanks

[Q]

Complement--not compliment.

[Cy Cabell]

A question was broached in this article, "How much can Netflix realistically charge for a streaming only service? $5.99/mo?" I'm currently paying $9.68/mo for my Netflix service now. I think since we started I have ordered less than a dozen DVDs, but I have watched dozens of streaming movies. Honestly, if I could have access to everyone of the thousands of titles that Netflix offers, I'd be willing to pay $15/mo or even $20/mo. Think about it, $20 per month to have any movie title in the Netflix library--now that's a deal! Just hope the studios figure this out!

[TWSimmons]

I stumbled across your site and I am very interested in your comments. I work at a public community college that is non-traditional. We have no campus and 40,000 students online and another 230,000 in our college system.

I have been trying to gather information about streaming video to provide movies to our students. I do not have a problem with the licensing fees, if I can just find someone who would help me.

Do you know anyone I could talk to about this? I have talked with Swank, Residence Life, Blockbuster, Netflix, Criterion Pictures. All to no avail. Is this because of the studios?

[Free2Watch All Movies Online]

netflix is far of a simple streaming service. in my oppinion netflix is the best service i ever used and i am very satisfied with it.

[Ray]

I think some of the folks doing the math are confusing gigabytes and gigabits, megabytes and megabits or kilobytes with kilobits. There is a big difference and not the same. Roughly a factor of 8 give or take. Basically divide by 8 for aprox. People do this all the time with their internet speeds too. They think a 8mbps/8000kbps connection should download at 8000 kilobytes per second for some reason. I think the math in this article is pretty close and sounds ball park.

Anyway what I keep wondering is how can they afford to pay all their employees as well and still maintain and report profits like they do?

Maybe some is outsourced for cheaper, but they do have plenty of u.s. distribution centers for the dvd mailers.

The profit per average customer can't be that much. I am guessing they hope people do not stream many movies in a month, and same with the dvd mailers. The ones that are not as active hopefully make up for those that do.

[Ben]

@ Alan: When kb is written it means kilo[bit] which is smaller than a kB which stands for a kilo[byte], so actually the guy is correct in his calculation.

[Anthony]

What do you think is the hardware used by Netflix to stream content

[Zack Coffman]

Very interesting and well written article. However, as a film producer I wish it would have been a bit more even handed. As an independent producer I am often at odds with the studios, but honestly Netflix operates just as onerously when it deals with indies. If they offered a fair deal regarding streaming, lots of independents would consider it. Treating indies poorly while doing rich side deals (DVD rev share) with studios doesn't seem like a departure, rather following the studios step for step. Interestingly enough, YouTube offers indies a rev share for streaming on a per rental basis, seems much more democratic and certainly creates good will with the indie producers. Thanks again for the stimulating article!

[mba student]

Their stock prices continues to climb.

I wonder how many movies the average uses watches per month.

Anyone have new information on the Netflix structure