How Netflix Licenses Work

Netflix is the world’s leading provider of Film and Television streaming. With over 200 million paying customers at the end of 2020, Netflix retains it’s number one spot globally, despite strong competition from Disney+, Hulu, Amazon prime and other streaming services. The company originally started out by renting DVDs in 1997 and by the late 2000s, it had launched its own streaming service which was first available only in the United States and then Canada before going worldwide. Unlike most other online businesses which earn income through multiple streams including advertisement, the Netflix business model relies solely on paying subscribers. Income from subscriptions, as well as capital from new debt issues are invested into content. Netflix produces in-house or acquires exclusive rights to stream content such as Orange is the New Black, House of Cards, Stranger Things, BoJack Horseman, Unbreakable Kimmy Schmidt, and many more. These productions are called Netflix originals. It also partners with content providers to license streaming rights for a variety of TV shows and movies. This article takes a closer look at the legal structure that holds up Netflixs’ third party content and examines the intricacies of a typical Netflix license.

A copyright license agreement refers to a contract in which one party grants to another the right to use their copyrighted material on specified terms and for a specific period of time. Licensing in the context of streaming digital content is therefore the process of getting permission from the owner of the copyright to make that content available for users to stream on one’s platform. For Netflix, licensing is the process of obtaining films and tv shows either exclusively or non-exclusively to put on its platform for users to stream on demand. Copyright is a legal right of ownership that allows the creator of a published work to control how others engage with that work. Unauthorized use of copyright content can result in copyright infringement which attracts legal consequences. In Nigeria, this is backed up by Section 14 of the Copyright Act (LFN 2004). A similar provision can be found in 17 USC 106 of the United States Copyright Law and indeed, across all Copyright regimes.

Each license agreement differs based on the requirements of both parties but for Netflix, the basic structure remains the same. Netflix uses a “fixed license fee” method for obtaining content. They pay a fixed fee upfront for a fixed amount of time and they don’t share revenue with the content owner. Netflix reportedly uses an algorithm to determine which content viewers pay to see and relies heavily on this information to determine the total cost of each licensing agreement. The data is compiled to determine the expected hours of viewing each TV show or movie generated over the course of a licensing agreement—establishing a cost per hour viewed. It compares this metric to similar content arrangements, and it bases final pricing on exclusivity, as well as the time frame of the contract. Other content licensing methods include Revenue Share and Minimum Guaranteed Revenue Share which are used by other streaming platforms.

Licenses may be either exclusive or non-exclusive. Exclusive licenses may also be further limited by territorial coverage, i.e Netflix may exclusively provide some content in specific areas while that content may be made available by other streaming services in other areas. Exclusive licenses are typically more expensive but also offer higher returns. Non-Exclusive licenses are usually used when Netflix is obtaining content from other networks and studios such as Freeform, HBO and others who also air the content on their own services.

Netflix is constantly releasing new content and because of the high cost of producing Netflix originals coupled with the demand for fan-favorite third party content by its subscribers; the company is constantly obtaining new licenses from television studios and filmmakers. Their efforts to produce new content, secure the rights for additional content, and diversify through 190 countries have resulted in the company racking up billions in debt: $21.9 billion as of September 2017, up from $16.8 billion from the previous year. Despite this, the company stuck to its vision of bringing quality content to its users and this has paid off. Netflix reached a financial milestone in January 2021 when it announced in its fourth-quarter earnings report that it would not “need to raise external financing for [our] day-to-day operations,”. According to S&P Capital IQ, Netflix collected $6.64 billion in revenue for the fourth quarter of 2020, up 21.5% over the prior-year quarter.

At the end of 2019, Netflix had $14.7 billion worth of licensed content in its repertoire while total Netflix Originals were worth $9.8 billion. As one imagines, this creates a complex licensing operation. Netflix does not accept pitches nor does it typically contact independent filmmakers to obtain licenses. From its headquarters in the United States and offices in Europe, South America and Asia, Netflix manages its content expansion through a carefully curated global network of registered distribution aggregators who have direct access to the company’s content acquisition team.

Netflix pioneered the growth of television streaming services and has forever changed the way we think about entertainment. By leveraging machine learning and using its algorithm to determine the costs of each license it negotiates, Netflix has built an impressive licensing system that has helped the company expand rapidly.

–Naro Omo-Osagie writes from A&E Law Partnership Abuja.