To further expand its subscriber base, Netflix is continually negotiating new licensing agreements with television shows, networks and film producers, or investing in its own content production. When a content license is granted, the rights are acquired by the owners of a television show or a film that broadcasts content on a service such as Netflix. A licensing agreement is entered into between content owners and Netflix. Any agreement depends on the needs of both parties. For example, the owner of a television show might agree to allow Netflix to broadcast all seasons of its show for one, three or five years. The license agreement may restrict or exclude Netflix to certain regions. A British crime show could be available worldwide for online distribution, with the exception of the UK, the domestic producer market. When the license agreement expires, both parties can negotiate an extension, or Netflix could remove the show from its library if the viewer`s interest does not guarantee the fee. A content owner can license programming on multiple streaming platforms such as Hulu or Amazon Prime Video, meaning that licensing agreements between parties are not exclusive.
Licensing agreements that are not exclusive are generally less expensive to obtain because non-exclusivity reduces the value of the content. Examples of licensed content include movies and shows such as Showtime`s Shameless, How to Do with ABC`s Murder, Universal`s The Office and Paramount`s The Godfather. Examples of Netflix originals, which are nevertheless licensed content, are MRC`s The House of Cards, Orange is Lionsgate`s New Black and Sony`s The Crown. The films and shows that Neflix produces and owns include Stranger Things, Mind Hunter and The Irishman. The fees collected by subscribers, coupled with the raising of capital through new debt issues, allow Netflix to invest in content, either through in-house production or licensing agreements with content providers. Online entertainment companies typically rely on advertising or a subscription business model, or a combination of it to support their operations. For example, Hulus` basic plan combines advertising and subscription fees, although customers can also pay more for viewing. Netflix has opted for a business model based solely on subscription revenues. It offers three price levels that allow customers to access exclusive and non-exclusive television shows and films that the company has either produced itself or licensed by the content owner. Securing licensing agreements is one of the most important expenses for Netflix. At the end of 2019, Netflix had $24.5 billion in content assets on its balance sheet, up from $20.1 billion the previous year.
Exclusive licensing agreements are much more expensive than non-exclusive agreements, although they have the potential to get more subscribers over time. As competition continues to saturate the market, streaming service providers recognize the importance of proprietary content.