In our April 5th newsletter, we argued that “Netflix might benefit from buying licensed content in favorable terms from distressed media companies”. This week, The Information reported that studios are indeed looking to offload movies to Netflix and Amazon due to the worldwide shut-down of movie theaters. Netflix is said to have received over 100 pitches. Some financially distressed studios are trying to sell movies below production costs to get an upfront payment.

The term “sell movies/shows” to Netflix means that Netflix licenses domestic or international streaming rights from studios. There are three categories of movies/shows on Netflix: a) Netflix originals that are produced by the company itself, b) Netflix originals that are licensed, and c) licensed 2nd run movies/shows.

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While Netflix in recent years is known for its successful self-produced shows, the licensed content still accounts for the majority of its spending budget. For example, in 2019, licensed content represented 60% of its content asset (balance sheet) and 79% of its amortization expense (cash flow).

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By having a large & sticky user base and a robust digital content distribution channel, Netflix managed to increase its leverage while licensing 3rd party content. That seems more than enough to offset the potential disruption of its original show production due to COVID-19.