Among the many speculations surrounding this week's Netflix-Epix deal is how much Netflix is actually paying. While there have been rumors suggesting the tab could run as high as $1 billion, nobody except the principals really knows. However, after talking with a Netflix spokesman yesterday, it is likely that whatever Netflix's is paying, it is virtually guaranteed to receive a satisfactory ROI. That's because Netflix has once again mined the extraordinary value of its user data to inform a critical business decision.
Back in January, after the NY Times shared a fascinating interactive map that displayed the top Netflix rentals in 12 geographic markets, I wrote that Netflix's user data, combined with its algorithms for predicting its users' preferences and behaviors, gave the company a huge strategic advantage. Therefore, when I asked a Netflix spokesman yesterday about what methodology Netflix uses in valuing a content license deal like it negotiated with Epix, I wasn't surprised by his answer that the process always starts by Netflix looking at its user data.
Netflix taps deeply into its user data, analyzing things like what movies are in queues, how often and where in queue they show up, number of searches, and other user behaviors. And I suspect that's just the tip of the iceberg. Netflix can then use this data to get insights into subscriber churn, lifetime value, viewing intensity and other relevant metrics that help it create algorithms predicting the financial upside of adding certain movies and TV shows to its library. In fact, with a new trove of data now pouring in from its streaming users, Netflix can further refine its predictive algorithms.
All of this makes Netflix a totally new kind of distribution partner for Hollywood, and also ups the ante for other distributors to improve their own data capabilities to compete. When Netflix comes to the negotiating table it knows far more about the value to its business of licensing a content portfolio - or arguably even a specific movie - than any distribution partner Hollywood has ever encountered. The good news for Hollywood is that this could mean Netflix will be willing to pay more, because it is more confident in its ability to generate an ROI. The bad news is that if Netflix doesn't calculate specific content will help its business, it will be less likely to bid aggressively.
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