Will Netflix, Inc.'s $40 Million 'Gotham' Gamble Pay Off?

Netflix, Inc. NFLX will reportedly pay $1.75 million for each episode of "Gotham," a new drama from Twenty-First Century Fox Inc FOX FOXA. The show premiered with fairly strong ratings on Monday night, but the series has a long way to go. If a full season is produced, Netflix could pay upwards of $40 million for the show (23 episodes x $1.75 million = $40.25 million). "I think it's a call option," Brett Golden, President and co-founder of The Chart Lab, told Benzinga. "I think it's a really good move to potentially lock in future profits."

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A Necessary Evil

Sean Udall, CIO of Quantum Trading Strategies and author of The TechStrat Report, told Benzinga that Netflix is simply doing what it has to do. "Their whole business model is predicated on securing content that the other streaming services do not have, and paying a lot for it," said Udall. "If they quit doing that, what do they really have? They don't have a technology that has a moat around it. Other people are doing the same thing -- Amazon, Hulu." Udall said that Netflix could be in trouble if it doesn't perpetuate this business model. "If they get to a point where they're not securing proprietary content -- either they don't get stuff that is coming out earlier than other [services] or shows that competitors don't have -- they're basically in trouble," he added.

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Searching For Network Success

Rob Enderle, Principal Analyst at Enderle Group, believes this strategy is all part of Netflix's plan to become a network. "The only way you're going to be a network is if you get lots of content," Enderle told Benzinga. "They recognize that as long as other people own the rights to top content, they can't get to where they wanna go, which is to basically replace a network, if not all of them. This is their path to success, so they gotta make bets on new shows, because once a show is successful it's too expensive to acquire." Enderle thinks that "Gotham" was a "pretty good risk" because "Smallville" and "Arrow" were successful. "They probably paid more for it than any other untested show, but certainly less for it than if they had waited until it was successful," Enderle added. "In fact, then it might have been too late because someone else may have acquired the rights."

Bingers Beware

Albert Fried & Company analyst Rich Tullo is worried that consumers will skip "Gotham" on TV and watch it later on Netflix. "I've seen it a couple times with these guys," Tullo told Benzinga. "A show, because it's gonna be on Netflix, doesn't do great in the ratings because people are gonna wait to binge-watch it on Netflix. It gets cancelled, and the Netflix picks it up even cheaper. That's what happened with 'The Killing' and another show." Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.