Why CBS Corporation Is a Big Fan of Netflix

By Markets Fool.com

Netflix made Star Trek: Discovery profitable before it even debuted on CBS All Access.Image source: CBS.

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One of the last things you might expect a television network executive to say is, "We're a big fan of Netflix (NASDAQ: NFLX)." Sure enough, CBS (NYSE: CBS) CEO Les Moonves uttered those words in front of analysts at the Goldman Sachs Communacopia conference earlier this month.

Although Netflix is often seen as public enemy No. 1 to the traditional television industry, its global presence can be of great benefit to media companies producing their own content, including CBS. Additionally, its business model is leading the way for CBS to launch its own over-the-top streaming services: Showtime and CBS All Access.

How All Access made a profit on Star Trek before it even debuted

CBS is producing a new Star Trek series exclusively for All Access. Moonves notes that Netflix has already bought the global rights outside of North America, and the licensing fee more than covers the production expense. Since All Access doesn't operate outside of North America, there's no opportunity cost for the company. It has already made a profit before the show even debuts.

That's telling of the role Netflix plays in the broader content marketplace. Although it's now producing original movies and shows, Netflix is still spending huge sums of money buying up content. This spending, along with the presence it invites from competition, means there are more bidders for content overall.

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Moonves said that just a few years ago, if CBS was selling its shows for syndication in a relatively big market like France or Germany, there would be just three buyers. Today, with the addition of streaming video services, it's seeing seven, eight, or nine buyers. As a result, CBS is able to get a much better return from selling its shows internationally. Coincidentally, content licensing revenue at CBS increased 30% from 2010 to 2014, a 6.8% annual growth rate.

Moonves also says that services like Netflix are allowing CBS to break into untapped markets. He specifically calls out China and Latin America, where consumers have gone from pirating content to paying for streaming services. CBS can license its content to those services and actually generate additional revenue.

Following Netflix's lead with original programming

The second reason CBS is a big fan of Netflix is that the company has developed a game plan on how to produce and distribute original programming on a streaming service. While CBS won't be releasing every episode of Star Trek at once, it's using original programming to reduce its churn rate -- the percentage of customers that cancel its service every month.

One of the biggest threats to over-the-top services is that customers will cancel them during periods when nothing they really want to watch is airing. Netflix started combating this by releasing a constant stream of original programming. It seems like every few weeks, people are talking about a new Netflix series or movie (personally, I can't keep up).

Moonves told the Communacopiaaudience that CBS All Access "will have a continual flow of original programming that will be on and hopefully that reduces the churn." On Showtime, which is now available over the top as well, the schedule changed so it debuts a new series or season about once a month. That way, there's always something fresh to keep subscribers watching.

Over the top is going to become increasingly important for CBS. Not only does Mr. Moonves see Showtime growing from one million subscribers today to about four million in a few years, All Access provides additional leverage when negotiating retransmission fees. It's proof that customers want its content, and CBS is going to make money with or without pay-TV operators.

So, while Netflix does compete with CBS, particularly its Showtime network, overall it has been beneficial force in the market. It has brought more money to the table for content sellers, and it has provided an excellent model for CBS to launch a competing product.

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Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.