Is Chris Rock Really Worth $40 Million To Netflix?

By Markets Fool.com

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Image Source: Netflix.

Netflix(NASDAQ: NFLX) is going on a shopping spree the likes of which Hollywood has never seen.

The leading streamer shocked the entertainment industry last year by promising to spend $6 billion on content to make 600 hours of original programming, and it's upping the ante in 2017, projecting 1,000 hours of original entertainment.

All that content doesn't come cheap. Netflix is going into the red on a cash basis, projecting free cash flow of negative $1.5 billion this year, and it just ordered up another $1 billion in debt to fund the expansion. Management argues that spending that money up front will be more cost-effective in the long run, as owning content that streams around the world is the best way to deliver value for its customers and drive a profit.

Analysts, however, have been skeptical about the level of spending, as some of the price tags are especially high.The Crown, a drama about Queen Elizabeth premiering next week, cost a reported $120 million.

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One of the more intriguing deals Netflix made recently was signing comedian Chris Rock to produce two stand-up specials for a reported $40 million. At $20 million/hour for an assumed two hours of material, that may be the highest price paid for at-home video content in entertainment history.

Netflix has built up a solid stable of stand-up comedy originals, focusing on the genre as it tends to be cheaper to produce and comedians are often eager for the exposure. Rock, who brings a pedigree to match arguably any comic working today, is different. Netflix reportedly outbidAmazon(NASDAQ: AMZN), Hulu, and HBO to sign the SNL alum and Oscar host.

Netflix Chief Content Officer Ted Sarandos said, "ChrisRockis a beloved actor and director, and his remarkable stand-up makes him comic royalty. There is no one like him, and Netflix offers the global platform and creative freedom that will serve as a perfect home for someone with his incredible talent."

Stand-up calculus

WhileNielsen reports TV ratings for shows on the traditional tube, Netflix has played coy with such figures. It has long refused to release data on viewership totals, sparking ire among its peers who feel handcuffed by ratings and the need to deliver for advertisers. With its subscription model, Netflix can take more risks, as it doesn't need every show to be a hit, and it can produce content for a niche audience.

But without those numbers, it's difficult to say what the company's return on investment is for individual shows -- though there are other approaches to a formula.

Netflix customers stream an average of about 1.5 hours of the service a day.Assuming the average price per month is $10, they pay about $0.25 per hour of entertainment. On a strictly per-hour basis, Rock's two hours of stand-up would only be worth $0.50 to each subscriber, meaning Netflix would have to get nearly all of its 87 million subscriber base to watch the specials.

But premium content deserves a higher price tag. Another way to consider the value of Rock would be the lifetime value from the new customers he brings in. If the average Netflix subscriber stays with the service for five years, spending a total of $600, Rock would have to attract about 67,000 new members to the service, a goal that seems reasonable considering Netflix has added at least 160,000 domestic subscribers in every quarter since it launched its streaming service. Finally, based on the oldBlockbuster model in which a two-hour movie cost $5 to rent, 8 million Netflix subscribers would have to watch the Rock specials in order to justify the cost. That also seems like a reasonable goal, considering that's less than 10% of its global base and 20% of its domestic base.

Blowing up the bidding wars

Netflix doesn't always get what it wants. It lost the streaming rights forSeinfeldto Hulu, which paid $180 million for the show about nothing, and it's been outbid by Amazon a number of times, including for the award-winningTransparent series.

But sometimes overspending, if that's what Netflix is doing here, isn't such a bad idea. There are benefits beyond the immediate customer satisfaction in making a deal with Rock. He could work on future stand-up specials or other content for the network, and signing him keeps a big draw away from rival services.

What will ultimately determine the success of Rock's specials will be their own merit. If they are funny and well-received, they will likely justify the price tag.

Netflix has made it clear that it will aggressively pursue the content it sees as valuable for its service. It's got its checkbook out, and it isn't planning to put it back in its pocket anytime soon. What counts in the end for the company isn't whether it spends a few extra million dollars here and there. It's the success of the business, and producing excellent content for its subscribers is the best way to ensure that continues.

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Jeremy Bowman owns shares of Netflix. The Motley Fool owns shares of and recommends Amazon.com and 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.