Netflix just spent $200 million for 'Game of Thrones' creators, but the cost could be greater

Key Points
  • "Game of Thrones" showrunners David Benioff and D.B. Weiss signed a $200 million deal with Netflix this week.
  • Analysts wonder if Netflix's string of deals with content creators are worth the money.
  • While Benioff and Weiss have cut ties with HBO, they still are contracted by Disney to write, produce and direct three Star Wars films.
Executive Creators and Producers of "Game of Thrones", David Benioff, George R. R. Martin and D.B Weiss attend the "Game Of Thrones" Season 8 NY Premiere on April 3, 2019 in New York City.
Jeff Kravitz | FilmMagic, Inc | Getty Images

"Game of Thrones" showrunners David Benioff and D.B. Weiss are leaving HBO for a $200 million paycheck from rival streaming service Netflix.

The deal is one of many that Netflix has made in the last year to bring in top-tier talent to make TV shows and films exclusive to the platform to better compete with rival streaming services like Hulu and Amazon Prime as well as up-and-coming ones like Disney+ and Comcast's yet-to-be-named service.

However, analysts wonder if these deals are worth the money for Netflix.

Netflix has been burning through cash for the last decade, signing names like Guillermo del Toro ("Shape of Water"), Ryan Murphy ("Glee") and Shonda Rhimes ("Grey's Anatomy").

Last year, Netflix shelled out more than $12 billion to purchase, license and produce content. This year, that figure will rise to $15 billion. It will spend $2.9 billion more on marketing. These costs come as Netflix is expected to report $20.2 billion in revenue in 2019, according to analysts surveyed by Refinitiv.

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While Benioff and Weiss were the shepherds of the Emmy Award-winning "Game of Thrones," there has been criticism about their writing on the show in later seasons, when the pair no longer had author George R. R. Martin's source material to work from.

"Either [Benioff and Weiss] are the next Steven Spielberg or they are the next Michael Cimino," Wedbush analyst Michael Pachter said.

While Spielberg has continued to thrive in the industry, Cimino famously wrote and directed "Heaven's Gate," a film that flopped so badly at the box office it caused Transamerica to shutter its film production and sell its studio to MGM. This was just two years after Cimino made the Academy Award-winning "Deer Hunter."

"I'd say somewhere in between," Pachter said. "They might be good enough to justify the price, but they might not be. Remember, they still have to produce something, and if it's not great, it isn't worth it."

And that's been an issue for Netflix. While someone like Murphy, whom they paid a reported $300 million for a five-year contract, has said he has 10 greenlit projects in the pipeline for Netflix — three documentaries, four TV shows and three movies — only one has been given a release date.

"The Politician" is an eight-episode show about the lengths the super rich will go to stay on top, including paying to get their children into elite colleges. The show, whose premise predates the college cheating scandal, is due out at the end of September.

A still from "Stranger Things" season three, with the Hawkins crew on the cusp of adulthood and facing enemies old and new.

Rhimes signed a deal with Netflix in 2017 for $150 million. While she has detailed eight projects in the works, none has a production or release date.

Then there is the monetization issue. Netflix makes the majority of its money from selling monthly subscriptions. It also makes a small amount from merchandising content that it owns. Netflix doesn't make money from individual views of content or from advertising.

However, since mid-2014, Netflix has been cash flow negative, which means more money is flowing out of its business than in. In fact, the company has been spending nearly twice as much as it has earned over the last few years in an effort to differentiate itself from other streaming services.

(Source: New Constructs)

Part of what Netflix is spending is on original content, with the idea these shows would help drive subscriber growth. But it's difficult to say what drives members to sign up and stick around. The company doesn't often release viewership data for its shows or movies and, since Netflix releases so many new programs and shows each month, it's difficult to connect a spike in members to one individual program.

"This reeks of desperation," said David Trainer, founder and CEO of investment research firm New Constructs. "For how long will investors continue to tolerate what appears to be Netflix's reckless allocation of capital?"

Netflix shares, which have a market value of $134 billion, are up 14% since January, but are down 12% from a year ago.

Trainer noted that deals like the one signed with Benioff and Weiss don't include the cost of production or marketing. Netflix is paying millions just for the content creator, not the content.

And, unlike many of the film deals made in Hollywood, which pay actors, producers and directors for a specific job and offer rewards based on performance, these deals are entirely based on past performance and future potential.

"Netflix is banking on [Benioff and Weiss'] future success," said Paul Dergarabedian, senior media analyst at Comscore. "Things like this often seem expensive, but in retrospect were good deals."

Dergarabedian noted how many analysts felt that Disney had overpaid for Pixar in 2007 when it shelled out more than $7 billion to bring the animation house under its umbrella.

But price isn't the only thing Netflix will deal with when it comes to Benioff and Weiss. While the pair have cut ties with HBO, they still are contracted by Disney to write, produce and direct three Star Wars films. The first film in that trilogy is due out in December 2022.

"How are they doing both?" Trainer asked.

Netflix did not immediately respond to CNBC's request for comment.

Disclosure: Comcast is the parent company of NBCUniversal and CNBC.