Recently Netflix confirmed rumors that the DVD-by-mail company would have the exclusive first-license to air a new drama called House of Cards on its instant streaming platform. This is a departure from Netflix’s normal business of licensing TV shows and movies from TV networks and movie studios after they have aired or been released on DVD. While the strategy of creating ‘must-see’ content to lure in more subscribers may or may not succeed, it’s the reported price-tag that raises eyebrows. The original report from Deadline estimates that at $4-6 million per episode, the 26-episode commitment would cost Netflix more than $100 million. Subsequent reports have called this estimate high; MediaMemo’s Peter Kafka figures a better estimate would be $3 million per episode, or around $78 million total. But that’s just for producing the new show; additional bandwidth and promotional expenses will likely run the number back up to $100 million. Can the company possibly justify such an expense for one show?

In 2010, with revenues of more than $2.1 billion, Netflix earned net income of $161 million for a healthy profit margin of 7.4%. The company is rapidly adding subscribers, with analysts estimating revenues at more than $3.1 billion for this year and $4 billion in 2012. Clearly, the company can afford House of Cards. However, with Netflix’s instant-streaming-only plan available for $7.99 per month, they would need to add more than one million additional subscribers for a year just to break-even on the deal. This would represent an increase of 5% on the company’s 20 million subscriber base.

Is it realistic to expect 1 million households to drop $7.99 per month for access to a new drama series? While the talent on board (which includes director David Fincher, fresh off an Oscar nomination for his work on The Social Network, as well as actor Kevin Spacey) is a positive sign for the quality of House of Cards, there’s no guarantee that the show will prove popular with viewers. Even HBO with its stellar track record including hits like The Sopranos and True Blood occasionally misfires (does anyone remember John From Cincinnati?). The fact that HBO turned down acquiring House of Cards itself because the show’s production company Media Rights Capital wouldn’t agree to produce a pilot episode doesn’t exactly fill me with confidence.

If new subscribers joined Netflix for House of Cards and subsequently stayed on board, the company would obviously profit. However, this is far from a sure thing. Netflix’s subscriber churn will make it unlikely that the company can continue to grow its subscriber base at the rate it has become accustomed to. Jim Pyke points out that new subscribers from 2002 to 2010 come in at over 50 million, or about half of all U.S. households. We don’t know how many of these subscribers are unique, and how many are people who joined Netflix, dropped it temporarily, and subsequently subscribed again, but making some reasonable assumptions about the churn rate and the number of U.S. households shows that Netflix will hit a wall in terms of household penetration within the next three or four years. HBO, the current leader in pay-TV, has topped out with 28 million subscribers.

The biggest obstacles that Netflix faces in the near term are the expiration of its licensing deals. With content owners being squeezed by the drop in DVD sales as more and more consumers eschew buying discs in favor of renting them, studios will be demanding more cash from Netflix for instant streaming rights. Couple that with broadband providers grumbling about the massive bandwidth that the service takes (and worried that more and more cable subscribers will cut the cord in favor of some combination of Netflix, iTunes and Hulu), and the company could be squeezed from both sides. A commitment of hundreds of millions for original content might not turn out to be the best use of shareholders’ cash, when the same money could buy shows with existing fan bases. Recent deals with ABC and CBS are reported to have come in the $150-200 million range.

It will be years before anyone knows whether or not Netflix’s new strategy is successful, and we may never know the truth. With or without original content Netflix will continue to gain subscribers as the value proposition of DVDs-by-mail plus an expanding lineup of instant streaming programming for a few dollars a month is tough to beat. The question is whether or not House of Cards and presumably additional original content will lure in enough subscribers to justify their high development costs. I think it’s likely that most of Netflix’s original content will not carry such a high price tag, because it doesn’t need to. The occasional ‘tentpole’ production like House of Cards will generate buzz, and it can be bolstered by cheaper-to-produce content (like reality shows) to make sure subscribers feel they’re getting their money’s worth from Netflix.

But maybe I’m asking the wrong question. Maybe CEO Reed Hastings first option isn’t becoming another HBO, but rather to keep open that possibility as an alternative to buying the rights to pre-existing content. If studios buy this bluff during the next round of negotiations, the $100 million could pay for itself.