Examing and reviewing the scintillating and thrilling Netflix business model and how they make money.
If you are having a conversation with a group of friends and you mention a series you watched, it is not likely that anyone will ask you ‘where’? Almost everyone that hear you will automatically assume you are referring to Netflix. Even when you are not. However, majority of the times they end up been right.
And that assumption will always be there because Netflix has become synonymous with video streaming. In fact, Netflix is the largest streaming provider of entertainment content in the world. It is equally the biggest platform responsible for the growth series have witnessed in recent years.
Netflix is also one of the current pioneers of subscription-based content, though it has not always been like that. Today, it runs on a Subscription Video on Demand (SVOD) model. Subscribers pay for a monthly plan and are given access to a vast library of media with all the flexibility of time and location they may need.
Netflix is also the most successful entertainment mass-media-companies of all times. However, when it started in 1997 its main service was DVD rental. It was providing services to customers through means of mailing out physical copies of movies, shows, video games and other forms of media through standard mailing system.
But as technology and internet grew it quickly modified its business model to a subscription-based online streaming platform.
Today, we analyze in details the Netflix business model that has given rise to a company now valued at nearly $150 billion. But to have a better understanding of how it works and how it makes money we shall look at the business segments and the promise to users.
What is Netflix?
Netflix is a paid subscription-based over the top platform. It is an online streaming media service provider that specializes on entertainment. The platform provides customers easy access to their favourite shows and movies on as many devices as they want. It is also the world’s largest video selling platform.
Subscribers to the Netflix have a huge selection of films, series, documentaries, and television shows at their disposal. This they can watch anytime and through any device connected to the internet (smartphone, tablets, smart TV, laptop, etc.).
In a space of 2 decades the company has experienced rapid growth thanks to the subscription-based business model of Netflix.
As at 2021, Netflix has 209 million subscribers with 72 million of them from the United States and Canada. The company has offices in Canada, India, Brazil, France, Netherlands, South Korea, Japan, and United Kingdom.
Netflix Business Model – Service Segments
Three major service segments maintained by Netflix are:
1. Domestic Streaming
Having been found in the United States, this streaming plan is solely provided to the members of the States itself, and the revenues are collected from the monthly membership fees.
In 2015, the numbers went on to increase from 44,738 to 54,750. This indicated an increase in the costs too. The contribution margin, i.e., the variable costs subtracted from the total revenue, sky-scraped to 37%. Such a contribution margin was noted to be the most profitable plan as a short-term plan.
2. International Streaming
The revenues from this streaming plan are collected from the monthly membership provided to the patrons residing outside the United States.
As of 2017, the revenues were confirmed over $5 billion because of the international extension plan in 2015. The contribution margin was noted to be a positive 4%, which was negative in 2016.
3. Domestic DVD
You recall where Netflix started – renting of DVDs. The business model may have changed, but it still collects collects monthly revenues from DVDs by e-mail. Being the company’s oldest form of revenue, the rental DVDs still provide a considerable margin.
What’s more intriguing is that the platform has separated the movies, TV shows, and documentaries for kids and adults to promote a family-friendly environment.
Netflix Business Model – Value Proposition
With the stiff competition in the industry today, Netflix is able to maintain its lead because of a strong value proposition.
The proposition from Netflix that continues to keep customers are:
- Access to a huge catalog of products, with content for all tastes;
- On-demand streaming, with 24/7 access
- 100% free of ads!
- Possibility of binge-watching;
- Offering personalized lists and recommendations, based on the content watched;
- Able to view shows and even movies on high-definition contents
- User accounts, which allow each person in the family to have a personalized profile
- Ability to access contents through any device as long as there is internet connection
- Stream content conveniently anywhere without going to a DVD store or theatre
- Get unlimited access to TV shows and movies
- New signups can avail a 30-day free trial (1 month free of services)
- Access locally-produced and culturally-relevant content no matter your country
- Receive algorithmic recommendation for new items to watch
Netflix Business Model – How Do They Make Money?
Netflix started originally as a DVD rental service in 2007. It took 10 years before the company decided to convert their business structure from mail-in-system to streaming content based on subscriptions.
Before launching online streaming in 2007, on the average Netflix revenue use to hover around $997 million.
But immediately the streaming services was launched in 2007 the revenue started growing at astronomical rate.
In 2019 for example, the company generated $20.16 billion annual revenue – that is more than double everything generated in the first 10 years of operation. And in 2021 it was even far better, at $29.6 billion.
So the major revenue sources for Netflix is through Monthly subscriptions.
And it has 3 popular plans that customers can choose from:
1. Basic Plan – $8.99 per month.
2. Standard Plan – $12. 99 per month
3. Premium Plan – $15.99 per month
Netflix is a subscription-based business model making money with three simple plans: basic, standard, and premium, giving access to stream series, movies, and shows. Leveraging on a streaming platform, Netflix generated over $29.6 billion in 2021, with an operating income of over $6 billion and a net income of over $5 billion. Since 2013, Netflix is transitioning from a platform (primarily providing licensed content) to a media powerhouse (mostly producing its own content). In 2021, Netflix spent over $4 billion on produced content.
Is Netflix profitable Yet?
We are know that most startups take many years and sometimes over a decade to attain profitability. And many people have been asking (rightfully) if Netflix is now making profit with its subscription business model.
This is even more so, knowing that Netflix has a huge cost structure to maintain. And at the beginning of the current Netflix business model, the company had to invest a lot in order to accomplish the kind of video collection it wanted to offer the customers. So, as expected, it didn’t start making profit early enough.
But today, that is no longer the case. In 2018, Netflix profit was in excess of 1 billion dollars. And in 2019 it increased to 1.8 billion dollars.
So if you are still asking the same question, the answer is ‘YES’.
Why is Netflix Business Model So Successful
Despite facing stiff competition from other companies in recent years, Netflix continues to be the market leader. And is still one of the most successful startups of the last 3 decades.
But the question to ask is, what exactly is responsible for the extra ordinary success of Netflix?
Here are some of the reasons I can show:
1. It maintains original content.
2. There is a huge catalog of movies, documentaries, shows etc to choose from.
3. All Netflix contents are available in over 20 languages across the world
4. It is no longer a ‘US company’, it has expanded to 190 countries in the world.
5. It targets all age and income groups
6. The prices are fair and have different plans
7. No ads while streaming is on
In conclusion, Netflix’s business model is trying to get as many users as possible glued to the platform. Though this has come at a huge cost, but the benefits are beginning to show.