How Does Netflix Make Money? (Netflix Business Model Analysis)

Barton Crockett, JP Morgan’s analyst, put out a statement in 2007, wherein he said Netflix, which pioneered online DVD rental and dominated the industry with over 6.8 million paid users, experienced competition from big players like Blockbuster that is much tougher than we had initially predicted.

He said that Netflix is going through a challenging competition by the back-then DVD rental – Blockbuster.

Because Netflix in 2007 was facing very peculiar crunch circumstances. Furthermore, after the news came out, the stock prices of Netflix went down by 5%.

Moreover, in general, the market became highly suspicious about Netflix’s future growth.
However, Netflix was so strategically competent to steer through this position that in the next 15 years, Netflix evolved as one of the best-performing stocks across the globe.

During the last few years, Netflix cultivated a return of 10,000% from 2017 to 2018.

In this aticle, let us decipher such an impactful analysis and the business model of the world’s largest OTT platform – Netflix. First, let us understand the business model of Netflix, followed by its strategies and money-magnet approach. Nevertheless, before we move further, let us take a bird’s eye view of how Netflix works.

What is Netflix?

Being the world’s leading entertainment service, with over 220 million paid memberships in over 190 countries, Netflix relishes various TV series, documentaries, feature films, and mobile games across multiple genres and languages.

Netflix currently has three subscription plans (basic, standard, and premium), starting from $8 to $14. However, it is not completely Netflix’s business model.

Netflix allows unlimited binge-watching for paid members. They can watch shows on any internet-connected screen anytime they want. Members can also play, pause, and resume watching without advertisement.

Netflix Business Model: A Quick Glance

Netflix’s Business Model is a blend of on-demand subscriptions with “eating till you get full” business models. Get it? Let us understand it further here.

How often have you heard this phrase, is that show on Netflix, from your friends and families when you tell them about a new show or movie?

If your answer is every time you are not alone, pal, because Netflix is now a global brand for online entertainment. Or perhaps it is a tremendous contributor to series growth in recent years.

Although you may be familiar with these things about Netflix, you may not know that Netflix is more than 20 years old, and when it was established back in 1998, it was merely a DVD rental service by mail.

Regardless, the company has not failed in time, like many others in the entertainment industry, and the current success of Netflix is because of its constant follow-ups to trends and standards.

Therefore, Netflix’s business model is a great learning experience for everyone. It shows how a company, earlier crawling towards disappointment, chased success in the long run.

How does the Netflix Business Model work?

Netflix is still a subscription-based service, making customers access an entire library of TV shows and movies in one easily-accessible place – and from multiple internet-connected devices like mobile phones, tablets, laptops, smart TVs, and media sticks.

As stated earlier, Netflix’s business model is subscription-based. It is an online streaming platform offering on-demand video.

In addition, Netflix aired its first in-house production -House of Cards, a critically-acclaimed political drama starring A-List actors like Kevin Spacey under the brand name Netflix Originals.
Its further production contains Orange Is The New Black, Stranger Things, and 13 Reasons Why Have You Followed.

Let us dive deeply to know more about the main components depicting Netflix’s Business Model Canvas.

Customer Segments

Netflix platform has a large subscriber base. Because of this, its profile covers multiple titles, e.g., it has films, documentaries, and shows of all genres, which is enough to entertain fans of all ages and preferences.

Hence, customer segmentation is both usage and geographical, but only to verify what type of content works best for each audience.

Value Addition

Besides providing diversified content, convenience is also an essential component of Netflix’s business model.

It has an easy-to-navigate user interface and a host of handy features like the ability to skip the opening credits of a show or watch trailers, along with deleted scenes. Thus, the company understands the viewing habits of its users.

Netflix keeps an eye on following consumer trends in general. In addition, the content suggestions are also highly personalized. For instance, users can watch content anywhere and anytime.

Less Fluff More Quality

Netflix values its customers, and that’s one of the core components of its business model. Its ability to provide high-quality shows/movies on demand. In addition, Netflix Business Model helps users with:

• Access to an in-depth catalog of products, with content for all genres, age groups, and preferences.
• On-demand online entertainment streaming, with 24/7 access – without ads.
• Original and high-quality content.
• Users account for optimum individual personalization.
• All internet-connected devices support Netflix.

Partners of Netflix

Amazon is one of Netflix’s core partners, whose AWS cloud servers supply critical support and hosting for all the company’s digital requirements.

This bond should be robust due to its complete dependence on user experience. For instance, customers cannot access their content if the servers are down, so this relationship must be strong.

It also includes media producers and TV networks, which authorize their content to Netflix; consumer electronic producers such as Wii, X-Box, and PlayStation, load Netflix with their systems. Besides these, there are investors and controllers.

Cost structure

The cost structure of Netflix is large. That is why the company had a not-so-good cash flow during its early years.

Later on, it required high investment to reach the company’s position today. The cost structure includes:

• Amazon AWS technology.
• Extensive research and development.
• Platform maintenance.
• Purchasing content and rights. Producing movies, series, and other new content.
• Cost of marketing and human resources.

Does Netflix make money?

As we know, Netflix’s business model is entirely dependent on subscriptions. So, the revenue streams are also established on the monthly fees paid by its millions of subscribers.

However, Netflix’s cost structure is also high, questioning whether the company is indeed profitable. Let us understand this more accurately.

How does Netflix make money?

There are multiple things you don’t know about Netflix, but one question, which every Netflix member has is – How does it make money? Perhaps, it is not rocket science. But, the question has a legit answer, in any case.
Netflix disburses more money than you probably concede, and the company is still technically in debt despite being valued at over $100 billion.

Netflix is the premium online television streaming due to its lead on its competitors. This lead is helping Netflix to outpace Amazon Prime and Hulu in terms of growth in this sector.

Hulu and Amazon Prime have enhanced their plan to put Netflix behind the race. Moreover, all three of them offer original content in addition to exclusive movies, shows, and documentaries.
Ultimately, Netflix does make money. How? Let’s have a look.

The massive profit comes from subscription plans.

Netflix suggests three plans to its subscribers: $7.99/month for one screen of streaming a month; $10.99/month for two simultaneous screens of streaming; and 13.99/month for four shares.

If you have that basic streaming plan, don’t feel guilty choosing the inexpensive option because Netflix is drawing in $950 million per month on their subscription model alone.

Netflix’s debt is a part of the plan.

Netflix has gone through significant debts of $4.8 billion. That was huge because their Free Cash Flow (FCF) was nearly negative $2 billion that year.

However, the negative FCF is not a statement of loss as it shows that the company is expanding more on things that will add value in the long term.

When Netflix declared its third quarter for 2017, it disclosed its spending between $7 billion and $8 billion on original content in 2018.

Ultimately, the company’s belief was to spend more on providing quality content. If they offer more quality content, it will attract more subscribers, eventually more profit.

Conclusion

Netflix has been an efficient place for streaming high-quality content affordably.
However, it witnessed many ups and downs during its journey to reach the epitome of the online entertainment industry.

Still, if you compare Netflix with its competitors like Amazon Prime or Hulu, Netflix could be a straight winner due to its convenience and affordability.

Moreover, the subscriber base of Netflix has reached astoundingly high in numbers; approx., $1billion monthly revenue from subscription, which is not surprising based on its total subscription.