How Does Netflix Make Money?

How Does Netflix Make Money?

The High-Quality Ringer Explainer

Image for postPhoto from twitter.com

?The goal is to become HBO faster than HBO can become us.?

? Ted Sorandos, Netflix Chief Content Officer

Netflix is spending $13 billion dollars this year on original content.

How do they make any money?

A few weeks ago, Victor Luckerson, staff writer at The Ringer, broke down Netflix?s business model in an extremely well done 6ish minute video. I am passing it along because it doesn?t have nearly enough views (34k) for the quality.

If everyone reading this watches it 10,000 times, maybe it will go viral? Is that how the internet works?

While the video itself is compelling because Netflix, along with Amazon, Google, Facebook and Apple, are always interesting in a, ?We?re all going to end up as indentured servants for these companies in 10 years,? type of way. But even more so, because of the new, cool features The Ringer Staff are trying.

With a deep podcast bench, great articles plus coverage of sports, pop culture, tech and of course, my #1 small talk topic, The Rewatchables podcast.

The Ringer is a scrappy, fun website that is always trying new things and never resting on it?s laurels.

Image for postPhoto from theringer.com

But anyway, back to Netflix.

A few takeaways (yes, I took notes watching this youtube video):

Original Content

By the end of 2018, Netflix plans to have 1,000 original productions on the service. More than double the number of pilots ordered by the top 5 broadcast networks since 2013.

Those productions don?t come cheap, either. Netflix is estimated to spend $13 billion on original content this year.

While the balance sheets show a profit because of amortization of costs, if you look at ?free-cash-flow? representing the true costs vs. revenue in a year, Netflix actually was $2 billion in the red in 2017 though they reported $11.7 billion in revenue and $560 million net income.

Why are they are burning so much cash on original programming?

Back in the day, when Netflix was still mailing you DVDs to sit on your kitchen table for months on end, they decided to launch a streaming service.

[Spoiler alert] Streaming on the internet ended up being a pretty good idea.

From 2007, when Netflix launched streaming, through 2013, it went from 7 million to 33 million subscribers. Hollywood woke up to the future and recognized the value of streaming and jacked up the price for licensing their content.

Image for postZoolander doesn?t come cheap. Photo from https://www.popsugar.com/Zoolander

Netflix pivoted and took their destiny in their own hands.

Thus, original content.

124 Million Subscribers ? ?The Only Number That Matters?

Currently, Netflix has 124 million subscribers worldwide. 56 million in the US, alone. Compare that to only 48 million subscribers across the top 6 cable providers, combined. (Altice, Charter, Comcast, Cox, Mediacom and Wow!)

While that seems like a lot, Netflix has to continue adding subscribers each month to justify it?s massive spending on content.

Investors have Netflix valued at $165 billion dollars which is more than Disney and all it?s many properties (ESPN, Star Wars, Marvel, ABC, etc.)

$165 Billion.

BUT, that number is based on the assumption they will continue to add subscribers. Every. Single. Month.

They are on a high wire. Earlier this year Netflix missed it?s subscriber target by 1 million and the stock price fell 14% that same day.

[It bounced back, but still]

How do they plan to ever become truly profitable?

  1. Continue adding subscribers, forever. Especially in overseas markets. It is projected that Netflix will have 272 million subscribers in 10 years.
  2. Raise prices. We can expect that sooner than later as the last price increase had zero impact on subscribers.
  3. Eventually, slow down production spending. Whatever you do, just don?t stop making Stranger Things. I want to hang out with those kids forever.

The Competition

Their rivals are lighting money on fire on original programming at an equal pace. From Disney?s upcoming competitive streaming service plus the usual suspects of Amazon, Apple and Facebook spending like crazy. They also have many of the cable companies desperately merging to put up a fight.

Needless to say, it is a good time to have a tv show idea.

Final Thoughts

Netflix and their business model is wildly interesting but my favorite thing about this video is that it exists at all and The Ringer is doing these Vox.com explainer-type videos.

Excited to see what they come up with next.

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