How Does Netflix Make Money

How Does Netflix Make Money – Unicorn Economy Analysis

How Does Netflix Make Money
How Does Netflix Make Money

About NetFlix

Netflix is an American multinational media and entertainment company founded in 1997 in California. It specializes in and provides streaming media and video on demand online and by DVD in mail on rent. In 2013, Netflix added film and television production, as well as online distribution. The company is currently headquartered in Los Gatos.

In 1998, about a year after Netflix’s founding, the company grew by starting in the DVD by mail business. In 2007, Netflix expanded its business with the introduction of streaming media, while retaining the DVD and Blu-ray rental service, with streaming made available to Canada in 2010. As of 2016, Netflix is available in over 190 countries. In 2016, now offers its “Netflix Original” content through its online library of films and television.

As of July 2016, Netflix reported over 83 million paid subscribers worldwide, including more than 47 million in the United States.

NetFlix Founders

Netflix was founded on August 29, 1997 in Scotts Valley, California by Marc Randolph and Reed Hastings.  Both Legends in their own Games.   Reed Hastings, had founded Pure Software, and sold it for a whopping $700 million.  Randolph was a co-founder of MicroWarehouse, a computer mail order company

NetFlix Funding

NetFlix Funding has been a Rare Example of an Internet Business with very low amount of External Funding by VCs or PE.  It has raised appx $200 Million by way of Equity Financing and about $1.8 Billion by way of Debt Financing.   The main Reason of getting the debt financing is to rub the noses of large production houses by investing in own content called “NetFlix Originals” like the names of “House of Cards” and “Orange is the New Black” which have been awesome hits with viewers.

How Does Netflix Make Money

Before we understand How Does Netflix Make Money we must first understand some bare facts about its operations and netflix business model.  Also, if you like reading books on true accounts, read about how NetFlix busted BlockBuster (DVD Rental Company) in NetFlixed.

Netflix Business Model

Netflix Business Model
Netflix Business Model

The Netflix business strategy is all about investing in content and reaping the distribution benefits in the long run perpetually.  Netflix is the one of the largest video / entertainment on Demand, paid-subscription, streaming site for movies and television series.  It has over 75 million paid and [password sharing thieves] worldwide. It competes with : Hulu and Amazon Prime for hosting and buying rights of content.  With a revenue of $6.7 billion for 2015, Netflix doesn’t have an issue with operational cash flow. But, Netflix needs a lot of money for buying the licensing rights of movie titles and television series and also the marketing expenses.

Thus the netflix business model is as clear as a Crystal:

  1. Buy / License the commercial rights to broadcast / stream content from production houses [ which are the real owners of the content ].
  2. Prepare and maintain a Robust Platform to broadcast these pieces of content.
  3. Attract Users to view these contents for free for a certain time [free trial for one month or so].
  4. Convert Free Users to paid recurring subscribers and charge a monthly fee for viewing the content.
  5. Maintain this subscriber base by continuously buying new and fresh content.
  6. Repeat.

How Does Netflix Make Money

Consider this Scenario:  Fox Studios, Warner Bros etc. produce awesome High Profile case Super Hero Movie and then what do they do?  They want Distributors for the content.

Just like your manufactured items or goods need to be sold via distributors [wholesale, retail, e-commerce and other avenues] any piece of content also needs to be distributed.

These owners of the content appoint movie theater companies, movie multiplex companies as their first distributors, which means they will display these content pieces on the day of release or airing of the content.

Post the newness wears off, they appoint companies which make copies of the content and resell it for a fee.  Like DVD Selling Companies, Online Paid Subscription Streaming companies [like NetFlix, Hulu, Amazon Prime etc.] – These are post production and post First Air Date – paid streamers.

You will be Interested to Read this: Amazon Business Model

How do the Licensing Deals Work

  1. I product the content and invest in marketing, production, moive / tv star payments
  2. I see the premiering rights to people at a fixed fee + percentage of box office revenue
  3. I make money off DVD sales [ as a percentage cut etc] – How Does Netflix Make Money from DVD Sales is also related to this.
  4. I make money off movie ticket bookings etc.

NetFlix is the largest buyer of the licensing rights of any piece of hot content, as shown in the following chart.

Business Model of NetFlix
Business Model of NetFlix

How Does NetFlix Make Money [via Licensing]

To understand this in a better way, I think it is important to understand the Revenue Model that NetFlix has.

NetFlix Revenue Model:

  1. Buy Licensing Deals from Movie Production Houses and TV Series Production Houses
  2. Stream that and Get Subscribers to pay either one time [via DVDs] or recurring subscription.
How Netflix Makes Money
How Netflix Makes Money

How Netflix Makes Money

  1. Buy Content from publishing houses / media houses
  2. Stream content and get Subscribers to pay for a monthly subscription to watch movies and other content via a recurring fee model or pay per use – YouTube Red may start competing with NetFlix here.
  3. Spend the money received from subscribers in buying more and more content
  4. Produce own content and stream that for subscribers and give out licensing deals for that particular content to other media channels [House of Cards and Orange is the New Black is being aired at Colors Infinity – This is a part of NetFlix’s own batch of content].
  5. Give out DVDs on Rental to Non Subscribers and one time users and make rental money as revenue.
  6. NetFlix converts the formats to other commercial streaming formats for other players and makes money doing that as well.
  7. Product Placements in NetFlix Originals [Season 1 of House of Cards had a lot of subtly inserted product placements: Renting a car from Enterprise, Frank Underwood loving his PS4 and Vita etc.]

How Does Netflix Make Money [Conclusion]

Netflix being the world’s leading provider of media on Demand, TV shows o Demand, and movies over the Internet to its subscribers.  Subscribers can view the content on any Internet enabled with-screen device like PCs, MACs, Smartphones, Tablets, Game consoles, Blu-ray players, television set-top boxes, and Smart TVs. In Only the USA, Netflix delivers DVDs at home to its subscribers.

For Streaming, NetFlix has three membership packages that have varying quality of content, amount of content and the number of screens that can access the content concurrently:

How NetFlix Earns Money
How NetFlix Earns Money

Consider this, It has about 80 Million Subscribers, Each at 8$ a Month, appx 100$ a year per subscriber, it has a revenue of about $7-$8 Billion Dollars.  Whoa….

Out of this mammoth revenue they spend most on Content Acquisition.  Thus I feel this is the best example of positive unit economics any one can have in an internet business model.

Hope you loved it.  Leave comments for more interesting stuff.

How Does Netflix Make Money Disclaimer : NetFlix is now in India as well.  All Views about NetFlix Business Model are of the Author, Please use your own best judgement to use the information mentioned.

Unicorn Economy
Unicorn Economy is your answer to all startup related queries with respect to business strategy, business model analysis and consulting. One stop stop for business plan and financial model development.

9 Comments

  1. Example: Friends. What does it cost to ‘license’ the show? Being netflix subscription is fixed, could someone watching multiple episodes cost more than their monthly subscription?

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