Netflix is one of the many available streaming services that has become a staple of entertainment in many households around the world. Most people reading this have probably had a subscription at some point in their life, or at least know of someone who does.
Back in the day, Netflix used to just be a rental store where people could go pick out a movie or TV show to rent for the night or weekend. But with the changing times, those types of services became out-of-date and unsustainable. As the world moved to the internet, Netflix had to keep up with the times and move to a more digital platform. Other places that failed to do so did not make it through the digital age.
Today we’ll answer the question, “How does Netflix make money?” but first we’ll look at some background information about this megalithic business model.
In the US, it’s estimated that around 54% of households have Netflix as a streaming service, and the platform accounts for about 10% of total screen time in the country. This adds up to over 100 million hours of Netflix being watched [err day. Netflix users pay somewhere between $8 to $16 a month for the streaming service.
While much of the content we consume is filled with advertisements that pay for the content itself, Netflix does not have any of that. Many people pay for Netflix to enjoy not only the large assortment of shows and movies to be endlessly entertained by, but also for the uninterrupted viewing experience since there are no commercials.
In terms of the content Netflix provides its users, they offer a plethora of options. Not only do they offer full seasons of shows and full movies from hundreds of genres and timeframes, but they also offer Netflix originals that have become a more enticing aspect of the Netflix subscription. Shows like Stranger Things and Ozark among many documentaries and movies have been produced by Netflix and have become some of the biggest entertainment hits of the last few years.
Costs versus Profits
While all of the money Netflix makes comes from the roughly 139 million subscribers paying a monthly fee to view all their favorite shows and movies, Netflix actually loses money! They make a profit, but once you factor in how much they spend on content creation for those amazing Netflix originals, their cash flow goes into the negatives.
In 2018, the company spent around $12 billion on content, which was up from $9 billion a year ago. They also have other expenses to cover such as streaming operations. So even though they brought in $16 billion in annual revenue, up 35% from the previous year, their expenses put them at negative $3 billion.
They plan to make a net profit in the coming years by slowing down their content creation. The goal is to spend so much money now making a ton of Netflix originals so that every user still has a ton of options when they eventually slow down their productions. So far it has been working for Netflix since they are the seventh-largest internet company in terms of revenue.
Lately, Netflix has been focusing on acquiring a larger global audience since their US numbers have stagnated a little bit. They also raised their prices in 2019 to compensate for the mass amounts of money they were spending on content creation. Some of their most-streamed TV shows such as Friends have moved to other platforms, which has created challenges for the streaming service. As the market becomes more flooded with options, potential customers may go to other streaming services such as Disney+ or Hulu to spend their money.
Nonetheless, Netflix remains one of the top streaming sites in the world and plans to continue making content for its users to consume and enjoy.