How does Netflix make money? Netflix business model: With its three straightforward plans—basic, standard, and premium—Netflix operates on a subscription-based business model and earns money by allowing users to stream television shows, movies, and series. This article answers the question: how does Netflix make money? read to the end.
Netflix produced approximately $29.6 billion in revenue in 2021 by utilizing a streaming platform, with an operational income of over $6 billion and a net income of over $5 billion.
Since 2013, Netflix has transformed from a platform (which mostly offered licensed material) into a major player in the media industry (mostly producing its own content).
Netflix spent more than $4 billion on original content in 2021. Using the FourWeekMBA’s VTDF framework, we describe the Netflix business model.
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How Does Netflix Make Money / Netflix Business Model Today
Prior to delving into the past and dissecting the entire Netflix business model. Let’s examine some of the major developments in the 2023 scenario, as reported in the most recent financial disclosures.
1. Business model change number one:
This is one of the ways that answer the question of how does Netflix make money. When Randolph and Hastings carpooled for a few months in search of their next business opportunity, they had the original concept for Netflix.
Hastings wasn’t enthused when Randolph originally proposed the concept of operating a movie by mail business.
The DVD, a new technology at the time (it was 1997), made the notion feasible a few months after they had their talk.
Orders began to flood in as soon as they implemented this DVD rental by mail business strategy. However, it took Netflix a full year and a half to make the switch and try out subscription services. Consequently, the discomfort of having to pay late fees is removed (something Blockbuster was doing).
Instead of an epiphany, the co-founders have emphasized throughout time that this was the outcome of a difficult battle to keep Netflix alive.
2. Business model change number two:
Another way on of how does Netflix make money is business model change number two. Reed Hastings, the firm’s new CEO who had replaced Randolph, foresaw a time when Netflix would have to make its programming available on-demand even before the business went public in 2002.
A few years prior, the Internet had just begun to take off, and Netflix was looking at ways to provide video instantly. However, it would still be a few years before this model was completely practical. Netflix began providing a streaming service in 2007.
The entire corporate strategy eventually shifted to it. a subscription-based on-demand streaming service that let paying subscribers to view all the information they desired at their own pace and without paying any additional fees.
3. DVD rentals as a heritage of the old business model:
This is another way on the list of how does Netflix make money. It’s interesting to observe how DVD rentals are a legacy of Netflix’s previous business strategy when we examine the company’s current financials. However, compared to the nearly $29 billion in revenue from streaming services, DVD sales in 2021 were only about $182 million.
However, it’s also intriguing to see how Netflix continues to generate sales in that industry, also by a significant margin. This demonstrates how the DVD delivery business was a smart, workable concept.
However, compared to the market for streaming services, Netflix’s DVD market would have been far lower if the company had not modified its business strategy.
4. The pandemic effect is over:
This is one of the ways on how does Netflix make money. The number of new paying members added fell in 2021. the number of new members increased from over 36 million in 2020 to over 18 million in 2021. The effect of the pandemic is over. Indeed, the pandemic was a major factor in the rapid development of Netflix paying subscribers.
5. Keep growing overall paying members’ base:
Another way on this list of how does netflix make money. From more than 189 million paying subscribers in 2020 to more than 210 paying subscribers in 2021, Netflix’s entire subscriber base continued to grow. This is encouraging since it shows that the business is still capable of achieving some remarkable growth rates as it develops.
6. Price spikes:
This is one way on the list of how does Netflix make money. Since the growth of paying subscribers as a whole began to slow down, Netflix announced a number of price increases to its membership plans.
Revenues increased as a result of this. While price increases may be long-lasting, Netflix must continue to make fantastic, exclusive original content that is only available on its platform.
Because subsequent price increases might become significantly more burdensome to subscribers over time, causing them to quit their memberships, if Netflix were to lose momentum in terms of the strength of the brand. The majority of paying members continue to use the basic packages since they are still practical at this time.
7. A media powerhouse:
Media powerhouse is one of the ways on this list of how does Netflix make money. The first streaming media provider to start making significant investments in original content as a core asset was Netflix.
In fact, a crucial number to consider is the ratio of paid vs. licensed content. In fact, in 2019 21% of the budget was spent on original content, compared to 79% on licensed content.
By 2021, when created content accounted for 34% of all content expenditures, this figure had changed. Licensed content, however, accounted for nearly 66% of all content spending in 2021.
This demonstrates the full transformation of Netflix into a media corporation, where the majority of the content made available on the platform may be.
8. Vertically integrating the content machine:
The aforementioned statement demonstrates how Netflix is vertically integrating its business model and becoming more and more involved in production, making it a major player in the media sector. This strategy is essential because it ensures that the overall business model will endure over time.
- Having content that is only available on Netflix: As we have seen, this is essential if the subscription is to remain a long-term draw for members. Particularly considering the declining rate of paying member growth. It also hinges on Netflix’s capacity to maintain pricing increases without causing a leaky bucket.
- Having control over content gives control over the cost structure: Given that Netflix will own the content, the corporation will eventually be able to manage its cost structures. In fact, for the time being, while subscribers pay for their subscriptions, the money Netflix advances to buy licensed content is amortized over the years. The subscription would become less appealing if the licensed content agreements expired and the content was suddenly no longer accessible on the site. Additionally, relying too heavily on licensed material exposes Netflix to reprisal from rivals. In other words, Netflix’s rivals might exclude it from licensing agreements, endangering its financial model.
- Having control over distribution: Netflix’s ability to freely distribute material worldwide without the need for country-specific license deals is another important aspect of producing your own content.This is important since it might be difficult to predict in advance which country a TV show will be most successful. In fact, Netflix has demonstrated throughout the years how locally produced television shows can become international successes (see the success of “Casa de Papel” or “Money Heist”).
- Having the option to license it to others as well, if doing so makes sense to amplify it: Netflix has the choice to license its material to third parties when it makes sense because it owns it. The promotion of TV shows on other networks depends on this. Consider an ancient Netflix series that had already been distributed on the site for many years.
The Mediafication of Netflix Business Model
Many analysts view Netflix as a tech business when examining it. In fact, Netflix’s economic model depends heavily on the use of technology. Additionally, the business operates using a platform business model. Netflix, on the other hand, views itself much more as a media organization.
Then why did Netflix not construct its own data centers? In actuality, Netflix is committed to delivering top-notch content and enhancing its brand with it.
Because of this, we have been helping Netflix “mediaficate” in recent years. I won’t be surprised if, at some point in the future, investments in generated content surpass those in licensed content. Then Netflix can be referred to as a media corporation!
A glance at the Netflix business model
The Netflix Originals brand, which the company began creating its own content under in 2013, is currently the most significant strategic asset for the business, which will have more than 221 million paying users globally by the year 2021. The way we consume traditional media is evolving thanks to Netflix.
With more than 150,000 subscribers worldwide, Netflix has been able to dominate the media landscape thanks to shows like Stranger Things, Narcos, and Black Mirror.
In March 2023, Netflix will be valued more than $150 billion thanks to its three straightforward subscription levels (basic, standard, and premium), which range in price from $9.99 to $19.99 (in the US).
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Netflix wasn’t an overnight success
Similar to any new business, Netflix has a founding myth. According to the narrative, Reed Hastings, the founder and CEO of Netflix, recalled how the inspiration for the service originated:
When I received this late fee for Apollo 13 in 1997—roughly $40—Netflix was born. I recall the charge because I felt ashamed of it. That was back when VHS was popular, and it made me realize that there is a sizable market.
So I started looking into the concept of setting up a mail-order movie rental business. When a buddy of mine informed me that DVDs were on the way, I had no prior knowledge of them. I hurried to Tower Records in Santa Cruz, California, and mailed myself a few CDs.
It took a long day for the mail to return to my home, but when it did, I ripped it open and found that everything was in excellent condition. That was the main source of enthusiasm.
How does Netflix’s business model work? A simple subscription will do
Netflix primarily offers three basic types of subscriptions: You can access the streaming of all the available series, movies, and shows in the Netflix library with simple packaging and one of three memberships (basic, standard, or premium).
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