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5 things you need to know about Netflix business model

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In January 2018, Netflix made BIG headlines. Its valuation broke the $100 billion ceilings for the first time. According to Statista, Netflix has an estimated 125 million customers (as of Q1 2018). In 2011, it had an estimated 23 million subscribers. And this is worth mentioning – Out of the 125 million customers, 56.71 million customers are from the United States.

In 2017, Netflix’s DVD rental services registered an estimated 3.38 million customers. In 2011, the number was 11.17 million. This is not to undermine the utility of DVD rental services but this is a fact you would otherwise agree with – The DVD rental services section is losing its charm.

Get Started – Planning how to start a streaming service like Netflix? Want to learn more about the Netflix business model? Sure, but before that, let’s take a look at Netflix’s revenue model.

Revenue Analysis and Global Expansion Strategy

In 2008, the total revenue of this video streaming giant stood at $1.36 billion. Fast forward 9 years and in 2017, the total revenue stood at $11.7 billion. In other words, the total revenue increased by a factor of 7.6x. This can be conveniently attributed to its global expansion strategy.

The number of non-US paying subscribers has increased. And according to Statista, by 2024, the number of subscribers from Brazil alone would amount to an estimated 24.4 million. Besides Brazil, the other important markets are Germany, Mexico, Canada, and the United Kingdom.

How Netflix Makes Money

In the US, the number of customers subscribing to Netflix is approaching saturation. Before it registers a phase of stagnation, Netflix has to penetrate and expand overseas. And Netflix is doing well in this aspect.

Recently, the company forayed into Japan. It’s toying with the idea of entering Asian markets such as Hong Kong and South Korea. It’s tough to profitably penetrate cost-sensitive markets such as China and India. Its annual reports and balance sheets suggest an increase in intangible assets such as copyrights, digital assets, etc. Industry experts opine that Netflix would be using its digital assets to tap the two major cost-sensitive markets: India and China.

How does Netflix get income? Netflix revenue model is based on memberships. In other words, endorsers pay to view the content and to get DVDs delivered to them. It offers three plans:

  • Basic
  • Standard
  • Premium

Average Revenue Per User (ARPU)

Almost every year, Netflix keeps revising and raising the subscription fees across all the plans. The key is to increase the average revenue per user (ARPU). According to Mashable, in the US, the premium tier is all set to go up from $11.99 to $13.99 per month. The standard tier is all set to go up from $9.99 to $10.99 per month. The subscription charges are bumped up in other countries as well.

Cost Centers

Let’s now take a look at Netflix’s cost centers.

Undoubtedly, advanced technology infrastructure is required. Netflix’s Content Delivery Networks, also called Open Connect, promise nothing less than 99.99% uptime is required. Bandwidth costs are overwhelming. In 2016, Netflix finished its massive migration to AWS (Amazon Web Services). It is important to learn and delve deep into customers’ content consumption traits. Netflix spends a fortune on its Data Analytics infrastructure.

Let’s now take a look at its content licensing costs per year. For all intents and purposes, content licensing agreements are an important part of Netflix’s revenue model.

The cost of doing business also includes other costs such as promotion costs, regulatory costs, etc. For instance, Netflix has to compete with other biggies such as Hulu, Amazon, HBO Go, etc. And there are very big players like Apple and Google which are extensively cash-rich. They already have a huge audience.

In India, the Netflix subscription rates start at roughly $8 per month. Amazon’s yearly subscription rate is just around $16 per year. To be upfront, Netflix isn’t a contender in India as yet.

Content creation and acquisition costs are also significant. In 2016, Netflix spent an estimated $5 billion on content acquisition. Nearly 10% of $5 billion was apportioned to original content creation. According to industry experts and business strategists, investments into original content creation can rise to as high as 50% of total content spends.

In 2016, Netflix severed ties with Epix. As a part of its content acquisition and content generation strategy, Netflix decided against streaming Transformers: Age of Extinction and Hunger Game: Catching Fire. Thanks to its commitment to original content development, Netflix has offered its audience more than 24 episodic series and dozen documentaries along with quite a few comedy specials. There is no denying that full-length feature films are in development.

Innovation in Tech Infrastructure

Netflix keeps innovating itself. In 2016, it announced an upgrade to one of its popular OSS projects – Chaos Monkey. Chaos Monkey’s project is essentially about minimizing the incidence of failures so that customers don’t suffer. When it comes to redundancy planning, Netflix is second to none. In case of a natural disaster, it just takes Netflix a few hours to recover data, many thanks to Google Cloud Storage.

Netflix’s Business Model Transformation

Netflix is aggressively investing in Real Estate. It is keen on building its own studios. As of now, it’s leasing its pre-production space and some office space to Hollywood. Coming to partnerships and alliances, Netflix is striking deals with premier hotels such as Marriott International, etc., all across the United States.

To take the in-room entertainment experiences to the best possible level, Netflix is offering a range of services such as high speed and low friction content, a dedicated app that provides uninterrupted access to Netflix content, etc. It’s a wonderful strategy to acquire new customers.

Netflix’s business model is all about understanding three important components:

  • Delivery channels (Distribution)
  • Content creation and acquisition (Key-Value Proposition)
  • The behavior of Users (Data Analytics)

Netflix is here to stay and likely to lead the race. It’s a tough scenario but it’s business model is sustainable and profitable. Cheers!

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