How Netflix Moved Operations to the Cloud and Saw Revenue Boom: A Digital Transformation Case Study
Remember the time you had to request mail-order DVDs to catch the latest flicks while munching popcorn on your couch?
It’s strange to think that about a decade ago, streaming giant Netflix had a business model built around direct mail.
Request a movie, put a few in your queue for next time, and let the anticipation build as you wait for your first DVD to arrive on your doorstep.
Now, our instant gratification bells ring daily as we pour through episode after episode of new material. And, we can barely remember the (dark) time where we waited days for entertainment instead of having it literally at our fingertips.
The shift from mail-in orders to a cloud streaming service improved customer satisfaction and made Netflix billions.
The company’s move to the cloud came with a hike in customer loyalty and a brand that competitors still fight tooth and nail to beat in the market.
Netflix serves as the ultimate digital transformation case study.
They transformed their entire business model and charted unprecedented waters. Here’s how to use their model as inspiration for your contact center’s digital transformation.
How to move your operations to the cloud, Netflix style: A digital transformation case study.
21 years after they started renting DVDs, Netflix now sits at a valuation of almost $145 Billion .
They came to market as a disruptor of traditional video stores like Blockbuster and Family Video.
Netflix founders Reed Hastings and Marc Randolph wanted to bring customer-centricity to the video rental market. At the time, renting videos was inconvenient and costly, with customers often plagued by expensive late fees.
They created an entirely new way to watch movies and consume content. And as time went on and subscribers grew, they continued to shift to keep pace with new consumer demands.
In 2007 , they took their first step into the world of streaming video. They offered customers a streaming subscription in addition to the more traditional DVD rental service, giving customers the option to chart their own path.
Since then, they’ve seen exponential growth in subscribers and revenue. Let’s take a look at their trends over time. We’ll skip over the first few years of the company’s infancy and jump to the year the company went public.
Here’s how Netflix has grown since 2002.
That incredible growth trajectory, and willingness to change, made Netflix stock skyrocket by 6,230% in a 10-year period.
And, they did it all without crazy price hikes, keeping customers top-of-mind.
While Netflix has adjusted prices over the years, they strike a balance by adding more value and services for the dollar. In 2019 , the Basic plan increased by $1 a month (adding up to $12 annually). While the Standard and Premier plans rose by $2 per month, (adding up to $24 annually, for each plan).
Meanwhile, the company is putting some $15 billion towards creating new content binge-watchers will love.
After this price change, Netflix saw a slight blip in subscriber growth, with growth in Q2 coming in low. But, analysts don’t think for a second it’s the beginning of a downward trend. In fact, a similar event happened back in 2010 when Netflix moved to a pricing model that broke out streaming and video rentals. And they clearly rebounded.
When you put the numbers into perspective, you see this is the first dip in subscriber growth in nearly a decade. That’s pretty remarkable. And, revenue still increased for the quarter. It’s clear the value of the digital innovator’s services still outweighs the cost for most.
Plus, if you can post positive revenue numbers for over a decade and become a multi-billion-dollar company in about 20 years, you’re doing alright.
Here’s what Netflix did to reach these lofty heights. And, how you study the same tactics to lead your contact center through a successful digital transformation.
Stay true to your vision.
Netflix started out with the idea to make it easier and less expensive for people to watch movies.
But they didn’t want to stay in the DVD game forever. They had the foresight to predict that consumer behaviors would continue to shift. And, they wanted to stay ahead of the competition.
Only, they didn’t sacrifice their vision when it came time for company-wide changes. Instead, they realigned their business strategies to fit their vision, even as consumers and trends shifted.
What you can do:
As you make digital shifts in your contact center and your company, keep your vision constant. While tons of other factors may orbit around you, your vision keeps you grounded.
Use your company vision to guide your decision-making. And, use data and trends to predict how your customer behavior will shift.
As you shift to keep pace with your customers’ needs, align your operations to your customer behaviors to realize your vision.
Reinvent the wheel if the old one doesn’t solve customer problems.
Netflix soared from seed idea to a $145-billion-dollar valuation in only 21 years. (Wow, they did that in less time than it took big tech vendors to break CSAT scores.)
And they didn’t get there by spinning up a new-and-improved version of Blockbuster.
Ted Sarandos, Head of Content at Netflix said when he came on board at the early stages of the company founder Reed Hastings used his vision to scale and innovate at Netflix.
“We never spent one minute trying to save the DVD business,” said Sarandos .
The company leaders didn’t stick to traditional best practices because they no longer worked for modern customers.
Instead of piggybacking off what other companies did, Netflix solved problems differently. And, they solved them better. The proof is in a bankrupt Blockbuster and dwindling Family Video stores.
Want to know what you’re missing when you only look at digital transformation best practices? Pop over to our article on the topic.
Tailor your path and contact center strategies to your specific business needs. Focus on listening and understanding your customers, with the help of better data and customer surveys .
Find out what’s causing your customers’ pain. See what common questions your customers have. Work with your sales team to find out why customers are fleeing competitors. Discover why they choose your products and services in the first place. Then, work with your contact center and company leaders to develop the methods to solve these pains.
Don’t get caught up in what your competition is doing. What they’re doing might work, but your actionable data and customer information can guide you to a way that works better.
If you’re going to be consumed by one thought, let it be this one: how might we better serve our customers?
Don’t force your customers down a single path.
In the early phases of Netflix, internet speeds weren’t built for streaming movies. People who tried to download and view movies online were only frustrated by the lengthy, often interrupted experience of watching a film online.
Netflix didn’t want to enter the streaming market until the right infrastructure was available to support a platform with high-quality and high-speed content. They didn’t want to taint their brand from day one, linking the Netflix name to all the baggage that came with poor streaming experiences.
At the same time, they were watching postage prices. The price of postage kept rising, and internet speeds were on the ups. By watching how the market and internet infrastructure changed, they identified the right moment to launch their first streaming service.
They tested their streaming service with lower-quality video, first. They wanted to gauge interest and customer experience without canceling their bread-and-butter DVD service.
Those who wanted access to the crisp DVD picture could still order movies to their doorstep. Others who wanted instant access could forgo the high-quality picture for convenience, instead.
Your contact center and customer experience will change. It has to. But as you make changes and shift your operations to the digital era, keep options open for your customers.
Just because chat and email are on the rise as popular customer service channels doesn’t mean every customer wants to use them. Use past data and communication history to learn more about your customers. Then, coach your agents to handle each interaction based on the customer’s preferences.
Bringing changes to your contact center has the potential to transform your customer experience for the better. But, without careful intention, it can also cause friction. Introduce changes to your customers slowly, and make sure your agents are always there to offer extra help through the process.
Use data and trends to personalize your customer experiences.
This one’s huge. It’s how Netflix keeps customers engaged with their platform, and how they coined the term binge-watching
As Netflix made changes in their operations, they watched their data like a hawk. They looked for trends on how people watched content, what kept them watching, and how personalization fueled content absorption. Then, they used an algorithm to serve up content tailored to their customers’ specific interests.
“Like a helpful video-store clerk, it recommended titles viewers might like based on others they’d seen.” – Twenty Years Ago, Netflix.com Launched. The Movie Business Has Never Been the Same , by Ashley Rodriguez for Quartz .
And, as their new cloud-based business let them scale globally, their data points multiplied.
Previously, Netflix could only mail DVDs to U.S. customers. Shipping DVDs overseas wouldn’t have been financially sustainable while keeping prices fair for all customers. Moving to an online business model allowed Netflix to target and reach new audiences without taking on the costs of shipping globally.
Doing this not only scaled their business, but it diversified their data and made their algorithm smarter. Enter, extreme personalization and binge-watching fever on a global scale.
Track and analyze data from your customer interactions. Create custom reports and dashboards to distill important findings from your data. Then, use the trends and patterns you find to personalize your customer service experiences.
From the way you send customer surveys to the tone your agents use, your interactions tell you what your customers want. Lean into your analytics for valuable insight into how to help your customers.
And, use the data to transform your contact center too. Customer data is a powerful tool to drive business change. If your metrics show customers aren’t happy, your company leaders want to know about it. And, they’ll want to fix it. There’s no better case for company transformation.
Netflix took risks to transform their business. But, there’s no bigger risk than stagnation. Staying the same doesn’t help you reach your contact center goals. Innovating and trying out your big ideas is what separates the leaders from the laggards.
Can your tech vendor survive in your digital transformation? Learn how to choose vendors who make your transformation strategy possible.
Related articles, 3 considerations when implementing ai in your contact center, 5 strategic goals to set for your call center, why is call center data so valuable, stay in the know, start typing and press enter to search.
Netflix Business Model (2023) | How does Netflix make money
Last Updated: Feb 3, 2023
Company: Netflix, Inc. Co-CEO: Ted Sarandos & Greg Peters Year founded: 1997 Headquarter: Los Gatos, USA Type: Public Ticker Symbol: NFLX (NASDAQ) Market Cap (Feb 2023): $ 162.95 Billion Annual Revenue(FY22): $ 31.6 Billion Profit |Net income (FY22): $ 4.49 Billion
Products & Services: Netflix Official Website | Monthly Subscription Plans | Video Recommendation-Algorithm System Offerings Streaming Options Domestic (featured tool) | International Streaming Options and Features Competitors: Amazon Prime Video | HULU | YouTube | Direct TV | Sony PlayStation’s Vue | HBO | Sling TV | HotStar | Disney + | Apple TV+
Table of Contents
Introduction to Netflix, Inc.
Netflix, Inc . happens to be one of the most successful entertainment mass-media-companies of all times. Netflix, Inc. originally began its inception in 1998 by providing services to customers through means of mailing out physical copies of movies, shows, video games and other forms of media through standard mailing system.
Through its successful startup and the rapid changes that technology introduced over time, Netflix converted its business model . They went from physical copies handouts to allowing customers streaming their favorite contents from the comfort of their own convenience.
Today, the platform has advanced to streaming technologies that have elevated and improved Netflix’s overall business structure and revenue. The platform provides its viewers the ability to stream and watch a variety of TV shows, movies, documentaries and much more, through means of using a software application.
Since Netflix converted to streaming, it is the world’s ninth-largest internet company by revenue , ranging its presence at a global scale. The following is a compilation that comprises specifications of Netflix’s business canvas model and its core operations.
Business Model Canvas of Netflix
1. Netflix’s Key Partners
Netflix has built more than 35+ partners across the media business. Netflix today has millions of different types of genres for subscribers to select from and enjoy watching.
- Built alliances with Smart TV companies like LG and Sony for new emerging markets and several other aspects.
- Netflix has set an alliance with Wii , X-Box , PlayStation and many other brands in the gaming industry. Netflix built partnerships to provide and cater its “ gamer-clients ” with an entertainment video game.
- Netflix joined forces and partnered with Dish, Tivo and other TV network companies.
- Netflix crucial phase of converting the business from mail-in-system to streaming, Netflix established a partnership with Apple , Android, and Microsoft .
- Finally, Netflix joined the network and big data providers like Google and Amazon . (Amazon was accompanied to promote Netflix listings and subscription options)
- Netflix recently partnered with Samsung to further integrate its streaming service with Galaxy smartphones. In exchange, Samsung users will benefit from Netflix’s original shows and special bonus content.
- To expand in West Africa more aggressively, Netflix partnered with Nigerian filmmaker Mo Abudu , the owner of Ebony Life TV. This partnership will enable Netflix to create new content targeting consumers in West African nations.
2. Netflix’s Value Propositions
Netflix strategizes methods and aims to provide the best customer experience by deploying valuable propositions.
Here are a few of what Netflix idolizes:
- Users can stream 24-7, minus the ads !
- View shows & movies in high-definition
- Stream content conveniently anywhere without going to a DVD store or theatre
- Get unlimited access to TV shows and movies
- Access to exclusive Netflix’s original movies or shows
- New signups can avail a 30-day free trial ( 1 month free of services )
- Contract-oriented but can cancel at any time !
- Access locally-produced and culturally-relevant content
- Receive algorithmic recommendation for new items to watch
- Avoid commercials ads- Some people like looking at commercials and other advertisements and some people avoid them.
- At Netflix, users have the flexibility to either turn on notifications and suggestions or keep them switched off.
- Netflix “ user profiles ” gives leverage for users to personalize their user account and preferences. The User profiles allow the “admin-user” to modify, allow or ever restrict certain users
- Sharing accounts options is one of the rarest features a movie platform can provide. Sharing accounts feature on Netflix allows spouses, friends or even groups to share an account with specific filters and preferences already set.
- Netflix solves the issues with theaters and mainstream media that frustrated most consumers. The company promises to solve the problems of its target with four simple words – Watch Anywhere. Cancel Anytime .
3. Netflix’s Key Activities
- Hire and retain software and tech geeks
- Maintain and expand its platform on the website, Mobile apps, TV apps.
- Produce, acquire and license Netflix’s original content to expand its video library
- Develop its pricing strategy and subscription model to ensure affordability and new customer acquisition.
- Develop a roadmap to enter into the new market .
- Ensure great user recommendation to retain current customer base.
- Build and secure a partnership with Studios and content production house
- Negotiate the deals with Studios, Content providers and Movie production houses
- Comply with the laws (laws as per to State or Region/country), maintaining compliance to censorship , specifically for minors and children. Netflix has always promoted and operated within the boundaries of censorship.
- Supporting disadvantaged communities and other ideological issues that are important to its customers.
- Building local communities and economies that support the development of its local original content .
4. Netflix’s Customer Segments
- The Netflix platform is designed to offer a vast collection of different types of genres for subscribers to select from. Their collection (movies or shows) are designed appropriately for
- Everyone, who is interested in watching movies, TV shows and documentaries – and honestly who isn’t?
- Although Netflix offers content for children and adults alike, Netflix aims to promote Family-friendly , educational and entertaining content to help capture the better interests of families.
5. Netflix’s Customer Relationships
Self-setup made easy.
- Netflix platform was originally designed to ensure that it is simple and easy to use.
- Developers of the Website ensured to associate elements and themes that serves and promotes friendliness and provides a self-setup
Exceptional Customer Experience
- Netflix provides customer services through means of the website portal, email inquiries and users have the option to reach a representative directly, by telephone and live chat.
Online Live Chat Services
- Users have the option to opt-in to a live chat session with a Netflix representative.
- Users can directly chat with a Netflix representative to ask questions and support related inquiries.
- Request for discounts and other special promotional deals that they may qualify or offer such user or subscriber.
- Channeling major advertisements, deals, and other promotional deals through Social media channels and other relative platforms to help gain the high attraction of customer and new sign up users conversions.
- Social media is also used to inform and update individuals that operate or are familiar with the Netflix platform. Such platforms may include Facebook , LinkedIn , Instagram, Twitter , Snapchat etc.
Netflix gift Cards
- Part of the subscription plan, all users will be geared to receive special promotional discounts and other gift cards to avail.
6. Netflix’s Key Resources
- Software developers at Netflix are at constant innovation
- Design and enhance to help create a better customer-user experience
Recommendation system (algorithm)
- Artificial intelligence and selection preference sequence technology helps developers design and build the recommendation algorithm system for its users.
- Some data are based on “new releases,” or internal data that identifies user watch selection and the most viewed.
- Provides users with relative results based off of frequent searches
7. Netflix’s Channels
Through Netflix’s channeling sequence, users and interested users can access Netflix platform from one or more of the following;
- Online streaming through the website
- Streaming through Mobile apps
- Streaming on TV Apps and Gaming consoles
- Mail delivery for DVDs
8. Netflix’s Cost Structure
- Major purchasing rights establishment (TV shows and movies)
- Cost of producing movies
- Cost for providing personalized recommendations, R&D and artificial intelligence
- Subscription maintenance cost
- Paid-Connection deal with Internet Service Provider (ISP) such as Comcast to stream Netflix data at high speed.
- Infrastructure (data centers) cost of streaming content
- DVDs and mail-related shipping costs
- Employee salary distribution (customer service, Engineers, etc.)
9. Netflix’s Revenue Streams
It wasn’t until 2007, when Netflix launched “streaming” services through Netflix subscription plans , that it attained significant revenue streams and additional revenues.
- Monthly subscriptions fees with three different price options In US market (Basic – $8.99/month, Standard – $12.99/ month & Premium – $15.99/ month)
- Netflix has established a global presence with international streaming to expand its customer base.
- Upselling opportunities – Upgrade from Basic to Premium Plan etc.
- Money-making movie studio with Netflix original shows like fuller house, house of cards, etc.
How does Netflix Make Money?
Netflix was a platform which started as only offering an extensive collection of movies, shows and dramas (925 listings) through the mail-in-delivery system . It wasn’t till 2007 when Netflix has decided to convert their business structure from mail-in-system to streaming content based on subscriptions. Before launching online streaming in 2007, Netflix revenue on average summed at annually at around $997 million .
Subscription-based Business Model
- Netflix has over 230 million members from over 190 countries (as of Dec 2022)
- In fiscal year 2022, Netflix generated $31.6 billion annual revenue from both the United States and international regions.
- One of the most influential tactics implemented was its ability to build alliances with a wide range of movie producers, filmmakers , writer, and animators to receive content and legally broadcasting the contents required aligning licenses.
- To make the Netflix platform and its streaming possible, setting the partnership between Internet Service provider was also crucially important.
Technology ( Monolithic architecture )
- Technology platforms allowed “streaming” accessibility to become convenient and unique and during their conversion year in 2007, not a lot of media companies offered such, which made the platform greatly attractive.
During the early year in 2000, Blockbuster was offered to purchase Netflix and all of its assets for only $50 million .
As of feb 2023, Netflix is worth $163 Billion in market cap value. Perhaps, it isn’t really about what a company sells, rather, it’s about how a company sells or promotes its products.
Through Netflix’s powerful technological tactics, innovating the accessibilities has helped to increase customer/user experience positively. Netflix implemented in several areas that helped to capture the global market.
References & more information
- Netflix Annual Report
Tell us what you think? Did you find this article interesting? Share your thoughts and experiences in the comments section below.
Uber Business Model | How does Uber make money
Flipkart business model | how does flipkart make money, 11 comments.
Informative article, exactly what I needed.
Thanks Umar, Happy reading !
really a good one
Thanks Luca !
Yes, artical was very informative. Thank you.
Kirby – Thank you for the great feedback, really appreciate it. Happy reading !!!
Great article! Where can I find the list of sources you used? Thank you!
The Primary source of the article is Netflix’s Annual report – you can find the link in the reference section. And for secondary sources, links are embedded within the article.
Leave a Reply Cancel reply
Save my name, email, and website in this browser for the next time I comment.
$11.692 billion (2017)
Read more (Wikipedia.org) →
Similar firms (based on pattern co-occurrence):
Business Model Patterns:
How they do it: Netflix’ subscription customers pay their monthly fee upfront. This give the company increased liquidity to operate their business and acquire additional users.
How they do it: Netflix started out as a DVD rental service, realizing however that the consumption of digital content was growing. Hence it launched its online subscription service bringing the content to everyones home through the internet without needing physical storage such as DVDs anymore.
How they do it: Netflix’s customers pay a monthly subscription fee, allowing users to consume an unlimited amount of content on the platform.
How they do it: Netflix’s offering is available 24/7 due to its digital nature, allowing it to scale its userbase rapidly.
How they do it: Netflix’s core offering is providing the infrastructure and user interface for customers to watch content on the platform. The content in form of movies, shows etc. is usually not produced by Netflix (although they started producing their own shows and movies as well). As such Netflix can focus on the technical site of their platform as well as on user acquisition and license content from rights owners.
How they do it: Netflix offers a wide variety of content on its platform. This allows the company to target a broad audience as it is easy to make all the content available and let the user chose what to watch. This also includes niche content.
How they do it: Through their broad choice of content, every user can customize its individual user experience on the Netflix website. Customers get displayed individual recommendations based on the content they watch.
Rent Instead Of Buy
How they do it: Initially Netflix started with a DVD rental by mail, allowing customers to order DVDs to their home. In 2007 they introduced the streaming platform which is now the core offering of the company.
How they do it: Netflix streaming service operates on a monthly subscription model. There are various options and the price is determined by the amount of how many screens can be used to stream in parallel.
Learn from this company and apply the same patterns to create your own successful business model!
Participate in our survey & stand the chance to win a FREE Pattern-Card Set, a Testing-Card Set and a Circular Economy-Pattern Card Set!
Fill out our 5-minute businessmodelnavigator.com improvement survey to enter the competition. Good luck!
The Leading Source of Insights On Business Model Strategy & Tech Business Models
How Does Netflix Make Money? Netflix Business Model Analysis
Netflix is a subscription-based business model making money with three simple plans: basic, standard, and premium, giving access to stream series, movies, and shows. Leveraging on a streaming platform, Netflix generated over $29.6 billion in 2021, with an operating income of over $6 billion and a net income of over $5 billion. Starting in 2013, Netflix started to develop its own content under the Netflix Originals brand, which today represents the most important strategic asset for the company that, in 2022, counted almost 223 million paying members worldwide.
Netflix Business Model Short Description
Netflix is a subscription-based business model making money with three simple plans : basic, standard, and premium, giving access to stream series, movies, and shows.
Leveraging on a streaming platform, Netflix generated over $31.6 billion in 2022.
Since 2013, Netflix has been transitioning from a platform (primarily providing licensed content) to a media powerhouse (mostly producing its own content). In 2021, Netflix spent over $4 billion on produced content.
We describe the Netflix business model via the VTDF framework developed by FourWeekMBA.
Table of Contents
Netflix’s business model today
Before we dive into the history and break down the Netflix business model.
Let’s look at some of the key highlights from the current landscape of 2022.
Let’s do that by looking at the graphic below:
2022 marked the year where The Walt Disney Company managed to build a streaming empire, which passed Netflix’s total subscription count.
Indeed, by November 2022, Disney’s streaming products had reached over 235 million subscribers, compared to the 230 million subscribers of Netflix.
It’s important to highlight and emphasize that Disney achieved that with a multi-product strategy , where with different streaming services (the primary ones are Disney+, ESPN+, and Hulu), it managed to grow big in a short time frame successfully.
Yet, it’s also true that Disney still has the option to bundle these streaming services up in a single offering. This indeed might be a possible move by Dinsey to expand its streaming empire further.
In fact, Netflix started as an aggregator, and by 2013, it had begun to invest more and more into original content. Going forward, Netflix’s main advantage will be built on original content.
2022 has been a difficult year for Netflix, and yet a year that is determining a business model transition that can help the company transition to a billion members/users worldwide.
To give you a little bit of context about what happened in 2022. By Q1 of 2022, for the first time in its history, Netflix subscribers had slowed down.
Yet by the end of 2022, Netflix was back on track, bringing its subscriber base to over 230 million subscribers.
This made the company rethink its all business model and evaluates, for the first time since its inception, an ad-supported Netflix.
Of course, the company might have been experimenting over the years with ads; we can’t know for sure.
Yet, the real move into the ad-supported business came this year.
Thus, let me take you through the journey to show you the various transitions, or if you wish, in startup lingo, the “pivots” Netflix has been going through for most of its history:
- Business model change number one: the initial idea of Netflix came when Randolph and Hastings carpooled for a few months, trying to figure out their next business venture. When Randolph pitched for the first time the idea of running a movie-by-mail business, Hastings wasn’t impressed. However, a couple of months after their discussion, a new technology (we were in the year 1997), the DVD, made the whole idea viable. As they started to roll this business model of DVD rentals by mail, orders began to pour in. However, it took a good year and a half for Netflix to transition and experiment with subscription services. Thus, eliminating the pain of having to pay for late fees (something Blockbuster was doing). As the co-founders explained over the years, rather than an aha moment, this was the result of a painful attempt to make Netflix survive.
- Business model change number two: As Netflix IPOed in 2002, Reed Hastings, who had succeeded Randolph as CEO of the company, already envisioned a future where Netflix had to make its content available on-demand. The Internet had exploded a few years earlier, and Netflix was already exploring ways to deliver content on demand. Yet, it would still take a few years for this model to become fully viable. In 2007, Netflix started to offer a streaming service. Eventually, the whole business model turned into that. An on-demand streaming service based on a subscription revenue model, where paying members could consume all the content they wanted at their own pace and without any additional fee.
- DVD rentals as a heritage of the old business model: when we look at today’s financials, it’s interesting to see how DVD rentals are a heritage of Netflix’s past business model. Indeed, in 2021 DVD revenues were about $182 million (a tiny number compared to the over $29 billion in revenues from streaming services). Yet it’s also interesting to notice how Netflix keeps generating revenues in that segment, also at a wide margin. This shows how the DVD subscription service was a great, viable idea. However, if Netflix had not changed its business model, its DVD market would have been way way smaller compared to the streaming services market.
- The pandemic effect is over: In 2021, the acquisition of new paid members slew down. From over 36 million new members in 2020 to over 18 million new members in 2021. The effect of the pandemic is over. Indeed, the fast growth of Netflix’s paying members was driven by the pandemic.
- Keep growing overall paying members’ base: Netflix still grew its overall paying members base, from over 189 million paying members in 2020 to over 210 million paying members in 2021. This is a good sign that the company, while maturing, can also pull some interesting growth numbers.
- Price spikes: since the overall paying members’ growth started to slow down, Netflix implemented various price spikes to its membership packages. This created a boost in revenues. While price spikes might be sustainable in the long term, it’s critical for Netflix to keep investing in great, original content only available on its platform. Because, over time, if Netflix were to lose traction in terms of the brand’s strength, additional price spikes might become way more burdening to users, which would cancel their subscriptions. For now, the basic packages are still convenient, thus, most paying members still stick with them.
- A media powerhouse: Netflix has been the first streaming media player to start massively investing in original content as its main asset. In fact, there is a key statistic to look at, which is licensed vs. paying content. Indeed, in 2019 the % spent on produced content was 21% vs. 79% on licensed content. This number changed by 2021 when the produced content grew to 34% of the total content spending. While licensed content in 2021 represented about 66% of the total content spending. This shows how Netflix is fully transitioning into a media company, where most of the content available on the platform might be produced content.
- Entering the ad business: since it inception, Netflix has worked with a simple subscription-based model. It’s incredible how the company managed to grow to over 220 million members worldwide, with a such simple revenue model. Yet, as of 2022, the company also realized that if it wanted to reach the next level of scale (a billion users?) in the next decade, it had to add an additional engine to its business model. Similar to Spotify’s business model , Netflix launched an ad-supported tier, in 2022. In my opinion, this is a way for Netflix to test, understand, and kick off a learning curve in the TV advertising business. If it will work out, we might see, over the years, Netflix offering a completely free ad-supported plan, as Spotify does. Why? Because, the ad-supported machine if scaled, can help Netflix reach a billion users worldwide, while it keeps growing its premium members base! Spotify has been the master of this model, and many companies like Netflix are trying to learn from it.
- Vertically integrating the content machine: the point above shows that Netflix is vertically integrating its business model, getting more and more into production, thus becoming a key player in the media industry. This approach is critical because the overall business model survival, in the long-term, depends on the ability of:
- Having content available on Netflix only. As we saw, this is critical to make its subscription sticky, for members, in the long term. Especially in light of the fact that paying members acquisition is slowing down. From that, it also depends on Netflix’s ability to keep increasing its prices, without triggering a leaky bucket.
- Having control over content gives control over the cost structure. The fact that Netflix will own the content makes it possible for the company (in the long term) to have control over its cost structure. Indeed, for now, when Netflix advances the money to acquire licensed content, this expense is amortized over the years, as members pay for their subscriptions. However, if the licensed content agreements expire, suddenly that content might not be available on the platform, making the subscription less interesting. In addition, relying too much on licensed content, also makes Netflix subject to competitors’ retaliation. In short, Netflix’s competitors might cut it out from licensing agreements, thus posing a threat to its business model.
- Having control over distribution: another key element of producing your own content, is the fact, that Netflix can freely distribute it across its global platform, without needing specific licensing agreements for each country. This is critical because it’s very hard to know at foresight, in which country, a TV series might be most successful. Indeed, over the years, Netflix has shown how series made in a country can become hits globally (see the “Casa de Papel” or “Money Heist” global success). The fact that Netflix does own the content makes it much easier to experiment, launch globally and benefit from that content.
- Also being able to license it to others, when it makes sense to amplify it. By owning its content, Netflix also has the option to license it to others, when it makes sense. This is critical to amplifying TV Series on other networks. Take the case of an old Netflix series, which had been already passed through the Netflix platform for years. As Netflix has already enjoyed the full distribution of this content on its platform, it can allow other networks to distribute it for a fee. Thus, creating an additional revenue stream, while amplifying its own content!
The Mediafication of Netflix Business Model
When many analysts look at Netflix, they consider it a tech company. Indeed, Netflix does have tech components that are an essential part of its business model.
And the company does work as a platform business model . However, Netflix identifies itself much more as a media company.
For instance, if you look at the underlying infrastructure for Netflix, this mostly relies on Amazon’s servers, as explained below:
Why didn’t Netflix build its own data centers? In reality, Netflix is focused on providing great content, and building its brand through that.
That is why, in these years, we’re assisting the “mediafication” of Netflix, and I won’t be surprised if in the coming years, at a certain point, produced content investments will pass the licensed content investments.
At that point, we can officially call Netflix a media company!
This index I like to call “Mediafication Index” and we can use it to track the full transitioning of Netflix from platform to media company.
Content Arbitrage Multiple
So how do we track the health and ability of Netflix to keep generating growing revenues compared to its content investments?
The answer is the Content Arbitrage Multiple. This metric, which we invented, is a ratio between the total revenues/content investments.
For instance, in 2021, the Content Arbitrage Multiple was 2.4x. Indeed, on the $29.7 billion of total revenues in 2021, Netflix had invested over $12.2 billion in content. This was a 5% growth compared to a Content Arbitrage Multiple of 2.3x in 2020.
Of course, there is a lagging issue here. For instance, when it comes to produced content, we’ll see the results of it in terms of revenues, profits and cash generated a few years in the future.
Indeed, with licensed content, this can be quickly made available on the platform and enhance its content selection.
When it comes to produced content, it might take 2-3 years from the first investment to see it going to fruition. Thus, it’s important to perform the same analysis on a 3-5 years basis at least.
Netflix origin story: the history of Netflix in a nutshell
As Marc Randolph, co-founder of Netflix, explained, the idea to start a company that would wreck down dominant players like Blockbuster wasn’t the result of a lightning moment, rather it happened after considering thousand of business ideas .
The initial launch of Netflix
For a bit of context, back in January of 1997, Randolph was working for a software company run by Reed Hastings. As the company got acquired, Randolph would be unemployed shortly after that. Both Randolph and Hastings were in the same situation, where the company who was acquiring them, was keeping them around for six months, as to enable a smooth transition after the acquisition.
Thus, in these six months, Randolph and Hastings started to brainstorm hundreds of business ideas . Indeed, Hastings and Randolph, which had the habit of carpooling, used that opportunity to brainstorm business ideas . As they drove each day to their office in the Santa Cruz Mountains, in Sunnyvale, the two men brainstormed hundreds of ideas, and for weeks they could not find a really good one to be the object of their next venture.
Among these ideas, Randolph pitched Hastings the idea of video rental by mail. Hastings was not impressed. Indeed, the business would not be viable considering that at the time video rentals came into big cassettes, which were heavy, expensive and fragile. Thus, not a feasible idea.
Yet, a couple of months after the idea came to Randolph, Hastings mentioned to him, how he had read about this new technology, called DVD. A thin and small flat rounded plastic object. This could easily fit into a small envelope.
They went right on to test the idea. Randolph placed a DVD into a pink gift envelope which he sent to Hastings’ home in Santa Cruz. The next day, Hastings received the DVD, intact, and handed it to Randolph. The CD inside was unbroken, and it had arrived in Hastings’ home in less than 24 hours for the price of a stamp!
That is how they realized their idea might work. And a few months later, Hastings wrote a check for 1.9 million dollars to Randolph to start the company.
After hiring a dozen people, and spending the next six months developing an e-commerce website, finally on April 14, 1998, Netflix was launched. As Randolph pointed out, at the time Netflix wasn’t trying to dominate the DVD market, to go against Blockbuster, or to look for a larger market, like streaming.
They were trying to survive. Indeed, for a year and a half, Netflix was struggling to find its business model , a business model that would make it viable and scalable.
Finding a viable business model for Netflix
Later on, the company would change leadership, with Hastings taking over as CEO (still to these days). Under Randolph, Netflix would go through a first transition phase becoming a subscription-based business model, with DVD rental. And it would later use the same model for streaming services.
Netflix started as a DVD-rental company. That was the most viable way to start a business that could compete with existing players like Blockbuster. Netflix could have tried to play it bigger.
Netflix had known for years that being a competitive player in the DVD-rental space, was “just the beginning of something else:”
In a Wired article , entitled “The Netflix Effect” from 2002, Reed Hastings, still current Netflix’s CEO, highlighted:
The dream 20 years from now, is to have a global entertainment distribution company that provides a unique channel for film producers and studios.
Converting the business model from DVD to streaming operations
Reed Hastings, after its initial investment, got more and more involved with the company until he took over as the new CEO. Already in the early 2000s, Netflix was looking into ways to transition from DVD, which had enabled the initial development of Netflix’s business model, to streaming.
For years, the Netflix executive team had been looking at how streaming was evolving. They thought by the early 2000s this might have been an option. Yet, they missed the shot for several years. Indeed, it would take longer for the streaming technology to become fully viable.
Yet when it did, it proved to be quite successful for Netflix’s business model. Indeed, Netflix started to offer streaming options by 2007. As the NYT announced at the time:
The impending death of the company, with its online system for renting DVDs delivered by mail, was predicted late in 2002, when Wal-Mart said it would enter the business; again last year, when Apple and Amazon announced movie-downloading services; and again last week, after the introduction of a series of products and services intended to bring Internet video to television sets.
The NYT highlighted, back in 2007, how Netflix’s death had been predicted several times (and indeed, the company did go through various near-death experiences in these years). Yet
Yet, as Hastings had highlighted “..DVD is not a hundred-year format, people wonder what will Netflix’s second act be.” Back then the NYT remarked:
Netflix is introducing a service to deliver movies and television shows directly to users’ PCs, not as downloads but as streaming video, which is not retained in computer memory. The service, which is free to Netflix subscribers, is meant to give the company a toehold in the embryonic world of Internet movie distribution.
As Netflix announced its streaming service, its shares dropped 6.3 percent and a JPMorgan Securities analyst downgraded the stock, citing increased competition.
Yet, by 2011, the streaming service execution had successfully been rolled out, with streaming subscribers passing the DVD subscribers. In 2011, in the US paid DVD subscribers were over 11 million, in the same period streaming subscribers had passed 20 million!
In 2009, Netflix’s revenues were over $1.6 billion. By 2011, the number passed the $3.2 billion mark!
Netflix had entered a new era, it had passed through the transitional business model of DVD subscription services, and tapped into a market expansion strategy , where the streaming segment became many times over the DVD segment.
In 2021, DVD subscriptions had become an obsolete business model, whereas the company generated over $29.5 billion from streaming subscription services!
However, to get there, Netflix had to go through another important transition in its business model. And move from being a platform/aggregator of content to becoming a media brand.
From platform to brand: Becoming the new Hollywood?
In a historic speech, in 2013, at the Edinburg International Film Festival, Kevin Spacey summarized well, the transition of Netflix, which created the company we know today:
Indeed, back in 2013, Netflix had started to implement a new strategy . The company no longer just aggregated content on top of its platform. It started to develop its own content, and it did that through a series called “House of Cards.”
Kevin Spacey’s speech captured the important transition that media companies had to go through if they wanted to survive the next wave of media, empowered by the Web. This speech is worth reading at it all because it opened up the way to the Netflix that we know today, and it created a new standard for media companies, where everyone followed the lead set by Netflix.
Like Kevin Spacey highlighted back in 2013:
House of Cards creatively actually follows the model more often employed here in Great Britain.The television industry here has never really embraced the pilot season looked to buy the networks in the United States as a worthwhile effort and now look of course we went out to all the major networks with House of Cards and every single one was interested in the idea but every single one wanted us to do a pilot first.
In short, Kevin Spacey highlighted how the “pilot content model” was broken. And how, thanks to the Internet, and new waves of content consumption, the habits of hundreds of millions of new consumers, had completely changed.
He further explained:
And look, it wasn’t out of arrogance that David Fincher and Beau Willimon (the producers of House of Cards) and I were not interested in having to audition the idea.
It was that we wanted to start to tell a story that would take a long time to tell. We were creating a sophisticated multi-layered story with complex characters who would reveal themselves over time and relationships that would need space to play out.
And the obligation of course of doing a pilot from the writing perspective is that you have to spend about 45 minutes establishing all the characters and create arbitrary cliffhangers and basically generally prove that what you’re setting out to do is network.
Netflix was the only network that said ‘we believe in you,’ we’ve run our data and it tells us that our audience would watch this series we don’t need you to do a pilot.
By comparison last year 113 pilots were made, 35 of those were chosen to go to air, 13 of those were renewed but most of those are gone now.
And this year 146 pilots were shot, 56 have gone to series but we don’t know the outcome of those yet, but the cost of these pilots was somewhere between 300 and 400 million dollars a year.
That makes our House of Cards deal for two seasons look really cost-effective.
In other words, Kevin Spacey explained how the new model, they envisioned, back then, was a model where it was way more about crafting a story, and the characters around the story. Thus, going way beyond the pilot.
This model not only focused more on building the story, and the characters, but it looked at creating such a hook for the people watching the series, that they wanted to watch it all at once.
Not only this model would be more convenient, eventually, as the cost of developing a few episodes would be much less expensive, in comparison, than that of developing a pilot. But, it would give it a different format. A format that would be more in line, with the way consumers approached it.
Indeed, Kevin Spacey explained:
Clearly the success of the Netflix model releasing the entire season of house of cards at once proved one thing: the audience wants the control they want the freedom!
If they want to binge as they’ve been doing on house of cards and lots of other shows then we should let them binge.
I mean I can’t tell you how many people have stopped me on the street and said thanks ‘you sucked three days out of my life.’
And through this new form of distribution we have demonstrated that we have learned the lesson that the music industry didn’t learn give people what they want when they want it in the form they want it in at a reasonable price and they’ll more likely pay for it rather than steal it.
Well, some will still steal it, but I think we can take a bite out of piracy so I predict that in the next decade or two any differentiation between these platforms will fall away.
This opened the way to binge-watching , a new, and powerful way, to distribute content. And Spacey also remarked:
Is 13 hours watched as one cinematic whole really any different than a film? do we define film as being something two hours or less? surely it goes deeper than that.
If you’re watching a film on your television is it no longer a film because you’re not watching it in the theater? if you watch TV show on your iPad is it no longer a TV show? The device and the length are irrelevant. The labels are useless except perhaps to agents and managers and lawyers who use these labels to conduct business deals.
But for kids growing up now there’s no difference watching avatar on an iPad or watching YouTube on a TV or watching Game of Thrones on their computer it’s all content it’s just story.
And the audience has spoken they want stories, they’re dying for them they’re rooting for us to give them the right thing and they will talk about it, binge on it carry it with them on the bus and to the hairdresser force it on their friends, tweet, blog, Facebook make fan pages silly gifs and God knows what else about it.
Engage with it with a passion and an intimacy that a blockbuster movie could only dream of.
And all we have to do is give it to them!
The prize fruit is right there shinier and juicier than it’s ever been before. So it’ll be all the more shame on each and every one of us if we don’t reach out and seize it.
And I want to leave you with the words of a man is as any to address the Nexus of Commerce and art Mr. Orson Welles who once said: “I hate television I hate it as much as peanuts.”
This was the start of Netflix’s transition from aggregator/ platform to media powerhouse!
In 2013, Netflix became the first streaming platform to win a Primetime Emmy Award with House of Cards. By 2021, most awarded shows were coming from Netflix’s original production!
A glance at the Netflix business model
Starting in 2013, Netflix started to develop its own content under the Netflix Originals brand, which today represents the most important strategic asset for the company that in 2021 counted over 221 million paying members worldwide.
Netflix is changing the way we consume traditional media. From series like Stranger Things, Narcos, and Black Mirror, Netflix has been able to become a titan of the media industry, with more than a hundred and fifty thousand members across the globe.
With three simple subscription plans (basic, standard, and premium) from $9.99 to $19.99 (in the US), Netflix has been able to become a multi-billion dollar unicorn worth more than $150 billion in March 2022.
Netflix wasn’t an overnight success
Like any start-up, also Netflix has its founding myth. As the story goes Netflix founder and CEO Reed Hastings recounted how the idea behind Netflix came about:
The genesis of Netflix came in 1997 when I got this late fee, about $40, for Apollo 13. I remember the fee because I was embarrassed about it. That was back in the VHS days, and it got me thinking that there’s a big market out there. So I started to investigate the idea of how to create a movie-rental business by mail. I didn’t know about DVDs, and then a friend of mine told me they were coming. I ran out to Tower Records in Santa Cruz, Calif., and mailed CDs to myself, just a disc in an envelope. It was a long 24 hours until the mail arrived back at my house, and I ripped them open and they were all in great shape. That was the big excitement point.
This was the year 1997, still a long way to go until Netflix reached its scale and international expansion worldwide, which can be dated in 2017.
Today Netflix is among the most successful brands in the world. And this happened not only because it managed to create one of the most successful streaming platforms of the Internet era. But also because Netflix has learned along the way when to transition its business model .
In fact, Netflix started with CD first, then it expanded its strategy by adopting streaming.
Also, it’s important to understand how Netflix changed the way we consume content (from movies to series) and also how it was the first platform player to transition from aggregator to media company.
Indeed, starting with House of Cards, in 2013, Netflix heavily invested in original programming, which today is the main growth driver and sticky engine for the company.
How does Netflix’s business model work? A simple subscription will do
As explained in the Netflix annual report:
Our business model is subscription based as opposed to a model generating revenues at a specific title level. Therefore, content assets, both licensed and produced, are reviewed in aggregate at the operating segment level when an event or change in circumstances indicates a change in the expected usefulness.
In short, Netflix sells three simple kinds of subscriptions:
With simple packaging and three subscriptions (basic, standard, and premium) you can get the streaming of all the available series, movies, and shows available on the Netflix library.
Currently, the subscription prices vary from a base plan of $9.99 to $19.99 (in the US).
The business segments are the are of the business that has a different financial logic and thus require a separated strategy .
As of 2021 Netflix revenues were over $29 billion, with a staggering growth compared to just 2013, when the revenues passed $4 billion. And a continued growth after 2019. As the pandemic hit Netflix revenues kept growing. Yet Netflix also managed to consolidate the revenues generated during the pandemic (also thanks to increased service prices).
If we look at the global picture, you can see how Netflix has more than 221 million subscribers worldwide.
The company has three business segments:
- Domestic streaming: revenues from monthly membership fees for services consisting solely of streaming content to our members in the United States.
- International streaming: revenues from monthly membership fees for services consisting solely of streaming content to our members outside the United States.
- and Domestic DVD: revenues from monthly membership fees for services consisting solely of DVD-by-mail. This is a heritage of the old business model, which Netflix used to run before it became a streaming-first company.
Let’s dive a bit into the numbers of each of those segments to understand the financial logic behind those and also see what’s strategy of Netflix in the next future.
Netflix US streaming financials explained
From the numbers above you can see how the Netflix total number of members in the US grew from 67 million in 2019 to over 75 million in 2021.
As you can see from the financials above, Netflix has managed to both increase the number of paying members, and the rate each of those members pays. Indeed, the average monthly revenue per membership grew from $12.57 in 2019 to $14.56 in 2021.
This shows, that the platform, for now, is sticky enough for paying members to stay, even when there are price increases. Thus, the churn rate, which is a key metric for a subscription-based platform is stable enough to enable a consistent revenue growth for Netflix.
Of course, where the brand becomes less differentiated in the future, additional price increases might determine a sudden switch of users to other platforms, and therefore, an accelerating churn.
What about other geographical areas?
Netflix international streaming financials explained
The overall international segment has become larger than the US segment. This shows the ability of Netflix to successfully launch its content worldwide. This is, in fact, one of the most effective strategies that Netflix has been using in the last years.
Netflix invests in original content worldwide, making it accessible on its international platform, thus, enabling the content to become successful worldwide.
This has created international series, like La Casa de Papel (Spanish series, in the US, renamed as Money Heist), which not only were massive successes in the countries where they were launched, but they became incredible successes worldwide.
While changing the whole way people consume content across the world.
Netflix indeed mastered a new methodology for analyzing, developing, launching, and distributing content.
In a speech at the Edinburgh Television Festival in 2013, Kevin Spacey said: “If they want to binge then we should let them binge,” r eferring to the method of consumption that Netflix enabled for the members.
Where platforms and TV networks released series gradually, Netflix released entire seasons all at once, giving consumers the choice of how to consume content. This has created a habit of binge-watching , which also turned out to be one of Netflix’s sticky engines of growth.
Below I explain the difference between the old content model, and the new one, built by Netflix.
When looking at Netflix’s content model, it’s also important to frame it in the context of its overall financial model.
In fact, Netflix is a subscription-based platform, where members pay for content, which is made available through it. In short, Netflix advances the investments needed to develop, and license content. And those costs are amortized over time, as subscription revenue comes in.
It all started with that DVD pay per rental business model
Today we give for granted the on-demand business model of Netflix. Yet, back in the day, you could have movies “on-demand” only with the pay per rental business model . As technology has evolved, the on-demand model has been possible also for media companies.
Netflix has been able to transition its business model when streaming became viable as a technology at scale. Thus transitioning its business from a pay-per-rental or DVD subscription business to an on-demand streaming service.
Yet, it’s interesting to notice, as of 2021, how DVD revenues still show up, as a heritage of Netflix’s past business model. This is a historical relic of the evolution of Netflix’s business model and is very interesting to look at. Indeed, as of 2021, Netflix still had $182 million in DVD revenues.
Is Netflix profitable?
Netflix is a profitable company, which net profits were $5.1 billion in 2021. Growing from $2.7 billion in 2020.
The company runs a negative cash flow business model, where it anticipates the costs of content development and licensing through the platform.
Those costs get amortized over the years, as subscribers stick to the platform.
Netflix cash flow negative business and cost structure
Netflix Financial Statements 2021
As highlighted in its financials:
Net cash provided by operating activities decreased $2,034 million from the year ended December 31, 2020 to $393 million for the year ended December 31, 2021 primarily driven by an increase in investments in content that require more upfront cash payments, partially offset by a $4,702 million or 19% increase in revenues. The payments for content assets increased $4,933 million, from $12,537 million to $17,469 million, or 39%, as compared to the increase in the amortization of content assets of $1,423 million, from $10,807 million to $12,230 million, or 13%. The increase in payments for content assets was primarily driven by delays in productions resulting from the pandemic that impacted the prior year, which resulted in the timing of certain production payments being shifted into the current year. In addition, we had increased payments associated with higher operating expenses, primarily related to increased headcount to support our continued improvements in our streaming service and our international expansion
Therefore, the company has to invest substantial amounts of cash upfront to develop Netflix’s original content.
To understand why the Netflix business model also runs on negative cash flows, we need to dig into the Netflix cost structure:
We acquire, license and produce content, including original programing, in order to offer our members unlimited viewing of TV series and films. The content licenses are for a fixed fee and specific windows of availability. Payment terms for certain content licenses and the production of content require more upfront cash payments relative to the amortization expense. Payments for content, including additions to streaming assets and the changes in related liabilities, are classified within “Net cash used in operating activities” on the Consolidated Statements of Cash Flows.
What can we learn from Netflix’s business model?
For a company that started in 1997 as a website with 925 titles available for rent through a traditional pay-per-rental model; a company that in 2000 offered itself for acquisition to Blockbuster for $50 million and now it’s worth more than a hundred fifty billion dollars. What can we learn from it?
Business modeling isn’t about just how you monetize
There is a misconception in the business world, that a business model is seen as a monetization strategy . A business model also embraces a monetization strategy but is way more than that. It is how you monetize your business.
It is about how you make your product or service available to an audience.
It is about the value you create not only for your business but also for several stakeholders. In fact, as I see it, the more a business model creates values for several players, the more it will be able to create an ecosystem that will help the organization part of its scale.
In the end, the organization and the scale are just the result of that ecosystem. This also applies to Netflix. Looking at the financials is a good starting point. Yet Netflix isn’t only a subscription-based media provider. Netflix is also based on the concept of on-demand. It is a media production company.
It is a brand that in the mind of its subscribers can mean several things. In fact, among the over a hundred thousand subscribers some tribes get assembled around the Netflix series which has become the symbol of our generation.
We like to call things “innovative.” What’s new isn’t the business model but the application of it
The first critical aspect of business models is that we like so much the word “innovative” which we tend to call anything we see as such. In reality, in most cases, it is just about taking an old business model and applying it to a new industry.
Just like the wheel , invented in Mesopotamia over five thousand years ago, it took us way more than a thousand years to put it on the bottom of the luggage. In fact, the first wheeled luggage might date back to the 1970s.
In other words, in business just like in any different life domain, what’s hard isn’t the discovery of a new business model but the application of a business model that has always existed to new industries.
The subscription business model has been used by traditional newspapers, magazines, and academic journals for decades.
As technology evolves old business models become viable to new industries
One interesting aspect that you’ll notice if you go on the Netflix blog is that the most critical editorial piece is the Netflix ISP Speed Index , a monthly report that provides updates on which Internet Service Providers (ISPs) offer the best primetime Netflix streaming experience.
Companies like Netflix, or other tech giants like Google, Amazon, Facebook, and Microsoft’s successes are strictly tied to the technological advancements we’ve achieved as humanity. Imagine you had a poor internet connection.
Would you pay even a dollar for a Netflix subscription? Of course, you wouldn’t. Thus, as technology evolves, the business models of companies like Netflix depend on how fast technology has advanced. Had the internet not snowballed Netflix would still be a DVD rental company.
Why? The on-demand business model is possible thanks to the speed at which the internet infrastructure can travel today.
The power of the on-demand business model and the “Uberization” of the service economy
In the digital world, the on-demand economy is dominating the business arena. The “Uberization” of services means offering more options on how to consume something.
In the Netflix case, the subscriber is given more flexibility and optionality about what to watch. For years, TV has used us to rigid schedules. That worked in the years when large corporations with strict schedules were the norm.
Instead, with the rise of digital nomadism and the self-employed, freelancer our habits and the way we consume media has changed drastically. In this scenario, on-demand has become a dominant business model in the media industry.
Also in this case though what seems an innovative business model it’s not. In fact, once again what is innovative in its application. In fact, when Netflix back in 1997 started to rent DVDs from its website, it was already working on the premises of the on-demand business model.
However, as the web evolved and streaming became viable, they started to apply the on-demand model through their platform.
On-demand model plus the subscription business model
What makes a business model powerful is the mixture of several ingredients; in the Netflix case, the on-demand business model, with a simple subscription applied to the traditional media industry has made it incredibly effective.
The subscription business model can scale
Netflix proved that the subscription business model could scale. However, this doesn’t happen overnight. If we look at the international expansion of Netflix, we can see how it started to expand outside the US only in 2010.
And it was only in 2016 that it launched globally. This isn’t random. The subscription business model requires a lot of financial resources.
The subscription business model requires enormous investments
We acquire, license and produce content, including original programing, in order to offer our members unlimited viewing of TV shows and films.
This was specified in the Netflix Annual report for 2018. In fact, at this stage Netflix is as much a media production company as a service provider:
Content obligations represent one of the most important financial items of Netflix. In fact, based on the success of the content investments Netflix has made in the past years and will be making in the coming years, will determine the success of the overall business model.
No wonder, then, that content obligations also represent a risk factor for the company, which in its financial statements highlighted:
We have a substantial amount of indebtedness and other obligations, including streaming content obligations, which could adversely affect our financial position. As of December 31, 2021, content obligations were comprised of $4.3 billion included in “Current content liabilities” and $3.1 billion of “Non-current content liabilities” on the Consolidated Balance Sheets and $15.8 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not then meet the criteria for recognition. Content obligations include amounts related to the acquisition, licensing and production of content. An obligation for the production of content includes non-cancelable commitments under creative talent and employment agreements and other production related commitments. An obligation for the acquisition and licensing of content is incurred at the time we enter into an agreement to obtain future titles. Once a title becomes available, a content liability is recorded on the Consolidated Balance Sheets. Certain agreements include the obligation to license rights for unknown future titles, the ultimate quantity and/or fees for which are not yet determinable as of the reporting date. Traditional film output deals, or certain TV series license agreements where the number of seasons to be aired is unknown, are examples of these types of agreements. The contractual obligations table above does not include any estimated obligation for the unknown future titles, payment for which could range from less than one year to more than five years. However, these unknown obligations are expected to be significant and we believe could include approximately $1 billion to $4 billion over the next three years, with the payments for the vast majority of such amounts expected to occur after the next twelve months. The foregoing range is based on considerable management judgments and the actual amounts may differ. Once we know the title that we will receive and the license fees, we include the amount in the contractual obligations table above.
We all like the logic and the scalability of the subscription business model. You create a product or service have people enroll in it, and you make money each month, steadily. Yet this isn’t always the case. And also scaling a consumer subscription business model is not easy at all. And Netflix is among the few who have learned this playbook on the fly.
And yet, also a company like Netflix still runs substantial risks related to the investments made in content.
When you offer a subscription that will never come at a low price. Instead, you will need continuous support, development, new ideas, and ways to make sure your subscribers stick as long as possible.
In fact, only when you’re able to have a customer acquisition cost (CAC) that is way lower than your customer lifetime value (CLV) that is when your business gets viable.
However, this is easy said than done. In fact, a sales funnel of a subscription-based model is way longer than a company that sells a one-off product or service.
This is reflected in Netflix’s financial statement as in many other companies that operate with the logic of the subscription-based business model.
Netflix is a media company
Another line item that is interesting to look at to witness the transition of Netflix, from just a tech platform to a media company, is the proportion of investment into licensed vs. produced content.
Wherewith licensed content Netflix purchases the rights to distribute it across its platform. For produced content Netflix, de facto, invests in owning the content and distributing it according to its own rules.
Indeed, the licensing content presents its advantages. Some of them are:
- Netflix can expand its library, faster, making available titles that otherwise would cost too much to produce from scratch.
- Licensed content also is less expensive (at least in the short-term) compared to produced content.
- And it can help the company quickly change the kind of content it offers on the platform.
However, licensed content has its limitations:
- You don’t own it.
- Distribution rights change over time and can be subject to retaliation from competing platforms.
- Your service might be influenced by external factors you can’t control, like changing rights agreements, which can affect the whole business’s bottom line.
Indeed, the difference between licensed vs. produced content, for Netflix, doesn’t just mark the difference between tech and media companies. It also marks the difference between a company that distributes content and a company that is vertically integrated.
When Netflix invests in production, it has to learn a playbook of how to manufacture content from scratch, this gives the company the ability to create long-term competitive advantages, and really become a new Hollywood.
Therefore, while content production can be pretty expensive, and it needs to be amortized over time, making sure to have subscribers that are willing to pay more over time, and stick to the platform also presents important advantages:
- Control over distribution, as owned and produced content can be distributed at the company’s own wish, which gives it great flexibility to understand where it’s best suited, thus, creating more options to make it successful.
- Control over the long-term strategy of the company, as the owned content, won’t be subject to the volatility, intrinsic to licensed content.
- Differentiation, as the produced content, will represent the company’s ability to innovate and produce great series (think of the growing numbers of Netflix Originals becoming hits).
- Monetization, as while in the short-term content production is way more expensive, it’s also what keeps subscribers hooked to the platform over time (If I can find Netflix series everywhere else, why would I stick to the platform?).
- More distribution options, as the company can perhaps license its content to other platforms, thus creating more options over time.
- Netflix has grown from a DVD rental site born in 1997 to an over a hundred fifty billion market cap company. Today Netflix has become a major player in the media industry, and it is investing billions of dollars in the production and development of TV Shows that have become a symbol for millions of people worldwide.
- At the same time, the international expansion is costing Netflix billion of dollars, and the subscription-based business model requires continuous investments to keep millions of people paying their monthly plans. As the SaaS industry has taken over the tech world, many give for granted that a subscription business model always makes sense.
- In reality, as we’ve seen in the Netflix case study, it took it thirteen years to start expanding outside the US. And only in 2016, after almost twenty years Netflix was able to reach Asia.
- Netflix runs a cash negative business model where it advances content development costs and amortizes them over time through paying subscriptions. Thus, it’s crucial that Netflix is able to make the platform sticky for subscribers.
- Netflix turned into a media company, as it started to invest more and more into content production, rather than content licensing.
- Netflix’s content model changed the industry, as it enabled members to have new options to consume content, it also generated whole new industries for series, based on binge-watching. What Netflix created in terms of a playbook for media platforms, in the course of the last decades has now become the standard playbook for anyone that wants to compete in the media industry!
Are we going toward an ad-supported Netflix?
For the first time, in 10 years, Netflix has lost subscribers.
As soon as Netflix announced its first-quarter results, on April 20th, 2022, the stock fell apart:
In a single session, the company lost 35%. And we’re not talking about a low-cap meme stock. That burned billions of dollars in a single stroke.
Not only this was unforeseen (clever investors like Bill Ackman had placed very large bets on Netflix) but it seems very hard to assess where the problem lies.
Indeed, it’s easy to point out all the issues Netflix has today. But there is another fundamental problem: where’s the attention going?
Netflix explained how the COVID boost in revenues has ended, and numbers didn’t lie about that:
The executive team has identified a few core problems that caused this sudden loss in subscribers:
Uptake of connected TVs
As Netflix pointed out they do not control the hardware part, thus, the more streaming services are offered on smart TVs, and the more traditional TV services add their own on-demand services, the harder it gets for Netflix to keep the same level of attention.
In the past, I pointed out, how Netflix started to build its distribution on hardware, by placing its default button on the smart TV controller, before anyone else. Yet the remote controller is now, getting very busy!
100m additional households are watching but not paying for Netflix.
Over the years, Netflix has incentivized users to simply share their passwords. This is also what made Netflix cool in the first place.
Yet, when you reach saturation, you get, as a company, much less cool about users sharing their passwords.
Therefore, Netflix is working on new paid sharing features, where current members have the choice to pay for additional households, trying to monetize these users.
We can also foresee some crackdowns, where users will be prevented to access the platform if sharing the password on other devices (things might get ugly there!).
An ad-supported Netflix
In the last years, as we went through the pandemic, Netflix has been spiking up prices for its subscriptions, which worked pretty well in terms of revenue generation .
For one thing, it shows how much people love Netflix, as they kept the subscription, nonetheless these price spikes. Yet, this strategy doesn’t work well, especially when the macroeconomic scenario isn’t as good.
As Netflix CEO, Reed Hastings has highlighted, on arstechnica:
“Those who follow Netflix know I’ve been against the complexity of advertising and a big fan of the simplicity of subscription, but as much as I’m a fan of that, I’m a bigger fan of consumer choice, and allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense.”
And Hastings further highlighted, in relation to the ad-supported plan:
“I think it’s pretty clear that it’s working for Hulu. Disney’s doing it; HBO did it. I don’t think we have a lot of doubt that it works. You know that all those companies have figured it out. I’m sure we’ll just get in and figure it out as opposed to test it and maybe do it or not do it.”
How would this work?
Hastings explained: “it would be a plan layer like it is at Hulu so if you still want the ad-free option, you’ll be able to have that as a consumer. And if you’d rather pay a lower price and you’re ad-tolerant, we’re going to cater to you also.” While the ad-supported service is tempting, is also worth highlighting that it might run at very tight margins for the company if the underlying content is primarily licensed content (just like for Spotify, the more you stream licensed content, the more content royalties costs go up).
Instead, such a model might work, if Netflix were to do it to offer its own content, but with the caveat of pacing that out.
In short, when a new series comes out, instead of enabling ad-supported subscribers to binge-watch it, content would be paced out. And if they want to watch it all, at once, they would need to pay for a full subscription plan.
New streaming services have also been launched
Including sluggish economic growth, increasing inflation, geopolitical events such as Russia’s invasion of Ukraine, and some continued disruption from COVID are likely having an impact as well.
Here there is not much control if not keep focusing on re-growing the subscriber base.
What do I think should Netflix do instead?
First, we need to reassess competition, and where it’s coming from., is the competition really between tv and streaming only , attention is not an asset, easy to control..
And while Netflix is assessing its competition, linearly, in reality, the threat might be coming from unexpected places.
The main mistake I believe Netflix is doing is on assuming that the main competitors are TV and streaming services. There is more to it!
Beyond streaming, attention is a fluid asset
As Anand from CB Insights has highlighted “Maybe TikTok is what is killing Netflix?”
“You get a show or a movie you’re really dying to watch, and you end up staying up late at night, so we actually compete with sleep, and we’re winning!”
Yet, today most of the attention is moving to other platforms. And the interesting part, is that, while platforms like TikTok offer natively short-form content. Many people end up spending hours on the platform.
So below are some of the things, I believe Netflix should do:
Netflix managed to build an incredible brand over the years. It’s still an app, either on a Smart TV or on a mobile marketplace. The main company’s asset is its content. Not even the licensed content (that can be taken away from it, anytime), but its own content (the Netflix original series and movies). Thus, in order to build a long-term advantage, Netflix should also focus on bringing to market a successful device for consuming content.
As the story goes, back in 2007, Netflix was looking into building its own hardware. Indeed, its set-top box (it would enable to stream movies from the Netflix catalog) was ready for launch! Yet, at the very last minute, CEO, Reed Hastings canceled the project.
As reported by The Verge , Hastings’ fear was that “if the company released its own hardware, it would be seen as a competitor to the very companies with which it hoped to partner.”
Hastings has been quoted as saying: “I want to be able to call Steve Jobs and talk to him about putting Netflix on Apple TV, but if I’m making my own hardware, Steve’s not going to take my call.”
This shaped the company for years. Yet, what if Netflix got into the hardware game again? Instead of a Smart TV, Netflix could build a VR device to watch its series in high definition. Or perhaps a projector, smart theater device, to project Netflix anywhere in the house!
The company could sell it at cost while offering its subscription services within the device. In this way, if successful, over time, it can control the overall customer experience.
Reassess the content development strategy.
In the last years Netflix has produced great series, and important hits, yet, it shifted on quantity vs. quality. The content development efforts instead should be more skewed toward coming up with new content formats, innovating those formats, and raising the bar again (just like Netflix did in 2013 with House of Cards).
A hybrid between binge-watching and scheduled releases.
Binge-watching has been a disruptive content format, which has helped define Netlfix as a brand. Yet, one thing was to enable binge-watching, back in 2013, and toward the pandemic. Another is to ask, whether binge-watching is still a competitive format today.
In fact, binge-watching worked as an incredible flywheel in the early years. The rhythm it demands might not be sustainable over time, from a business standpoint.
While in the past, as a Netflix subscriber, once you had binge-watched your way through a series, you could still wait for the next series. Now, you have way more choices and options. And the need to jump on another series might drive you out of the platform.
Paradoxically then, in this scenario, it might make sense to start testing out some hybrid forms of content consumption. For instance, why not give the ability to binge-watch only for higher-tier plans? In short, binge-watching has been a defining feature of Netflix, in the early days. Might become a feature to discern between basic to more advanced plans.
Content formats that go beyond series
Netflix has been testing, for a few months, new short-form content formats, such as Kids Clips and Fast Laughs . Fast Laughs, in particular, is a TikTok-like platform where clips of popular shows on Netflix are hosted, and shown with a continuous scroll, and at full screen. In short, it tries to replicate TikTok’s successful formats.
Indeed, as Netflix highlighted: Fast Laughs offers a full-screen feed of funny clips from our big comedy catalog including films (Murder Mystery), series (Big Mouth), sitcoms (The Crew), and stand-up from comedians like Kevin Hart and Ali Wong.
Of course, this can be a powerful strategy to attract young users from platforms like TikTok, and Netflix has the data to understand what content on Netlfix makes sense to translate into short-form clips.
Yet to make those sorts of platforms successful, Netlfix should plug in user-generated content. In short, it should enable mechanisms on its platform that enable users to cut the clips they find most interesting and interact with the content.
This new, user-generated content, can become new formats, that can also serve as a way for the company to create new types of content, that are able to attract future generations.
More on Netflix Business Model
- Netflix Business Model
Platform Expansion Theory
Netflix SWOT Analysis
Is Netflix Profitable
Who Owns Netflix?
Disney vs. Netflix
Read Also: Netflix Business Model , Netflix Content Strategy , Netflix SWOT Analysis , Coopetition , Is Netflix Profitable .
About The Author
Leave a reply cancel reply.
- Business Bundle
- 70+ Business Models
- Airbnb Business Model
- Amazon Business Model
- Apple Business Model
- Google Business Model
- Facebook [Meta] Business Model
- Microsoft Business Model
- Uber Business Model
- Skip to primary navigation
- Skip to content
- Skip to primary sidebar
Netflix Business Model : World’s Largest Video Selling Platform
June 30, 2022 /
The article is to explain a few basic metrics on Netflix business model and how it has changed over the years. The media and entertainment industry is one of the leading growth sectors of recent times contributing to billions of US dollars every year. One of the main elements of this sector is the television industry. However, with the fast-paced nature of everyone’s life, nowadays it has become almost impossible to watch one’s favorite shows at a particular time on a daily basis. Netflix, an online streaming media services pave the way for all customers for easy access of their favorite shows and movies in as many devices as they want.
Brief History of Netflix Business
The history of Netflix dates back to 1997 when Reed Hastings of USA first incorporated the idea and later on in 1999, he officially started the movie rental business. Initially, it was a subscription-based DVD mailing service, where a customer would pay a certain amount for renting and videos on DVDs for a stipulated subscription period. In 2010, Netflix began its streaming services in Canada and within one year, these services were initiated in 43 countries worldwide. The mail services were prevalent in North America as it did originally. In 2011, Netflix announced that the DVD mail services and the video streaming services will have separate packages. This created a negative response among the current customers and Netflix’s stock prices fell. With time, the Netflix business model transformed into an on-demand internet streaming media available to the viewers in North America, South America, parts of Asia, Europe and Ocenia. In 2012, they had over 120000 titles for online streaming and over 23 million subscribers.
Initiation of Business Expansion
They are ever expanding with time and currently, with over 83 million subscribers in 190 countries, 125 million hours of movies and TV shows, it has more media for one lifetime. Today Netflix with its hosted and original content offers movies and media in 270 languages in over 190 countries and is the biggest online Internet Television service provider. Its revenue in 2013 was over 4.37 billion. In 2018, its total revenue amounted to around 15.79 billion U.S. dollars, has grown from 1.36 billion U.S. dollars a decade ago. The net income of the company in 2018 stood at 1.21 billion U.S. dollars, with a total of 7,100 employees working worldwide.
Netflix revenue model
Netflix is one of the current pioneers of subscription-based content. It runs on a Subscription Video on Demand (SVOD) model. Subscribers pay for a monthly plan and are given access to a vast library of media—any time, anywhere. Thus, subscriptions are Netflix’s main source of revenue.
But unlike apps like Spotify which also runs on premium subscription, there’s no free option in Netflix. This means all members are paying for the content they want to watch. Users enjoy the convenience of ad-free entertainment, although ad trials have taken place recently.
It also has a DVD rental on a subscription basis, but only the streaming side of the business will be discussed in this blog.
Pricing strategy of Netflix
Netflix offers different prices based on the quality of video required- Basic, Standard and Premium. Generally, it provides the first month of subscription for free. Basic with standard resolution is $7.99 a month, but it can only be used one device at a time. On the other hand, for $10.99 a month, one gets HD video on two devices, and shelling out $13.99 a month offers Ultra HD streaming on four devices. Additionally, opting in for Netflix’s DVD service will be costly- with their Premium service, as it will be $30 a month when all is said and done.
The diagram below shows the structure of Netflix pricing.
As Netflix opened up to around 190 countries all over the globe, the cost varies depending on the country as well. You can get a Basic subscription for as low as $5 in Mexico or as high as $11 in Switzerland and Denmark.
This “simultaneously local, personal, and global” approach, according to chief product officer Greg Peters, is the reason why international revenue is expected to surpass revenue generated from US consumers . But as of now, international audiences only account for 40% of Netflix’s overall quarterly revenue.
The graph below vouches the fact that there had been a steady increase in revenue for this American video streaming company over the years.
Content costs and content acquisition
Over the past year, Netflix spent more than $8.9 billion cash just for streaming content. It already spent $5.39 this year, expanding its vast library through acquiring and creating content.
One of the reasons why Netflix has a vast library is that they acquire content from distributors and studios. They do this using direct purchases, revenue sharing agreements, and license agreements. It pays back to the overall revenue, as 80% of Netflix’s revenue comes from licensed content.
The company also puts a premium on those shows branded with the Netflix logo in their upper left corners—called Netflix Originals. In 2013, Netflix presented Netflix Originals as a way of filling up more content for the users to watch. They spent $2.7 billion in new content alone and will aim to have 1,000 original content by the end of 2018.
It is expected that investments for original content can increase up to 50% of the content budget, according to industry experts.
Video streaming server costs
Netflix uses its own content delivery network for USA- Namely Open Connect, the advanced technology infrastructure promises nothing less than 99.99% uptime. Though for delivery across the world, it relies on top-tier CDN like Akamai.
Data is stored Amazon Web Services (AWS), where terabytes of storage can be deployed to a thousand servers quickly . They also have backup data from Google Cloud Storage, along with Netflix using the platform for AI-supported applications .
Netflix is still a tech company, even if it’s different than the usual tech companies. After all, it is lumped together with technology giants Facebook, Amazon, Apple, and Alphabet’s Google. Thus, it puts a premium on its employees, especially those working in tech. Average pay range varies from approximately 10.57 U.S.D per hour for Operations Associate to 17.10 U.S.D per hour for Customer Support representative. The diagram below shows the variation in the range of salaries for Netflix employees.
Competition faced by Netflix
At present Netflix is the largest online subscription service for streaming entertainment in the world. In the initial years, it gained popularity by providing its customers with unlimited DVD rentals at fixed rates with extended due dates. Hence, when it was first launched, this business model was the first one of its kind in the whole world. The only competition Netflix faced in the initial years was from Blockbuster, which was the largest home video service in the U.S. In 2004, when Netflix’s revenue was around 500 million U.S.D, Blockbuster launched its own rent-by-mail service called Total Access to increase its revenue and hold on to the customers that Netflix had appealed to. In the first quarter of 2007, it is reported that Netflix’s growth was slowed down due to the new program launched by Blockbuster. However, in 2010 Blockbuster became bankrupt and went out of the competition. Few other competitors of Netflix are Redbox, Hulu, Amazon Prime, HBO Go & HBO Now, Vudu, Turner, Spotify etc. When Netflix initially came into the Indian market, BIGFlix, a movie streaming service was re-launched by Reliance Entertainment. But it was ousted by Netflix as it only offered movies only in regional languages.
Major reasons for the success of Netflix business model
- Netflix is expanding internationally. Within a span of 7 years, it has established its popularity in 190 countries across the world.
- The strength of Netflix is its original contents. In 2018, Netflix has released over 1500 hours of movie, TV series and other productions. It also creates sequels to original ended TV series.
- Netflix provides a variety of shows in several foreign languages, thus attracting a huge number of subscribers across the world. It has expanded from three languages- English, Spanish and Portuguese to more than 20 foreign languages.
- Netflix does not show any commercial during video streaming. Anyone who has internet connection can be a potential Netflix subscriber. With its content both hosted and original, Netflix targets all age and income groups.
- It provides reasonable pricing. However, Netflix will face tougher competitions in the future as more video streaming services are coming up. Netflix sets very high standard for its employees, therefore it may be difficult for selecting the top talents from the industry. It is noteworthy to say that Netflix has constantly ventured to develop and introduce new services and improving its value propositions with never ending hosted data and great range of its own original content. If the company wants more subscribers to join their network they need to have a stronger e-commerce oriented business model and services along with innovative marketing strategies.
In conclusion, Netflix’s business model is trying to get as many users hooked as possible in spite of the costs. Will the number of subscribers outweigh the billions of costs invested? It’s a question to ponder about, as we go along with binge-watching in our different screens.
Want to be the next Netflix? VdoCipher offers most secure video selling platform which includes a ready to launch video website, course builder, membership management, DRM security including encryption and watermarking, and payment integration.
You can read more about Netflix in these blogs:
- Netflix Codec
- Netflix Password Sharing Crackdown
- Netflix History
- Netflix DRM
Supercharge Your Business with Videos
At VdoCipher we maintain the strongest content protection for videos. We also work extremely hard to deliver the best viewer experience. We'd love to hear from you, and help boost your video streaming business.
CEO, VdoCipher. Writes about video tech, ed tech and media tech.
Leave a reply cancel reply.
Your email address will not be published. Required fields are marked *
Save my name, email, and website in this browser for the next time I comment.
Netflix is a product business model that runs a video-on-demand service through streaming technology for a subscription fee.
Overview Netflix represents a classical “product” business model in the video-on-demand industry where users pay a subscription fee to access Netflix’ library of films and television shows. Netflix was one of the pioneers of offering entertainment content using video streaming technology in exchange for a subscription fee.
History Netflix video on demand (VoD) originated from a DVD rental business in 2007. The company still operates the DVD rental service, but its primary focus has since shifted to the VoD streaming business. This business model write-up focuses on the VoD business. Netflix is the largest online movie and TV show streaming provider with more than 40 million streaming members as of 2013; Netflix streaming accounted for 89% of shows streamed in Q1 2013. The company also produces original content. Video on demand industry is a crowded one, with multiple players and business models. Players in the industry compete on price, exclusivity and range of content, as well as user experience in terms of personalization and compatibility with different devices. Some of the largeest competitors include Hulu, which uses a hybrid business model partly based on advertising revenues, and Amazon’s Prime Instant Video offered as a complement to their retail market place business.
Customers Netflix’s customers are the individuals who pay a subscription fee to access the entertainment content in Netflix’s library. They must have an internet connection. Netflix launched in the United States and is currently available in many other countries in North America, Europe, and Asia. Netflix customers span wide demographic ranges – young to old, wealthy to lower-income, men and women, etc.
Learn more about the Product Business Model
A dyadic transactional relationship where your good or service can be designed and delivered without prior interactions with the customer.
Engagement — Value Creation Proposition The main value propositions to streaming consumers are the legal access to a large movie database (in the UK there are currently almost 3,000 different titles available1 – note that availability varies by country) and the personalized service expressed in the suggestions of movies for each customer. The customers’ ratings serve as the basis for the recommendations and not a film’s popularity at the box office. The rating algorithm makes better use of movies available on the website tailored to his/her taste to watch. Netflix also creates value by having one of the widest supported devices ranges, including game consoles, smart phones, tablets, PCs, and internet TVs. Finally, Netflix offers original and exclusive content to its subscribers. New and exclusive series are released as full seasons, enabling binge watching; users do not have to wait week by week for new episodes to be released. Combined, these products and services significantly increase customers’ willingness to pay for access to Netflix’s catalogue as they have a wider choice and easy use.
Delivery — Value Chain Netflix licenses content from broadcast networks, cable network providers, and film and television studios. As an early entrant, Netflix was able to build a huge database of movies benefitting from the willingness of both TV studios and media companies to license their content. These companies hoped that Netflix users would have a chance to catch up on previous series of TV shows or films and, as a result, would be more willing to pay for their services to watch new episodes or film releases. As time passed, however, Netflix was viewed as a substitute rather than a complementary good to traditional content distributors.
Netflix also produces original content based on customer viewing data. By analysing behavioural propensities of its paying customers, Netflix determined that a political drama starring Kevin Spacey and produced by David Fincher would appeal to a large cross-section of its existing subscriber base, resulting in the highly successful (14 Emmy nominations) political drama “House of Cards”. Netflix has now licensed its original content to other distribution channels.
Netflix delivers its streamed media through Microsoft’s SilverLight platform, which is a platform that permits programmers to develop complex web applications. In 2010 Netflix switched to Amazon’s cloud services and started using some features of the HTML5 technology to extend the range of devices that could stream video through Netflix to numerous web browsers, consoles, and other devices including tablets and iOS systems since they do not work with Flash. Due to the fact that HTML5 platform is not yet implemented officially Netflix engineers had to work to integrate and innovate the way they deliver video in order to use the technology. The way Netflix integrates HTML5 enables a wider range of devices able to stream media, and uses less battery than other platforms. The supreme rating algorithm CineMatch, which recommends movies to customers matched to their tastes, makes for a distinct personalized service.
Monetisation — Value Capture Netflix’s major source of revenue are the subscription fees of $7.99 per month for unlimited access to TV shows and movies streamed over the internet to a range of devices. Currently Netflix does not use price discrimination for its customers. A popular critique of Netflix is that the company cannot bring in enough revenue from customers alone to keep up with the need to continue purchasing new content for their service: “Netflix needs advertisements to bring in more money.” Netflix’s response has always been a solid “No.” Instead, the company is planning to increase their fees, while still protecting the original add-free value proposition.
Discover Your Business Model
To help you, we need to know your business model. In knowing this we can support you to think more creatively about your business. Answer the rapid-fire questions below to find out:
To what extent do your customers pay for a physical or digital product/service? Guide to Physical and Digital businesses >>
To what extent do you customize your product/service according to customer needs guide to customization of product/service according to customer needs >>, to what extent does your business’s survival depend on your ability to influence relationships between different customers guide to business survival depending on ability to influence relationships >>, your business is most likely to be the product business model.
A dyadic transactional relationship where your physical good or service can be designed and delivered without prior interactions with the customer.
Your business is most likely to be the Matchmaking Business Model
You identify two or more customer groups and brings them together in your physical marketplace.
Your business is most likely to be the Solutions Business Model
A dyadic relationship where your physical good or service can only be designed and delivered after prior interactions with the customer.
Your business is most likely to be the Multi-sided Business Model
You identify two or more different customer groups; and after interacting with each you design and deliver your physical goods or services in a manner that connects the two parties.
A dyadic transactional relationship where your digital good or service can be designed and delivered without prior interactions with the customer.
You identify two or more customer groups and brings them together in your digital marketplace.
A dyadic relationship where your digital good or service can only be designed and delivered after prior interactions with the customer.
You identify two or more different customer groups; and after interacting with each you design and deliver your digital goods or services in a manner that connects the two parties.
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
- Ask a Question
- Write a Blog Post
- Login / Sign-up
The Netflix Effect: How Digital Transformation Changed the Entertainment Industry Forever.
Let me start by quoting Peter Drucker the management consultant “Whenever you see a successful business, someone once made a courageous decision.” Netflix is a well-known example of a company that has undergone a successful digital transformation. Having started as a DVD rental service and has since evolved into one of the world’s leading providers of streaming video content. This kind of transition is remarkable, to say the least. How did it happen?
We understand Netflix’s transformation was driven by many factors. Let us understand it better. The first point that comes to my mind is the changing media landscape, the rise of online streaming, and the need to better compete with established players in the entertainment industry. To stay ahead of the curve, Netflix embraced digital technologies and transformed its business model in several ways, including:
· Personalization: Netflix leverages data and algorithms to provide personalized recommendations to its customers. By analyzing user behavior, preferences, and viewing history, the company delivers content that is tailored to each user’s interests and preferences. Netflix is a well-known example of how personalization can be used to enhance the customer experience. The company uses personalization algorithms to provide each of its customers with a customized viewing experience. Netflix collects data on its users’ viewing habits and preferences, such as what they have watched in the past, what they have rated, and what they have added to their watchlist. Using this data, Netflix’s algorithms generate personalized recommendations for each user, helping them discover new content that they may enjoy. It improves the customer experience but also helps Netflix to retain its customers and increase engagement. By providing a more relevant and enjoyable viewing experience, Netflix creates a niche for itself. With the help of personalization, Netflix optimizes its content offering and increases its efficiency. By understanding what content is popular and what is not, Netflix can make better decisions about what content to produce, acquire, or promote. Overall, personalization has been a key driver of Netflix’s success, and the company’s use of personalization is a great example of how companies can leverage data and technology to improve the customer experience and drive growth.
· Content creation: Netflix has shifted its focus from acquiring content to producing original content. The company has invested heavily in the production of its own series, films, and documentaries, giving it a unique and differentiated offering in the market. Netflix’s focus on content creation is a key aspect of its digital transformation. The company has shifted its strategy from acquiring content to producing original content, which has helped it to differentiate itself from its competitors and provide a unique viewing experience for its customers. By producing original content, Netflix attracts new customers, retains existing ones, and generates more revenue through subscriptions and licensing. In addition, Netflix’s focus on content creation has allowed it to reach new audiences and expand its global reach. The company’s original content is available in multiple languages and is designed to appeal to a wide variety of cultures and tastes.
· Localized content: Netflix has made its content available in multiple languages and has produced original content that is designed to appeal to a wide variety of cultures and tastes.
· User experience: Netflix has made it easy for users to access its content, regardless of their location. The company has a simple and intuitive user interface that can be accessed on a wide range of devices, including smart TVs, gaming consoles, and mobile devices.
· Data privacy: Netflix has taken steps to protect the privacy of its users, regardless of their location. The company complies with local privacy regulations and has implemented security measures to protect user data.
· Technical support: Netflix provides technical support to its customers, 24/7. The company has a dedicated support team that is available to answer questions and resolve any technical issues customers may have.
“Risk-taking is the cornerstone of empires.”. Here I quote Estée Lauder, a co-founder of Estée Lauder. Reed Hastings and Marc Randolph’s focus on customer experience has been a key driver of its success and has allowed the company to create a loyal customer base and retain its customers over the long term. The company’s focus on personalization, user interface, content availability, and technical support serves as a great example of how companies can leverage digital technologies to improve the customer experience and drive growth.
Competition: Netflix has faced intense competition from other streaming video providers, including Amazon Prime Video, Disney+, and Hulu. The competitive landscape has made it difficult for Netflix to retain its market share and attract new customers.
Content creation: Netflix has invested heavily in content creation, but the high cost of producing original content has become a major challenge for the company. The company needs to continue producing high-quality content to retain its customers and attract new subscribers.
Intellectual property rights: Netflix has faced challenges with acquiring and licensing the rights to content from other producers and studios. The company needs to strike the right balance between acquiring popular content and controlling costs.
Global expansion: As Netflix expands into new markets, the company faces challenges with local regulations and cultural differences. The company needs to navigate these challenges to be successful in these markets.
Customer data privacy: Netflix has faced challenges with protecting its customers’ data and viewing habits. The company needs to maintain the trust of its customers by protecting their data and complying with privacy regulations.
Despite these challenges, Netflix has continued to grow and evolve, leveraging digital technologies and data-driven insights to overcome these problems and drive its business forward. The company’s ability to navigate these challenges and continue to evolve serves as a great example of the importance of digital transformation for businesses in today’s fast-paced digital landscape.
P.S.: This article has been published in my Linkedin account.
Enter the destination URL
Or link to existing content
Business Model of Netflix – How Does Netflix Make Money?
June 9, 2023 | By Hitesh Bhasin | Filed Under: Business
The business model of Netflix is a subscription-based model that makes money via basic, standard, and premium subscription plans while offering access to stream series, shows, and movies on the Netflix streaming platform. Its business model is quite innovative. A renowned OTT(Over The Top) content provider, Netflix provides media through internet streaming.
Netflix is an American over-the-top content platform and production company. Reed Hastings and Marc Randolph founded Netflix in 1997 in Scotts Valley and it is now headquartered in Los Gatos, California. Netflix incorporates a subscription-based streaming service offering online streaming from a library of films and television series alongside those that Netflix produces itself.
Table of Contents
What is the Business Model of Netflix
As a streaming content provider that is specialized in entertainment has 209 million subscribers as of July 2021 of which 72 million users are from the United States and Canada. Netflix has its offices in Canada, India, Brazil, France, Netherlands, South Korea, Japan, and United Kingdom. It is also a member of the Motion Picture Association (MPA) that produces and distributes content from countries all over the globe.
To think of the company, it was founded in the year 1997 by Marc Rudolph and Reed Hastings. It was then known for providing the services which would be used by the people to rent some movies that they wanted to see on the DVD format. It would use the services of the Internet to make sure that happened without any trouble for sure. Netflix’s business model is profitable but it runs on negative cash flow because of the upfront cash paid for content licensing and original content production by Netflix.
The subscribers would be able to use the internet services and the services of the company to rent their movies as well as some of the online shows as well. The subscription base which is incorporated by the company is something which is considered to be very huge and it can be something that can be really helpful when it comes to the Netflix business model generating some money as well.
What does Netflix Business Model work?
To define Netflix, it can be said that it is a basic content provider which is used online and can be used properly to stream online movies and TV shows along with some of the other documentaries these days. This online streaming site has its own application and it can be accessible from some of the other connected devices as well. So, we can also say that it can provide all the services that people need to have.
Netflix defines its business model as-
Our business model is subscription based as opposed to a model generating revenues at a specific title level. Therefore, content assets, both licensed and produced, are reviewed in aggregate at the operating segment level when an event or change in circumstances indicates a change in the expected usefulness.
As an American Media Services Provider and Production Company, Netflix’s business model revolves around its subscription-based streaming service that comprises online streaming of a library of films and TV programs that also include those films that are also produced in-house.
The users will have to make sure that they are paying their monthly subscriptions to use the services which are provided to the people in the best way. Different types of content are provided on the online streaming sites and to access all of them, the users and the clients of Netflix will have to make sure that they can pay the money.
Also, there are the video formats that are available on Netflix such as HD and Ultra HD, and to access these video formats, some additional charges have to be paid to ensure that people can get the best options for Netflix.
Understand the Netflix Business Model Canvas
In the late 1900s, renting DVDs was a common business but was an expensive one too in the United States due to the high demands of the public.
It was in 1997 when software engineers Marc Rudolf and Reed Hastings realized that the charges demanded by the various companies for the DVD rental business were way too expensive. In 1998, they launched Netflix with the motive to deliver DVD by mail.
When only 2% of the Americans owned DVD players, the idea of delivering DVDs by mail became a game-changer in the business.
Netflix business model got expanded in 2007 with the introduction of streaming for binge-watching while retaining the DVD and Blu-ray rental business. The company expanded across the globe in 2010 with streaming available in Canada then Latin America and the Caribbean. In the year 2013, they entered into the content-production industry by debuting its first series House of Cards.
In the year 2020, they make US$25 billion in revenues. Let us now have a look at their business model canvas here-
1. Key Partners of Netflix Business Model
For channelizing its business model, Netflix depends upon different partners such as-
- Content Owners
- Internet Service Providers
- Filmmaker Guides and Individuals
- Cinemas and Theaters
- Prizes and Film Festivals
- TV Network Companies
- Google and Amazon
- Alliances with Smart TV Companies
- Alliances with the Gaming Industry
Netflix is one of the leading names when it comes to the platforms which provide online streaming services to people these days. To be honest, the company has managed to serve more than 190 countries in total.
The business model totally depends on the Target audience of the company. The more members are present in the company, the better it will be for the people for sure.
2. Value Propositions of Netflix Business Model
Having a huge customer base of over 195 million all over the world, Netflix’s business model idolizes some of the following points:
- The 24/7 streaming ability on the OTT platform with zero ads gives a superior edge.
- Unlimited access to HD and ultra-HD Tv shows, movies, and many other types of entertainment never fails to bore the users. Having a large number of partners allows the company to never fall short of content of any type.
- The contents can be accessed in any part of the world with the Internet. Though the membership is contract-oriented, it can be canceled at any point in time.
- Netflix has a very virtuous way of advertisements. It recommends content based on the ones the users have recently watched, which in a way compels them to view more movies and shows and eventually extend their plans too.
- Sharing of accounts is one of the rarest features provided by Netflix. The users share their accounts with anyone and entertain themselves simultaneously.
3. Customer Segments & Business Segments
Generally, the customer segments of Netflix include users who enjoy watching movies, TV Shows, and documentaries. Netflix also targets avid video content lovers who enjoy convenient delivery on their Smartphones and TVs.
Customer segmentation is done in three ways here-
- Micro-Segmentation- 2000 taste clusters
- User Segmentation (usage parameters)- Technology, Viewing behaviors, & browsing behaviors
- Macro-Segments/Ad Targeting (non-users)- Geodemographic, and other macros
More, the company has three business segments, which make them money in different ways. They are as follows:
1. Domestic Streaming
Having been found in the United States, this streaming plan is solely provided to the members of the States itself, and the revenues are collected from the monthly membership fees.
In 2015, the numbers went on to increase from 44,738 to 54,750. This indicated an increase in the costs too. The contribution margin, i.e., the variable costs subtracted from the total revenue, sky-scraped to 37%. Such a contribution margin was noted to be the most profitable plan as a short-term plan.
2. International Streaming
The revenues from this streaming plan are collected from the monthly membership provided to the patrons residing outside the United States.
As of 2017, the revenues were confirmed over $5 billion because of the international extension plan in 2015. The contribution margin was noted to be a positive 4%, which was negative in 2016.
3. Domestic DVD
Well, it is often said that we should never forget about the times when we started. The same has been done by Netflix.
Starting with renting DVDs, the OTT platform has not forgotten about its roots and still collects monthly revenues from DVDs by e-mail. Being the company’s oldest form of revenue, the rental DVDs still provide a considerable margin.
What’s more intriguing is that the platform has separated the movies, TV shows, and documentaries for kids and adults to promote a family-friendly environment.
We will discuss this in our next section while understanding the revenue stream that helps Netflix make good money-
4. How does Netflix Make Money? – Netflix Revenue Streams
The main revenue line of Netflix is its subscribed users who opt for different subscription programs for enjoying the streaming of Netflix shows.
In the year 2007 Netflix decided to convert its business structure from mail-in-system to streaming content based on subscriptions. Let us now understand how it has helped Netflix in making money-
1. Subscription-based Model
Netflix has more than 209 million subscribers from over 190 countries that have been one of the prime factors behind their revenue generation.
The three subscription plans that Netflix offers are-
In this plan, Netflix content can be enjoyed in the standard definition
This Netflix plan lets users enjoy streaming in high definition
By opting for this subscription plan, users can enjoy the streaming of videos in ultra-high definition
The pricing of these plans varies with the countries.
2. Important partnerships
Netflix also builds alliances with a wide range of movie producers, writers, filmmakers, and animators for receiving content and legally broadcasting the content. It also has partnerships with Internet Service providers and all of this helps it in making money.
In addition, owners of Netflix make money via licensing Netflix-owned content, product placement, DVD rental, etc.
5. Netflix’s Key Activities
Different activities that Netflix performs include hiring and retaining software and tech geeks, plus it is also involved in maintaining and optimizing its platform on the web, mobile applications, TV apps, etc.
- Netflix is also associated with producing, licensing, and acquiring its original content for expanding the Netflix video library. Netflix further develops a pricing business strategy for the Netflix subscription model to ensure cost-effectiveness and channelize new customer acquisition.
- It is involved in making a roadmap to enter into the new market and optimize user recommendations for retaining the existing customer base. Business model Netflix is additionally responsible for building local communities and economies to support the development of Netflix’s local original content.
- Building and securing a partnership with studios and content production houses, plus negotiating profitable deals with Studios, Movie production houses, and content providers are some other key activities that are not only considered as the value proposition of the brand but also understood as key resources to optimize revenue streams.
Finally, Netflix activities are also associated with complying with the laws as per the State or Region, or country to maintain compliance to censorship. Its business model is also involved in supporting disadvantaged communities and other ideological issues concerning their customers and society at large.
6. Building Unique Networks & Channels
Netflix has its own unique way of building and establishing long-term networks. Knowing about the desires of their customers, the company knows how to build an effective relationship with their patrons.
They provide customer support via e-mails, text, websites, and even through calls. It invigorates its networks with social media platforms like Instagram , Facebook , and LinkedIn to amplify its customer base and keep the target audience updated about the latest releases and promotions.
Besides these, Netflix also invests in online and offline advertising. The eulogization from their own customers attracts a lot of new ones as well and largens the numbers of users.
All in all, you can access Netflix from one or more of the following-
- Online streaming through the website
- Streaming through Mobile apps
- Streaming on TV Apps and Gaming consoles
- Mail delivery for DVDs
7. Customer Relationships of Netflix
Different factors upon which the customer relationships of Netflix is based are-
- Self-Setup Made Easy
- Exceptional Customer Experience
- Online Live Chat Services
- Social media
- Netflix Gift Cards
- Recommendation system
- Ensure transparency
- Guide through joining step
8. Netflix’s Cost Structure
Different elements that are integral to the cost structure of the Netflix business model are-
- Cost of purchasing rights establishment (TV shows and movies)
- Subscription maintenance cost
- Cost of producing movies
- Paid-Connection deal with Internet Service Provider (ISP) such as Comcast to stream Netflix data at high speed
- Cost for providing personalized recommendations, R&D, and artificial intelligence
- Infrastructure (data centers) cost of streaming content
- Employee salary distribution (customer service, Engineers, etc.)
- DVDs and mail-related shipping costs, etc
9. Trends Driving the Exponential Growth
As of 2021, the number of Netflix users was 209 million, which is a rapid increase from 2015 (70.84 million users).
Nowadays, the craze of Netflix has increased in youth so much so that the ones not having an account of the same regret and become jealous of their friends.
Now, what are the trends that allow this OTT platform to grow so much? Following are some of the points: –
A wide variety of content is available to watch seamlessly on different devices concomitantly.
You can have a lavish time at your home watching any movie, web series, etc., sitting comfortably at your home with some popcorn and soft drinks. With Netflix, there is no need to go out and spend in theatres and cineplexes.
The feature of watch anytime/anywhere and cancel anytime provides the rostrum an upper edge over their rivals.
4. Low-Cost Subscription
The filmy geeks won’t deny that the subscription fee of Netflix is not a high one and a simple structure of payment. The company also looks after the privacy and security of the users.
Netflix is not only used for recommendation purposes but is also used pro-actively to create content that fits personal preferences.
6. Uberization of the Service Economy
Uberization means benefitting more options on how to overwhelm the minds of the patrons. In the past years, especially in India, TV serials have fixed the schedule of the public on watching the same shows at the same time every day.
With Netflix, the case was reversed, having given the users to watch anything with great flexibility and optionality. The growth of digital nomadism and the self-employed/freelancer has transformed our habits and the way we consume media dramatically instead of the opposite. For media companies in this situation, on-demand has become a dominating economic strategy.
So, these are some of the important details that people need to know about Netflix. We hope that the business model can help you out in understanding how it can make money.
Netflix business has become the most prominent player in the media and video streaming industry which is also inspiring many other players around the world.
The innovative strategies of Netflix proved that just establishing a business model doesn’t help in monetizing those strategies too. It is more about the companies that allured their target audience with their content.
In fact, the more a company adds value to its business models, the more it creates an ecosystem for the organization to grow. Companies like Netflix create a user-friendly as well as a cost-friendly ecosystem with their business models paying attention to the fast growth of technology. The evolution of tech put to use in the right way has helped Netflix evolve in recent years in the most effective way.
What are your thoughts about the Netflix business model? Do you find the subscription business model the prime reason behind its success? Share your thoughts with us in the comments.
Liked this post? Check out the complete series on Business Models
About Hitesh Bhasin
Hitesh Bhasin is the CEO of Marketing91 and has over a decade of experience in the marketing field. He is an accomplished author of thousands of insightful articles, including in-depth analyses of brands and companies. Holding an MBA in Marketing, Hitesh manages several offline ventures, where he applies all the concepts of Marketing that he writes about.
- Business Model of Airbnb – How does Airbnb Make Money?
- Business Model of Dell – How does Dell Make Money?
- Business Model of Instagram – How does Instagram make money?
- Business Model of Samsung – How does Samsung make money?
- Business Model of SpaceX – How does SpaceX make money?
- Business Model of Spotify – How does Spotify make money?
- Business Model of Tesla – How does Tesla earn money?
- Business Model of YouTube – How does YouTube Make Money?
- Business Model of Zara – How does Zara make money?
- Business Model of Zomato – How does Zomato make money?
Leave a Reply Cancel reply
Your email address will not be published. Required fields are marked *
- About Marketing91
- Marketing91 Team
- Editorial Policy
WE WRITE ON
- Digital Marketing
- Human Resources
- Operations Management
- Marketing News
- Marketing mix's
Netflix Business Model (2023) | How Does Netflix Make Money
8 minutes read
Anyone who has access to online streaming platforms knows the existence of Netflix. Who would not when it’s one of the leading sites in the world today? If one takes a deeper look at Netflix, one would know its unique features and elements make it stand out.
For you to know how Netflix operations work, seeing the Netflix business model canvas might be beneficial. It’s a comprehensive visual illustration so you can understand Netflix better. You can bookmark this article or take some notes as you go along. It might inspire you as you plot your company’s business model. Continue reading to learn more.
A Brief History of Netflix
Netflix is a company established by Mac Rudolph and Reed Hastings in 1997. The name Netflix comes from a combination of ‘net,’ which means the internet, and ‘flix,’ which is a ‘flick’ variation, also an abbreviation for movies. The company started using the internet to offer movies on DVD rental services. With technological innovations over the years, Netflix transformed its business model. The company went from distributing physical copies to allowing customers to stream their favorite content through mobile phones, tablets, computers, and laptops.
Netflix’s video streaming service was introduced in 2007, with 1000 titles in its library. Initially, the streaming only worked on computers and Internet Explorer, with an 18-hour free monthly stream. At the end of 2007, the company gained 7.5 million subscribers.
Fast forward to 2016, when Netflix expanded globally to about 190 countries in 21 languages. Along the way, Netflix won Academy Awards for some of the company’s original productions. It took Netflix years to be a solid streaming service provider.
Today, one can trust Netflix to provide a vast range of content from movies, documentaries, television shows, and Netflix originals. While the competition is intense, Netflix can hold its position and even account for over a third of internet traffic during peak hours. If you’re one of Netflix’s subscribers, you know that the company imposes a monthly subscription plan giving access to streaming movies, series, and other content on the streaming platform.
Netflix Business Model Canvas
With this data, what does the business model canvas of Netflix look like? There are nine sections of the streaming platform’s business model. Each aspect is vital to understanding how Netflix works and in what areas it spends its budget.
Value Propositions of Netflix
Netflix’s value proposition focuses on providing engaging and fun digital content conveniently. Once you subscribe to Netflix, you can stream on-demand content without ad interruptions. Since the platform supports a wide range of devices like mobile phones, smart TVs, PCs, and gaming consoles, subscribers can enjoy streaming all content whenever and wherever.
Customer Segments of Netflix
The business model canvas of Netflix under the customer segments category has one entry: the ‘moviegoer.’ While this could also be true in specific aspects, the streaming service caters to many subscribers. Surely, those who subscribe to Netflix are into movies and other content.
Here is how Netflix categorizes its customers:
Micro segmentation: 2000 taste clusters which are identified through viewing histories.
- Demographics - individual, family, etc.
- Gender and age brackets
- Geo-demographics - city vs. rural, country, region
- Languages spoken and its proficiency
- Technology - screen size, device used, connection type, and speed
- Viewing behaviors - binge-watcher, weekday, weekend patterns, on-the-go, home
- First series or movie watched after subscribing
- Browsing behaviors - explorative vs. repeat watcher
Key Partners of Netflix
Producers, consumer electronics, broadcasters, and cable companies are the essential partners of Netflix. They ensure the flawless and successful execution of the company’s services and processes. There are specific components that Netflix considers its primary partners. They are the IP/content owners, which refers to movies and shows the company acquires from third parties.
Secondary partners are promoters and influencers who help get the word out to Netflix’s target market. They can be cinemas, theaters, award-giving bodies, magazines, and television shows.
Key Activities of Netflix
The key activities in the Netflix business model canvas focus on licensing, producing, and platform development. Ultimately, the goal of Netflix is to provide the best streaming content to its subscribers. Besides the content, Netflix provides one of the best user interface designs among other streaming service providers today. This is why even beginners in streaming know how to navigate the Netflix app and website since it’s user-friendly and high-performance.
The competition is also strong in the online streaming industry, so Netflix must continue to produce, choose, acquire, and license relevant content, building relationships and negotiating with content producers, movie production houses, and studios. Most importantly, Netflix must keep updating its subscription model, including the pricing strategy, to sustain its growth and increase its customer base.
Customer Relationships of Netflix
The customer relationship of Netflix is generally built around the platform itself. As previously mentioned, the website and the app are user-friendly, allowing subscribers to configure based on their preferences. Furthermore, the Netflix algorithm suggests various series and films based on the user’s content consumption. Netflix provides a comprehensive FAQ section for subscribers’ concerns and questions. Besides that, users can also reach the support team through email, phone, or chat.
Most importantly, Netflix takes pride in efficiently using its networks online to engage with its subscribers. It consistently provides updates on promotions and new releases on Instagram, X (formerly Twitter), Linkedin, and Facebook. The additional clips and highlights on its YouTube handles allow Netflix fans to be more excited about their favorite shows on the streaming platform.
Key Resources of Netflix
The Netflix brand is one of the key resources of the company. Along with that are its movie portfolio and the Netflix platform. Netflix’s brand and platform are so broad that one must categorize them. The specifications are as follows:
- Content library. This could include Netflix originals and those that the streaming service must secure a license to be streamed on Netflix. Due to some streaming content providers announcing their plans to build their streaming libraries, Netflix has to pour a considerable budget into creating original content.
- Filmmakers, writers, and actors. In some cases, Netflix also provides a space for indie and newcomers and gives creative freedom in creating content. It will be interesting to know how the supply and demand will shift with various streaming platforms boosting their content creations.
- Studios. To support Netflix’s initiatives for content creation, the company is starting to acquire its studios and hire additional staff.
- Tech staff. This is another key resource in the Netflix business model canvas. The technology people are those who made Netflix a streaming service provider.
Channels of Netflix
Netflix embraces a diverse array of devices as channels through which customers can access its content. Whether it’s a laptop, computer, smartphone, tablet, or Smart TV, Netflix ensures compatibility with virtually any screen-equipped device that can connect to the internet. Additionally, set-top boxes and gaming consoles also support Netflix, making it accessible to an even wider audience. Essentially, if a device has the capabilities for connectivity and screen display, it can serve as a channel for enjoying Netflix’s vast content library, ensuring that customers have the flexibility to choose their preferred platform.
Beyond the hardware channels, Netflix employs online channels for extended reach and publicity. These encompass a robust presence on social media platforms, engagement with various media outlets, and participation in renowned film festivals. These online channels serve as vital tools for promoting Netflix’s content and connecting with a global audience.
Cost Structure of Netflix
Netflix’s cost structure is enormous. This is why the company experienced a poor cash flow during its first years. The business model canvas of Netflix needs considerable investment to reach the current state of the streaming service.
Generally, Netflix allows a massive budget for production and licensing. Besides producing Netflix series and film originals, the company must purchase content and licenses from other production houses. This is to keep its library intact with relevant and new content. This is a relatively huge task, as other streaming services are doing the same.
Digital infrastructure is another aspect that gets the higher budget from the Netflix cost structure, from when Netflix was developed to maintenance, patents, research, and software development. As you know, the bread and butter of Netflix is the app and website where subscribers access various content.
Revenue Streams of Netflix
Subscriptions are where Netflix gets its revenue. There are three different plans the streaming service offers, depending on the quality of content provided. The basic plan includes content that is streamable in standard definition. Subscribers can also opt for the standard plan if they prefer to stream Netflix content in high definition. Finally, the premium plan allows streamers to watch content in ultra-HD. The price for each plan, though, depends on the country the user is in.
Netflix also has its DVD renting service, the company’s first project before being an online streaming service provider. The monthly membership costs depend on the allowed number of discs per month. However, in April 2023, the company announced it would shut down its rental services after twenty-five years. This is probably due to the decline in demand, as most people today prefer to stream movies and series online.
How Does Netflix Make Money?
Based on the Netflix business model canvas, the company generally makes money from the content it provides to its subscribers. The more content variety the platform has, the better the reception would be from movie and series fans.
Interestingly, nearly 90% of Netflix’s revenue comes from partnerships and subscriptions, while the remaining 10% is from advertising. It’s the first company to completely leverage the internet as a vital medium to provide OTT solutions filled with exceptional services. Along the way, it allowed Netflix to easily connect with its target markets and learn about the audiences’ perspectives.
Netflix capitalized on the latest entertainment trend and infused it with its brand. Its selling point ultimately reached every subscriber on the platform who wished to see every episode of their favorite series. In most cases, the company even gets the upper hand in securing rights to the newly released movies. This is an excellent strategy, especially in geolocations where a specific film is not shown in cinemas.
Despite its billions of budget on original content, Netflix is still highly profitable. In 2022, it generated $4.5 billion in profits. This is primarily due to the high viewership demand during the pandemic when almost everyone was in lockdown.
Netflix still draws more subscribers year after year, but with Disney, Apple, and other streaming services being Netflix’s competition, the streaming platform is finding innovative means to grow its customer base even further.
As you know, the power of OTT streaming services was spearheaded by Netflix. While there might be solid competition in its industry, it’s interesting that it sticks to the business model canvas of Netflix to ensure it follows the right processes while achieving its goals. You know that the Netflix business model changes over time. It was just recently announced that it will insert ads on some low-tier plans, so this element adds to its revenue streams.
Also, the business model presented by Netflix is generally straightforward, which must be the case if you plan to develop one for your company. Longer phrases and sentences can be too much for your audience to read, so keywords are fitting.
Most importantly, the best way to plot your business model is through an online diagramming tool. With Boadmix, you can access hundreds of templates, including the business model canvas template . It’s editable, so you can use the diagram and tweak some parts to make it your own. The diagramming software promotes collaboration by inviting team members and stakeholders to view the business model template through a dedicated link.