Table of Contents Hide
- What is Netflix?
- How Does Netflix Make Money
- How Does Netflix Make Money other than Subscriptions?
- What is The Future of Netflix?
The Subscription Video on Demand (SVOD) business model has become a prevalent business model for companies offering TV streaming services. The likes of Disney+, Apple TV+, Amazon Prime Video, Hulu, YouTube TV, Peacock (a subsidiary of Comcast) have all gained considerable market share using this model. But it was Netflix that made it famous as one of the first companies to test the model. Netflix started in 1997 as a DVD rental platform sending DVDs to different homes by email. But the transition to a streaming platform started in 2017, almost 10 years after.
Despite the intense competition from other players and despite working on yet another major transition in 2022, Netflix remains the industry leader. But the question is, apart from subscriptions, how else does Netflix make money to remain competitive, making $29.6 billion in revenue in 2021?
So if you are considering starting a business with a similar model or are just a researcher interested in the knowledge, stay put as I share details of how Netflix makes money from all of its services.
What is Netflix?
Netflix is a popular media streaming content provider on a subscription basis. It allows subscribers to watch TV shows, movies, documentaries, and more on-demand and a wide range of Internet-based devices. The company also provides DVD rental plans where it supplies shows and movies on DVDs. This is the original model it started with. And even though over 95% of consumers now prefer to access the most popular Netflix content online, the company still offers its original DVD-by-mail service, at least in the U.S. Also among Netflix services is a range of mobile games.
There are 3 different plans for Netflix subscription services. And the plan determines the number of devices a subscriber can view content with and the quality (SD, HD, Ultra HD) they can view. And the subscription is usually monthly.
But beyond subscriptions, there are other ways through which Netflix makes money. Let’s explore them in detail.
How Does Netflix Make Money
There are three simple plans in the Netflix streaming subscription model:
- Basic: With the basic package, which is the cheapest package, one is limited to just one device at a time. In terms of downloads, you can also download on just one smart device. However, this plan allows unlimited movies, TV shows, and mobile games. And it costs just $9.99 to retain your subscription each month. This plan is perfectly okay for an individual living alone.
- Standard: The standard plan is ideal for intending couples or newlyweds as it allows the subscriber to watch on 2 devices simultaneously. Like the basic plan, you also have unlimited movies, TV shows, and mobile games. Another advantage this has over the basic plan is that HD viewing is available. The charge for this is $15.49.
- Premium: I refer to this as ‘the family package’ because it simultaneously allows as many as 4 screens. It also allows HD and Ultra HD in addition to all the other features of the standard plan. It is a bit pricey but worth the charge of $19.99 per month.
Incidentally, these 3 plans are where most of Netflix’s revenue comes from.
However, as we shall see below, there are still other ways Netflix makes money.
How Does Netflix Make Money other than Subscriptions?
The following are the other ways Netflix makes money other than subscriptions:
How Does Netflix Make Money on Originals?
Netflix Originals are exclusive contents you can only watch on Netflix and are not to be found on any other streaming platform. Originals were first introduced in 2013 to evade licensing costs and as a part of their marketing strategy to produce Netflix-exclusive content. This original series involves huge production costs. But it is one of the advantages Netflix has over other competitors.
However, there are four types of Netflix Originals as follows:
- Netflix Original Programmes: These are programs produced and commissioned in-house by the production crews. Netflix owns 100% of the rights to these programs.
- Netflix owns international rights: These shows or contents are not commissioned by Netflix. However, they exclusively own international streaming rights to the shows.
- Co-Production: This refers to when Netflix partners with a network in a particular country to produce and exclusively distribute to other regions outside the parent country.
- Continuation of a canceled show: These are programs that have originally been produced, distributed, and marketed by other production companies or networks. But along the line, the deal is canceled for whatever reason, and Netflix takes it up exclusively.
In any case, it is a Netflix original if you can only watch it on Netflix in your own country. This implies that the original in the US may not necessarily be the original in the UK.
Originals also follow the same revenue model (subscription) as licensed content.
How Does Netflix Make Money from Views?
There have been lingering questions about whether Netflix makes money from views. Well, today, we will put that argument to rest once and for all. The truth is that Netflix makes money from views, but it is indirectly. First, you have to know that it doesn’t work with the same model as YouTube since there are no ads on Netflix.
So how does it work?
It uses the number of views to determine what content to fund. So views are a proxy for attracting new subscribers with a popular new show. It also helps them gauge the number of active subscribers on the platform.
How Do Individual Shows on Netflix Make Money?
Physical shows are monetized. And when people air their television shows, they make lots of money from ads that show in between the show. But with no ads on Netflix, you would want to imagine how those individuals make money from their shows.
Well, it is still tied to the subscription fees paid by subscribers. The people that own those shows are partnering with Netflix. And in most cases, they even make the shows exclusive to Netflix. Although Netflix doesn’t publicly announce the royalty offer to owners of the shows, we know that a part of the money paid by subscribers goes to the owners of the shows. Netflix pays them that in the form of royalties.
How Do Movie Producers Make Money on Netflix?
This one is even more straightforward.
Apart from the enormous profits they make from the channels the movies are aired on or theaters/cinemas where it premiers, movie producers that partner with Netflix for online streaming also make so much more from Netflix.
From the information available, Netflix pays about $150 million to $250 million as a license fee for blockbuster movies. And when it is a famous movie with multiple seasons, it can go as high as 300 to 500 million dollars.
Is Netflix a Profitable Company?
Although it is still growing and exploring more opportunities, Netflix has been a very profitable business for years. For example, for the year ending September 30, 2022 Netflix’s gross profit was $12.469B. And that is a 0.76% increase year-over-year when it made $12.365B in 2021
But it is important to note that the bulk of revenue in Netflix still comes from the streaming subscription, at least today. For example, in 2021, the company made a total revenue of $29.7 billion. Of that amount, $29.51 billion (over 99%) is from streaming, while $182 million (less than 1%) is from DVD rentals.
And in terms of region, most of the revenue comes from the US, and Canada still accounts for over 44% of all Netflix revenues.
What is The Future of Netflix?
Netflix is investing massively in the production of original content. Despite still being able to compete favorably with licensed content, it has invested heavily in original content as its main asset. And it is not doing that for no reason. Statistics show that the percentage of produced content to licensed content has been growing steadily since 2019. And this is an indication of what could be the future of Netflix. So the future might see Netflix transition from a tech company to a media company where most of the content will be produced.
However, there are indications that Netflix might be entering the ad business as another way of making money. This is a temptation Netflix has resisted for many years, managing to grow its subscribers to over 200 million without showing ads. But the company probably has realized that amid intense competition, what brought it this far may not be able to take it further.
Of course, growing the subscriber base to 1 billion has always been the goal. But to achieve that may require pivoting a little. And in 2022, the company started doing that by launching an ad-supported tier for the first time since its inception.
This might also represent the future. I see what they are doing now as a test run which, if it proves to work, may become a significant revenue source where they will be a free plan with ads to compensate. This is a similar model Spotify is using.
The long-term success and sustainability of Netflix’s subscription-based model will depend to a large extent on two factors:
- Ability to have as many contents that are not found on other platforms as possible
- Ability to keep the price as low as possible.
And to achieve this, more will have to be done to produce more original content. This means that Netflix may soon become a complete media company. And if produced content becomes the majority on Netflix, then the Facebook, YouTube, or Spotify advertising revenue model will become a possibility. But for today, the subscription remains the primary way Netflix makes money.
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