is-netflix-profitable

Is Netflix Profitable? Netflix Profitability 2014-2018

Netflix is a profitable company. It generated over $1.2 billion in 2018, a 116% increase compared to 2017, primarily driven by substantial growth in paid memberships. However, Netflix has negative cash flows as it invests massively on content license agreements and original content.

What drove Netflix’s profitability?

In 2018 revenues drove profitability as they increased by 35%. More precisely those included an increase of 24% and 53% in revenues in the Domestic streaming and International streaming segments, respectively.

International revenues accounted for 50% of total streaming revenue for 2018 primarily driven by the growth in the average number of streaming paid memberships globally.

International streaming memberships accounted for 55% of total average streaming paid memberships in 2018, primarily driven also by an increase in the plan mix, that moved toward higher-priced plans:

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Netflix old plans in euros

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Netflix new plans in euros

As we’ll see Netflix has been increasing its content expenses as it continues to acquire, license and produce content (Netflix originals).

Netflix offers three main types of streaming membership plans:

  • Basic
  • Standard
  • Premium

Why Netflix is investing massively on content

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Netflix financials

While Netflix has a positive income and it shows growing profits. The company also used a substantial amount of cash for its operating activities. For instance, in 2018 an additional $895 billions, compared to 2017, were used for investments in streaming content.

It’s important to understand the unit economics of the Netflix business model. The company has to pay in advance for the right to stream content, or at least have content ready to be streamed on its platform.

Indeed, it’s critical for Netflix to show to its members that it has a library of content always available, and it is also critical for Netflix to make an upfront investment in original content.

To understand why we need to look at the Netflix distribution strategy.

Understanding the Netflix distribution strategy

A distribution strategy starts with a product. Without a product, there is no distribution. For how trivial that might sound if we go back of a few years, Netflix didn’t have a product of its own.

Instead, the company assembled the content to stream on its platform for its members. While this strategy worked pretty well over the years. As Netflix scaled up and it became a threat to the same platforms licensing that content to it. Netflix realized it needed to start producing its own content, what the company calls Netflix Originals.

If you have a strong distribution platform but you don’t have a product you make, there are several long-term risks:

  • You’re subject to the provider of content changing agreements, pricing, and distribution
  • Your brand won’t be recognized
  • You are not free to distribute that content as you wish as the licensing agreements might have intrinsic limitations

When you do understand that, you can appreciate why Netflix is burning so much cash to produce its own content.

As Netflix highlighted in its financial statements “the payments for streaming content assets increased $3,138 million, from $8,906 million to $12,044 million, or 35%.”

And again those higher expenses were primarily driven by increased headcount to support growing streaming services, the international expansion, and the increased content production activities.

Why content is so expensive?

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Original content is extremely expensive. A show like Chris Rock stand-up series for Netflix costs $20 million per episode. A series like Orange Is the New Black cost as much as $50 million per season.

If you add those numbers up for all the original series, documentaries and else that makes up billions of dollars in investments. That is why Netflix balance sheet in the coming years will be dominated by an item called “screaming content obligations” which consists of almost $20 billion, and that the company will have to pay in about five years.

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, professionals, and entrepreneurs in 2019 alone | Gennaro is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

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