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:
Netflix old plans in euros
Netflix new plans in euros
Netflix offers three main types of streaming membership plans:
Why Netflix is investing massively on content
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.
Understanding the Netflix distribution strategy
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.
- 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
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?
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.
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