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. This is the main weakness of Netflix’s business model.
What drove Netflix’s profitability?
In 2021 revenues drove profitability.
However, as of 2022, for the first time in years, Netflix’s subscriber base has slowed down, thus steering the company toward restructuring its whole strategy for the next decade, and revamping the Netflix Business Model.
Netflix old plans in euros
Netflix new plans in euros
Netflix offers three main types of streaming membership plans:
Why Netflix is investing massively in content
The company also used a substantial amount of cash for its operating activities.
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 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.
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.
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’s 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 make-up billion 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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Does Netflix turn a profit?
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.