is-netflix-profitable

Is Netflix Profitable? Netflix Profitability 2014-2021

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. 

netflix-business-model
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.

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-subscription-business-model

Netflix old plans in euros

new-subscription-plans-netflix

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 in content

netflix-licensed-vs-produced-content

While Netflix has a positive income and shows growing profits.

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.

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 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.

netflix-content-arbitrage-multiple
In order for Netflix to keep its business model healthy over the years, it needs to keep investing in content, which the company needs to be able to monetize. Therefore, the Content Arbitrage Multiple is a ratio made of Revenues/Content Investments, which tells us the ability of the company to generate revenues for the content investments performed. 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.

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.

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?

netflix-contractual-obligations

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.

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.

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