Netflix is a profitable company, which almost $4.5 billion in net profits in 2022, slowing down compared to over $5 billion in earnings for 2021.
Table of Contents
What drove Netflix’s profitability?
In 2021 revenues drove profitability.Â
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. Starting in 2013, Netflix started to develop its own content under the Netflix Originals brand, which today represents the most important strategic asset for the company that, in 2022, counted almost 223 million paying members worldwide.
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.Â
Netflix old plans in euros
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
While Netflix has a positive income and shows growing profits.
The company also used a substantial amount of cash for its operating activities.Â
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.
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.
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 distributionplatform 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.
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.
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 Netflixbalance 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.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
