Netflix is a popular subscription-based video streaming service. It is an undisputed leader when it comes to OTT video streaming services.
With its wide range of titles in genres ranging from Horror, Drama, suspense, romantic, steamy, or even Comic or kid-friendly, the tagline “There a Netflix for all” cannot stand more true.
In fact, Netflix focuses on youth-centric content, which is relatable to Gen Z. This is the reason why a Netflix subscription is on top of their “Must have” lists.
Netflix has redefined “Me time” as people's favorite thing to do at home is to just bundle up on the couch with a blanket and binge-watch series on Netflix.
Also Read: How does Signal Make Money
How does Netflix make money?
History of Netflix
Netflix is a vision of two American entrepreneurs Reed Hastings and Marc Randolph, who founded it in the year 1997. Netflix began its initial journey as a rental DVD service. It shifted its focus on providing premier OTT content in the year 2007.
This was supported by the boom in personal mobile usage along with affordable unlimited internet plans.
Netflix later started producing and streaming its own content in 2013 and there is no looking back since.
Netflix now hosts over 3000 titles in various genres on its platform and has over 182.2 million active and paying customers, in over 190 countries.
How does Netflix work?
Netflix uses the internet to stream videos on devices from their servers. However, the requested video touches many points before streaming to the user’s device.
When a user clicks on a particular title, the Netflix algorithm plans the best possible route to deliver the title to the user’s ISP. The shorter the route, the better the streaming quality. This is how a video reaches the user’s IP address.
When the users open the Netflix app on their devices, they are bombarded with recommendations. Though these recommendations may not look as functional to the user, it is a key to Netflix's success.
Netflix needs to remain relevant to its subscribers or else they may end up canceling their subscription. This is where Netflix's powerful algorithm comes to play. Based on the user's viewing history, Netflix recommends similar shows to keep them hooked. Also, the best thing about this algorithm is that it keeps changing based on the changing preferences of the user. This strategy has kept Netflix on top of the OTT market for years
Another strategy that Netflix adapts to stay on top of the market is to know where to put their money. Among the host of titles available to watch on Netflix, some are self-produced.
These titles are only renewed for the next season if their previous season was a success. If not, it moves onto the next thing. When there is a paradigm shift in user preferences, Netflix reviews both its licensed and self-produced content at operating levels and follows the trend. This is the strategy that lets Netflix keep content that is in demand and most sought after.
How does Netflix make money?
Netflix is a huge platform that has its base in over 190 countries. With such wide operations and a huge database of titles on its platform, the upkeep would definitely be a task for the team.
Netflix has come a long way from its DVD rental days to becoming the largest OTT video streaming platform in the world. However, this has not happened overnight. Netflix has taken strides towards better technology to provide quality service to its subscribers.
However, this technology and the infrastructure that Netflix uses for video streaming come at a huge price. Also, Netflix produces its own titles. So where does Netflix earn money from?
Though the primary source of income for subscription-based services like Netflix is the subscription fee itself, the platform has figured out other ways to generate income.
Here are some of how Netflix makes money-
Subscription-based model
The majority of Netflix's income is through the subscription fees paid by the users, with over 182.8 million active and paying subscribers all over the world.
To use Netflix, one must choose a plan that works for them. Currently, Netflix offers three plans for its users to choose from.
Basic plan
The cost of the basic plan is $9.99 per month. Users are allowed only one active screen at a time under this plan. They can also download and watch titles on any one of their mobile or tablet device.
They have access to unlimited titles, games, movies and T.V shows on the platform. This plan provides a standard definition of video quality for all titles.
Standard plan
The Standard plan is priced at $15.49 per month. Under this plan, users are allowed 2 active screens at a time. Users have access to unlimited content on the platform. Under this plan, users can access high-definition video quality.
Premium plan
This is the most high-end plan offered by Netflix. The monthly subscription fee under the premium plan is $19.99 per month. Under this plan, users are allowed 4 active screens at a time.
This can be touted as a family plan. Premium users receive the highest ultra-high-definition video quality on all their logged-in devices.
Important partnerships |
Netflix has tie-ups with major TV producers, writers, and filmmakers that create content for the platform. The revenue from these sources is another way Netflix makes money.
Here are other important partnerships that help Netflix make money-
What does it cost to run Netflix?
After understanding the income avenues of the streaming platform, it is important to understand the costs that Netflix has to bear as well. Here is a list of major costs that Netflix should bear to keep its services up and running.
Licensing cost
Netflix has a wide variety of titles that require a license to be showcased on the platform. The licensing costs of acquiring crowd favorite titles are the way to attract subscribers to sign in on the platform. The license cost of acquiring titles is one of the major costs that Netflix has to incur.
Netflix pays around $100-$250 million to license movies and $300-$400 million to license trending TV shows.
Production cost
Apart from licensed titles, Netflix also produces its own titles. The company has to bear the entire production costs of these titles.
In fact, Netflix spends a large chunk of its income on producing its own titles and has become one of the biggest spenders in this category.
The production cost of each title varies. However, producing a movie can set Netflix back by anywhere between $ 8 million to $ 100 million.
Marketing cost
Effective marketing is important even for a major brand such as Netflix. Users should be educated regarding the titles available on the platform to compel them into subscribing.
Any new shows or titles added should be marketed widely on all channels and this requires sufficient marketing cost. This also includes payments made to affiliates and partner devices.
In 2021, Netflix has reportedly spent around 2.55 billion in marketing costs.
Research and development cost
Effective research and development are what have made Netflix a market leader in OTT platforms. It is due to research that the company has moved from a DVD delivery model to a subscription-based OTT platform to stay relevant in today’s market.
Also, constant research is needed to understand the user preferences and provide content accordingly.
In 2021, Netflix has reportedly spent around 2.274 billion dollars on R & D.
Technology and Development cost
General and administrative costs
Netflix has to incur other costs such as Human resources, payroll as well as investments in other companies. This also includes payment processing fees and
Netflix has incurred a general cost of 3.127 billion in general and administrative sectors by the end of 2021.
Impact of Netflix
When Netflix was introduced, it was one of its kind video streaming services in the market, without any competitors. It paved a way for other streaming services. It has revolutionized the world by providing viewers with unlimited options for movies and TV shows across all genres. At a time when entertainment options were limited to cable TV and Live events, Netflix bombarded viewers with unlimited entertainment and endless titles.
Netflix leverages the impact of the internet to reach its viewers and target audience. It was introduced at the time when mobile phones became a common phenomenon and mobile networks enticed their users with unlimited internet data. This worked great to Netflix’s advantage and the OTT platform became the most sought-after OTT service provider.
The original shows and exclusive content on Netflix is another reason the subscribers love the platform. With original shoes in wide genres, Netflix is capable of holding the interest of its subscribers
Conclusion
The ease of use and the variety of entertainment options that Netflix provides are what make its subscribers loyal. Several Netflix original shows are a rage among the crowd. Netflix manages to create such hype that non-subscribers end up subscribing to the platform due to FOMO.
Netflix has time and again proven why it is on top of the OTT platform market. With its youth-centric and relevant content, top-class streaming technology, excellent video quality, and affordable pricing, Netflix is here to stay.
FAQs
How does Netflix make a profit?
Netflix earns its revenue through subscription fees and tie-ups with major movie producers. Also, Netflix makes money through ads on its streaming platform. It streams exclusive content that attracts a large number of subscribers to its platform.
How much debt is Netflix in?
As of 2021, the company is said to be $10-$15 billion in debt. However, Netflix recently released a statement saying that it is now making enough to cover its debt and become profitable.
Does Netflix lose money?
It is said that every year, Netflix loses about $ 6 billion in revenue due to password sharing. This is the reason why Netflix has put curbs on the number of devices that the users can log in through one account.
Does Netflix buy movie rights?
Yes, buying movie rights is one of the most important costs that Netflix has to incur. However, Netflix makes sure that the streaming of the movie covers the licensing cost.