Netflix profit vs cost

NETFLIX PROFIT vs COST

One question that hits the minds of people whenever they see the financial statements of Netflix is the question, “is Netflix profitable?”

Netflix Inc., a California-based subscription streaming service that started out on August 29, 1997, offers a film and television series library through distribution deals as well as its own productions, known as Netflix Originals.

Netflix started out as a DVD-by-mail sales and rental company, but the services were eliminated not long after. In 2007, Netflix began its streaming media and video-on-demand services via the internet.

Netflix which is a member of the Motion Picture Association (MPA) has shown a lot of prominence through its role in independent film distribution. Netflix is available worldwide except for places such as Mainland China, Syria, North Korea, and Russia. As of June 30, 2022, it was recorded to have over 220 million subscribers. In February of 2022, it was ranked high in terms of largest entertainment/media agency and also ranked as the eighth-most trusted brand globally by Morning Consult.

Despite all of its achievements and its position in the entertainment industry, there is still the question of the profitability of Netflix. We will be exploring the financials of Netflix over the last decade to understand its financial position.

Netflix has been recorded to spend heavily on Originals, even with the financial standings of the company. Many companies would fold up if they had half as much cash burn, but Netflix continues to spend more and more on its content.

Before delving into the financials fully, we will be looking at the number of subscriptions and the growth rate over recent times. In 2007 when Netflix began its streaming service, the company had a subscription figure of approximately 7.32 million. The figure gradually increased in the years that followed. At the height of the pandemic, Netflix witnessed a rise in the number of subscriptions.

In the real sense, Netflix is actually very profitable. It’s a bit tricky to evaluate Netflix profit when you consider how much money it has generated over time on the annual basis. 

The fortune of the company comes mainly from its subscriptions which it offers in three plans: basic, standard, and premium, which gives its subscribers access to stream series, movies, and shows.

Many, question Netflix profitability. In fact, most people view Netflix to be unprofitable because of the amount of money it invests into the production of its content. Starting in 2013 when it started its Netflix Originals, the company has been running on what is called a negative cash flow. What this means is that the company has more money going out than money coming into the company.

For a small business, negative cash flow could spell doom. But when a company the size of Netflix runs that kind of business model, it will then rely not only on sales but on money from investments and financing.

In 2013 when Netflix decided to start producing its own content, it became evident that a lot of competitors especially the ones which it had been getting licensing from would find this development problematic. Competitors such as Amazon and Disney had to be on their toes and make advances to ensure they don’t lose their share of the market to Netflix.

For Netflix profit to be guaranteed, this meant they had to do a lot more to ensure they don’t get knocked out of business. This meant more and more investment into its original content. Which is what led to the rise in the negative cashflow business model.

The question is now why is it important to spend more and more money on producing original content?

Netflix uses what is called a distribution strategy, and like every other distribution strategy, it always starts with a product. For any company to run a distribution strategy, it needs to have enough products up-front else they stand the risk of losing membership.

It doesn’t end with just the loss of membership alone, not having content of its own subjects them to some long-term risks such as the provider of content changing agreements, pricing, and distribution; the brand won’t be recognizable and there won’t be enough freedom to distribute contents as it wishes because the licensing agreements might have intrinsic limitations.

Over the years, the company has recorded an increased amount of cash burn. Between 2013 and 2020, Netflix recorded an estimated of about 27 per cent increase in its spending on the production of content.

Yearly spending on content within the time period produces the following figures;

Year                     Revenue spent

2013      –             2.4 billion dollars

2014      –             3.18 billion dollars

2015      –             4.61 billion dollars

2016      –             6.88 billion dollars

2017      –             8.91 billion dollars

2018      –             12.04 billion dollars

2019      –             14.61 billion dollars

2020      –             17.3 billion

Source: https://backlinko.com/netflix-users

Meanwhile, its revenue within the same period experienced a growth rate of about 36 per cent. Presented below is the annual review generated from 2013 to 2022;

Year                     Revenue Generated

2013      –             4.37 billion dollars

2014      –             5.5 billion dollars

2015      –             6.78 billion dollars

2016      –             8.83 billion dollars

2017      –             11.69 billion dollars

2018      –             15.79 billion dollars

2019      –             20.15 billion dollars

2020      –             24.99 billion dollars

Source: https://backlinko.com/netflix-users

The increment in the amount of revenue spent on the production of content slowed drown drastically in 2021 when it spent only around 17 billion dollars on content. The revenue for 2021 stood at about 29.7 billion dollars. This would be the most productive year for the streaming giant so far.

Netflix said most of its spending on debut, takes about four years to generate returns. But this doesn’t deter the streaming giant because it stands on a very competitive plain. The competition has recently become very steep as competitors are making efforts to ensure they increase their fortunes.

This is the major reason why it is important for the company to pay in advance for the right to stream content, or at least have enough content ready to be streamed on its platform. Subscribers always have content to go through when they use Netflix.

Original content is very expensive. Going through some of the movies and shows produced by Netflix, it is evident that it cost a whole lot of fortune to put out a single well-shot movie or even premiere a season or episode of a series. For instance, considering the cost it takes to put out only one episode of Chris Rock’s Stand-Up series which goes for 20 million dollars. Multiply this by the number of episodes, then multiply that number by the number of similar series and others, and you will get a fair understanding of why there is so much cash burn.

Netflix funds their original shows differently from the way other major TV and streaming services do their funding. They make their funding up-front, securing and making payment for two seasons ahead for most series. Data from Netflix over the years indicates that the company has over 17 thousand titles across all of its libraries globally. The just mentioned statistic was recorded in April 2022.

Since 2013 when it first started to produce original content, Netflix Originals has recorded over 1500 titles. The titles are in two tiers viz TV shows and movies which are either paid for or made in-house. When you calculate all of these titles and the amount it takes to produce them, you will record a figure which will run into tens of billions of dollars if not up too hundreds.

Netflix has a lot of studios it has partnered with over the years and lots of others which it has acquired licenses from to air some of its shows. Some of those studios include Warner Bros., Universal Pictures and Sony Pictures Entertainment.

2022 has been a truly interesting year in the history of Netflix. Netflix has remained one of the biggest names in the streaming and entertainment industry. Recent events have seen it coming in the number two position in the race of streaming services with the highest subscribers worldwide. Second only to Amazon Prime, Netflix is relentless in its pursuit of dominance as it is still making lots of waves in the industry.

Netflix in 2022, has been releasing approximately 40 movies per month. In its most recent release on September 1, 2022, it was recorded to have added approximately 50 plus titles.

While there are quite a lot of factors to consider when looking at the future of Netflix, it is rather clear that the company is already working to ensure it secures its position through massive investment in content.

It recently established new international offices in a select number of regions to help better coordinate and improve its content production.

Its future survival to a large extent depends on the number of subscriptions and streaming hours it can amass in coming years. Most of its spending is future based and so they will be hopefully amortized as subscribers stick to the platform.

One way it can better its fortune is to increase the quality of its contents and try to reduce the amount of spending it uses to finance some of its shows, ensuring finances mainly the ones that are sure to generate revenue within the shortest possible time. This is because of the level of uncertainty in the market due to changing times and technology.

Netflix is bound to face stiffer competition in the future as many on-demand and streaming services are also pushing heavily to gain market shares. Amongst its big competitors, you will find names such as Amazon Prime, Hulu, and HBO Max amongst others.