A few months ago, Netflix celebrated an annual revenue record of $6.8 billion, which is almost six times more than in 2007. The company introduced its streaming service in that year and has seen its number of subscribers rise to more than 80 million. Its cable competitors, meanwhile, have lost 6.7 million subscribers over the last 5 years alone. How did this happen and is this growth (from Netflix’s perspective) actually sustainable?
Netflix started of as a DVD rental company in 1997, but transformed its business model into streaming media and video on demand online. One of the first series to appear on Netflix was Mad Men, which was produced and first broadcasted by cable company AMC. At the time, Netflix was the first to put an entire season online at once. Binge-watching was born.
However, in order to stand out from the crowd and reduce its dependency on other media giants, Netflix decided to produce its own exclusive series in 2012. The first experiment turned out to be a major success: House of Cards is actually one of the best-known modern series. After successfully producing shows like Narcos and Orange is the New Black, Netflix is currently spending $5 billion on content, which also includes media provided by its competitors.
Although Netflix might seem like a success story of its own, there is a downside to the company’s success. Netflix has a negative cash flow of almost $1 billion and regularly issues new debt to finance new content. Simultaneously, its profit margin is extremely thin, with an estimated 1.4% in the first quarter of this year.
The company’s competitors, such as Time Warner, Amazon and cable companies, have also woken up. They have seen Netflix dominate this market for too long and will try to leverage on their market size (with annual revenues up to $100 billion) to rip into the current market leader. They also see the potential risk the streaming service poses to their longtime business model, since so many people are switching from mainstream TV to on demand.
Now that these companies realize that Netflix is hurting their business, it might be time for payback. The networks and studios could charge higher fees for their shows and could potentially refuse to work with Netflix altogether. In the former case, Netflix will have to raise subscription prizes and hope the number of subscribers keeps growing. In the latter case, the company will have to focus more on original content, where upfront costs of more than 30$ billion for one show is not uncommon. Either way, these developments pose a real threat to the sustainability of Netflix’s business model. To be continued…
Thanks Dave for this interesting post. In the competitive video entertainment industry being popular is a vital condition to survive. Subscribers can easily switch to another streaming or cable provider, as the switching costs are zero. So it is of the utmost importance to give the subscribers reasons to join and stay: popular series and films.
The more subscribers a provider has, the more money it can spend on creating its own content and on licensing popular content from others. Netflix currently has more than 80 million subscribers world-wide and this number is expected to grow in the next years. This large subscriber base allows them to create many Netflix original series, which has led to successful series like House of Cards, Narcos, Orange is the New Black and Daredevil. The current financials show that Netflix sees the need to invest in content to increase the subscriber base. This allows them to create more popular content, which leads to a further increase in the number of subscribers (virtuous circle).
So I think the answer to your question is yes, because in the end the winner takes all.
Nice blog!
I think Netflix is together with many startups a bit inflated. By that I mean that the startup has a huge evaluation and keeps getting VC founding without actually paying back the investors or generating cash flow.
As a company selling information goods, it should try to expand faster to more markets and try to make cash on their already available resources like the series and movies they have already.
Anyway they should make some quick cash shortly otherwise the competitors will catch up and they will be left with a big company and no profits. I was thinking of a pay-per-view system to acquire users outside of their customer circles, who watch tv or series only once in a while. Maybe that could be a viable solution !
Hi Dave,
Thank you for your blog post! I’m a big fan of Netflix myself. I’ve watched many TV-series on this online platform (breaking bad is my favorite).
However, in my opinion, Netflix won’t disappear from the radar. It’s currently one of the biggest streaming platforms in the world. Should Netflix need to reduce their investments on new TV-series, their assortment will decrease only slightly. I think the consequences are overrated. If I look at myself, I will most definitely not switch to another streaming platform, because of a small decrease in their collection. I got used to Netflix and even became an avid fan of Netflix. I think Netflix has earned credit with a lot of people all over the world. Customers do not so easily leave organizations as soon as they have earned their loyalty. Even a small fall back in the amount of TV-series will probably not cause them to switch platforms. Due to its immense reputation worldwide and the huge amount of loyal customers, I think Netflix will survive the emerging competitors.