How Does Netflix Make Money?

While many sectors and companies suffered significantly during the pandemic, Netflix has thrived, hitting all-time highs again and again.

Sept. 8, 2020

Netflix (NASDAQ: NFLX) is the clear leader in the on-demand video entertainment streaming space, with its share price hitting all-time highs regularly during the pandemic. There has been record-setting user growth as of late, with more paying subscribers acquired during the first half of 2020 than in all of last year. While people wonder if these subscribers will stay on board once the pandemic passes, Netflix still has a lot of potential to grow.

What is Netflix? 

Netflix began by renting and selling DVDs by mail, being the first online DVD-rental store in existence. The company today has a market cap of about $232 billion and finances many hit shows such as ‘Ozark’, ‘The Witcher’, and ‘Stranger Things’. 

The number of paying Netflix subscribers rose by 26 million during the first half of 2020, compared to an increase of 28 million for the entire of 2019. While others like Hulu, Amazon, and Disney are pushing hard to compete, Netflix still rules the roost in the U.S. market. It is constantly looking at expansion into untapped markets, staying ahead of the competition.

Netflix’s business model

The Netflix business model is subscription-based, allowing users to stream content from its library whenever they want. There is a monthly subscription plan, with a number of different packages available at different price points. For many years, one of the main acquisition tactics for Netflix was offering a 30-day free trial. 

Giving people access to a massive database of television shows, movies, and documentaries paired with a seamless delivery, no ads, and a personalized algorithm for suggestions, Netflix is the clear market leader. The company invests heavily to drive growth, having previously planned to pour more than $17 billion into content in 2020. 

Netflix has seen positive cash flow in the first two quarters this year. Thanks to people being confined to their homes due to the pandemic, Q2 2020 paid membership numbers rose by 274% year-on-year, with net income rising 166.1% when compared to the same period in 2019.

How does it make money?

Naturally, the main source of revenue for Netflix is the subscriptions. For most regions, there are three different packages on offer. The basic package ($9) offers content to be streamed in standard definition. The Standard package ($13) offers content in HD, while the Premium package ($16) delivers streaming content in Ultra-HD, while each tier also has a different amount of screens allowed to be played at the same time.

Having initially focused its efforts primarily on the U.S. market, Netflix has managed to diversify its customer base somewhat in more recent times. About 47% of revenue comes from the U.S. and Canada, with 31% coming from Europe, Middle East and Africa. The remaining share is split between Latin America (13%) and Asia-Pacific (9%).

What’s next?

Netflix is constantly looking to expand its library and bring more original content to the platform. It is also eying up markets that have previously been largely untapped. 

One of the company’s main focuses in the near term is the Asia-Pacific market, which was its fastest-growing geographical segment in Q2. While it does not have any plans to enter the Chinese market as of yet, there are many other markets in the region with large populations. 

Competition is constantly growing, with rival platforms investing heavily in originally produced shows and movies. However, Netflix still is the clear market leader and due to its ability to bring hit content to this platform (think ‘Tiger King’ and ‘The Last Dance’ during the pandemic), it looks like it will continue its dominance for some time.

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