How Does Netflix Make Money

A:

Netflix makes money by providing a movie and television streaming service to approximately 93 million members across the world. They also offer an option to have DVDs mailed to your home if you are a U.S. customer. Netflix makes money by charging a monthly fee for these services.

Below are the fees in the U.S. as of October 2, 2017:

Streaming Plan Fees

Number of ScreensDescriptionFee
1 ScreenWatch on 1 screen at a time in Standard Definition.$7.99/month
2 ScreensWatch on 2 screens at a time with High Definition availability.$9.99/month
4 ScreensWatch on 4 screens at a time. High Definition and Ultra High Definition are available.$11.99/month

DVD Plan Fees

 Starter (Standard Definition)Standard (Standard Definition)Premier (Standard Definition)Starter (HD - Blu-Ray)Standard (HD - Blu-Ray)Premier (HD - Blu-Ray)
Price$4.99$7.99$11.99$5.99$9.99$14.99
Discs out-at-a-time1 Disc1 Disc2 Discs1 Disc1 Disc2 Discs
Discs Per Month2UnlimitedUnlimited2UnlimitedUnlimited
Late FeesNoneNoneNoneNoneNoneNone

Performance Overview

The below tables reflects an overview of the revenue and income figures for global streaming memberships between 2014 and 2016. This should provide you with a snapshot of how much money is being brought in through their streaming service across 190 countries.

 2016 (Year Ended December 31)2015 (Year Ended December 31)2014 (Year Ended December 31)
Global Streaming Memberships93,796,00074,762,00057,391,000
Average Streaming Monthly Revenue Per Paying Membership (Global)$8.61$8.15$8.20
Revenues$8,830,669,000$6,779,511,000$5,504,656,000
Operating Income$379,793,000$305,826,000$402,648,000
Net Income$186,678,000$122,641,000$266,799,000

Free Cash Flow

The above table shows a rosy picture of increasing net income over the previous three years. In basic terms, to calculate net income you take revenues minus expenses. Cash flow is not a factor. When you look at cash flow, you see they are burning through a lot of cash for additional programming and expansion outside of the United States. This has created significant negative cash flow for the company of $2.1 billion (12 months ended June 30, 2017). Bloomberg has a good article titled “Netflix’s Money Pit Is on Fire“, which dives into the challenges Netflix faces with expanding and paying for content. According to the article, Netflix is due to pay $13 billion over the next three years for programming.

Netflix’s wants to create “amazing” content to fuel growth and that comes at a price of negative cash flow/debt. They need to keep growing their customer base to justify the massive amount of money they are using for expansion and programming. The customers will likely only keep coming if they can truly keep developing that amazing content that surpasses the competition. Eventually, the content paid for is going to have to start paying for the new content. The reality is that free cash flow will remainin negative for the foreseeable future. Meanwhile, the competition also is growing with the likes of Hulu, YouTube, Amazon Prime, and FaceBook potentially becoming a bigger player.

Image Credit: Sardayyy / flickr