Netflix is one of the largest and most successful streaming platforms. Nearly 25% of the US adult population checked-in with the service daily in 2017. So, they must be generating an enormous profit, right?
Subscribers to this service pay a relatively modest monthly fee, which accounts for all of Netflix's profits. They do not host advertising, and so they make no profit from ads, unlike rival streaming company Hulu.
But with a vast global audience – 190 countries to be exact – Netflix does earn billions of dollars every year. However, if you consider the billions that Netflix spends to generate content, the profits don't accurately keep pace with the expenditures. So, how does Netflix make money?
What Is Netflix?
Netflix is a media-services provider most known for its television and movie streaming subscription services. It was founded in 1997, initially as DVD rental service with at-home delivery. Ten years later, they began offering streaming services in addition to their rental services.
What Is Streaming Service?
A streaming service is any media-related service that provides content to a user or subscriber at a constant rate. This media must be available to the user or subscriber at any time.
Video streaming is not the only kind of streaming, with other service providers offering streaming music, podcasts, images, and information.
Is Netflix The Most Popular Video Streaming Service?
Netflix is the most popular choice for Americans, with approximately half of all Americans subscribing to their video streaming service monthly.
How Much Does Netflix Cost?
Netflix offers three subscription plans to choose from, each with benefits and costs. It is important to note that each new subscriber is eligible to receive their first month of service completely free of charge! Let's explore the three subscription options that Netflix provides.
For those who wish to use the streaming services only, and not the DVD rental service, the price varies depending on the quality you desire.
The Basic package starts at $8.99 and includes standard, non-HD streaming to a single device at a time. The next tier up is the Standard package, at $12.99. The Standard package provides HD streaming on up to two devices at a time. The final and most comprehensive of the streaming-only packages is the Premium package, which allows for four devices to simultaneously stream content in Ultra HD quality. It costs $15.99.
Each subscription package is billed to you monthly. Annually, the Basic package will cost you about $108. The Standard option will cost you approximately $156, and the Premium service will end up costing just under $192. That’s a difference of nearly $100 annually, from Basic to Premium.
Your choice of package will depend on the needs of your household and the desired quality of your videos.
If you are uninterested in streaming media, Netflix has you covered with their non-streaming, DVD rental subscription service. This service is available in the form of three various packages.
The most basic of these three options is the Starter package, a $4.99 per month plan which allows you to rent up to two DVDs per month and have one in your possession at a time.
In the next tier, we have the Standard $7.99 per month plan, which allows you to rent an unlimited number of DVDs per month, considering that you can only have one with you at any given time.
The most expensive of the DVD Rental packages is the Premier package, a solid $11.99 per month option. Not only can you rent an unlimited number of DVDs per month, but you can also have up to two in your possession at a time, doubling your video-watching capacity.
Netflix also offers Blu Ray DVD options, at a slightly higher price than their regular DVD Rental fee schedule.
Want the best of both worlds? Netflix offers four “combination” plans that range from about $16 to $30 a month, depending on the number of DVDs you would like to be able to have out at any one time.
The least expensive option includes unlimited streaming, unlimited DVDs per month, and only one DVD out at a time. For approximately $15 more, you can have all that plus four DVDs in your possession at any time, ensuring that the entire family is happy with their viewing options.
Where Does Netflix’s Money Go?
Netflix spends quite a lot of money. In 2018, they planned to spend about $15.7 billion on content alone. If you add the general costs that Netflix incurs to this significant figure, the losses begin to seem impossible.
Content Creation Costs
Netflix is known for its original shows and self-created content. From the worldwide phenomenon that is Stranger Things to Netflix's groundbreaking hit Orange Is the New Black, audiences continue to choose Netflix for its unique and high-quality content.
Most of the money that Netflix spends annually goes toward further content creation.
Because Netflix is such a large and well-known company, it's typical costs can be anything but ordinary. Netflix pays for the following to keep itself alive:
To stream a wide variety of content, Netflix must pay the licensing fees for that content. With such a massive library of media to choose from, you can only imagine how much they pay to license that media!
Netflix is certainly not the only video streaming service available, though it is the most popular. To maintain their popularity, they must compete with rival companies, and one of the most effective means of competition is consistent advertising.
Netflix can avoid licensing fees by producing their content, but at a high price. Production costs for films or television shows can be in the hundreds of millions of dollars if not much more.
Technology And Research Development Costs
The algorithm which suggests new content to Netflix users is one of the most praised features of the service. Continuing to research new software, technologies, and consumer patterns are critical to the long-term success of Netflix.
Every company must pay its employees, and Netflix is no exception.
And there are many other, smaller miscellaneous costs that Netflix incurs, such as postage to mail out rental DVDs.
How Much Money Does Netflix Earn?
How Much Does Netflix Spend Every Year?
In 2018, it was estimated that Netflix spent more than $13 billion on content, such as Netflix original shows and movies. The rate at which Netflix pays money to generate new content is currently higher than its rate of profit.
Netflix is several billion dollars in debt, reporting a total debt amount of around $10 billion as of 2019. They intend to increase this debt as much as fiscally possible, to continue generating unique content. With this increasing debt, it’s no wonder why many people wonder to themselves, “How does Netflix make money?”
How Does Netflix Intend To Make A Profit?
With all this spending, it may seem like Netflix is asking for trouble. After all, it is probably challenging to come back from being $10 billion in long-term debt. But Netflix has a plan. It can fundamentally be broken down into three integral parts.
Currently, Netflix has over 125 million subscribers worldwide. They plan on expanding that number quarterly, until the end of time.
For many developing countries, Netflix is one of the first introductions of entertainment and media technology, after Facebook. Its membership is only bound to increase as more people find access to suitable electronic devices that can hold an internet connection.
The most rapidly spreading form of streaming comes to us via smartphones, which are now available nearly everywhere in the world. People can now communicate, learn, and watch without having access to a bulky, expensive desktop computer.
More Netflix-Generated Content
The licensing costs that Netflix incurs when it hosts well-liked content are outrageous. Depending on the media, Netflix may pay hundreds of millions of dollars to have the right to stream that content to its subscribers.
Because of this, Netflix has consistently produced self-made content in the form of television shows and films, some of which have gained global popularity.
Though the cost for producing this content is billions of dollars, Netflix is not ready to slow down quite yet, as it hopes to one day host primarily its self-produced content, to avoid the hefty licensing fees.
Since the introduction of streaming services in 2007, the price for a Netflix subscription has steadily risen. In 2014, the average Netflix user paid between $8 and $12 monthly for their service. Recently, that price has been increased to between $9 and $16.
As Netflix continues to expand and add more content, its base price will continue to increase, and so will their profits.