How Netflix Makes Money: The Secrets Behind Its Business Model

Summary

The video explores Netflix's financial success, highlighting its growth to over 232 million subscribers in Q1 FY23, with a 5% increase year over year. It credits compelling content like 'Stranger Things' and 'Bridgerton' for this growth. Despite price hikes and initial churn, Netflix's pricing power is evident with a 4% increase in average revenue per membership. The company aims for sustained double-digit growth, expanding margins, and improved free cash flow, with strategies like limiting account sharing and launching an ad-supported tier to boost subscriptions and revenue.

Takeaways

• 📦 Netflix was originally a DVD delivery service before transitioning to the top streaming platform.
• 🌟 Netflix is known for pioneering binge-watching and having a significant influence on modern entertainment consumption.
• 📈 As of Q1, FY 23, Netflix boasted over 232 million subscribers, with a 5% growth year over year, largely from outside North America.
• 🎬 The platform's success is attributed to its compelling content, such as Stranger Things, Wednesday, and Bridgerton.
• 💵 Netflix has regularly increased its prices, demonstrating strong pricing power and a 4% year-over-year growth in average revenue per membership in Q1.
• 📊 Despite a challenging start to 2022 with subscriber declines, Netflix has rebounded with strategic initiatives.
• 💹 Netflix's revenue in Q1, FY 23, was $8.16 billion, growing 4% year over year, with an operating margin of 21%.
• 💸 Netflix expects to significantly improve free cash flow to $3.5 billion in FY 23, despite a net debt position of around $6 billion.
• 🔒 Netflix is implementing measures to limit account sharing and monetize it, potentially increasing subscriptions.
• 📺 Netflix launched an ad-supported plan at a lower price point, aiming to attract more subscribers and increase revenue per member.
• 🎮 The company is expanding into gaming, seeking to retain users within its ecosystem and explore new revenue streams.

Q & A

When was Netflix founded and what was its initial service?

Netflix was founded in 1997 and initially provided a service that delivered DVDs to customers' doorsteps.

What is Netflix's current position in the streaming industry?

Netflix is at the top of the streaming world, known for pioneering the concept of binge-watching and significantly altering the way people consume entertainment.

How many subscribers did Netflix have in Q1 of FY23?

Netflix reached more than 232 million subscribers globally in Q1 of FY23.

From where did Netflix get most of its subscriber growth in the past two years?

Most of Netflix's subscriber growth in the past two years came from outside of North America.

What does Netflix attribute its recent success to?

Netflix attributes its recent success to its compelling content slate, including shows like Stranger Things, Wednesday, and Bridgerton.

How has Netflix's pricing strategy evolved over the years?

Netflix has regularly raised its prices over the years, with recent price hikes in January 2022, demonstrating its pricing power.

What was Netflix's average revenue per membership growth in Q1 of FY23?

Netflix's average revenue per membership grew by 4% year over year in Q1 of FY23.

What were the challenges Netflix faced at the beginning of 2022?

Netflix faced a decline in subscribers for two consecutive quarters at the beginning of 2022.

What are some of the critical initiatives Netflix is undertaking to improve its business?

Netflix is undertaking initiatives such as limiting account sharing to one household, launching an ad-supported plan, and expanding its gaming strategy.

What is Netflix's stance on entering the live sports market?

Netflix's co-CEO, Ted Sarandos, expressed reluctance towards entering the live sports market, comparing it to running on a treadmill with no real progress.

How does Netflix's churn rate compare to the industry average?

Netflix has a lower churn rate than the competition, just above 3%, which is significantly lower than the industry average of 5% for premium SVOD services.

What is Netflix's strategy to maintain user engagement and retention?

Netflix focuses on creating pop culture moments and a variety of content to maintain user engagement and retention, with the belief that 'content is king, but engagement is Queen'.

Outlines

00:00

📈 Netflix's Growth and Financial Insights

This paragraph discusses Netflix's journey from a DVD delivery service to a leading streaming platform. It highlights Netflix's pioneering role in binge-watching culture and its current dominance in the streaming market. The script covers Netflix's financial performance, emphasizing its subscriber growth, particularly outside North America, and the impact of compelling content like 'Stranger Things' and 'Bridgerton'. It also addresses the company's pricing strategy, including recent price hikes, and how they've managed to maintain a low churn rate despite temporary setbacks. The discussion includes Netflix's revenue growth, operating margin, and expectations for free cash flow improvement. The paragraph concludes with a call to action for viewers to subscribe for more content on fascinating companies.

05:01

🎮 Netflix's Strategic Initiatives and Market Position

The second paragraph delves into Netflix's strategic initiatives, such as limiting account sharing to one household and launching an ad-supported plan to boost subscriptions and revenue. It also explores Netflix's foray into live events and gaming, with the potential for high-budget PC games and the use of iPhones as controllers for TV games. The paragraph addresses the company's reluctance to enter live sports due to the high costs and short-term value. It provides insights into Netflix's market share and churn rate compared to the industry, emphasizing its low churn and strong user retention. The discussion also touches on the global streaming market's growth potential, particularly in regions like LATAM and APAC, and Netflix's ability to create engaging content across various genres. The paragraph ends with a teaser for a video on the streaming wars among major platforms.

Keywords

💡Netflix

Netflix is a leading streaming service that was originally known for delivering DVDs to customers' doorsteps but has since pivoted to become a major player in the online streaming industry. The video discusses Netflix's journey from its founding in 1997 to its current dominance in the streaming world, highlighting its role in pioneering binge-watching culture.

💡Binge-watching

Binge-watching refers to the act of watching multiple episodes of a TV show in rapid succession, often over a short period. The video credits Netflix with pioneering this concept, which has significantly altered viewing habits and contributed to the company's success.

💡Subscriber Growth

Subscriber growth is a key metric for measuring the success of streaming services like Netflix. The script mentions that Netflix reached over 232 million subscribers globally in Q1, FY 23, with most growth coming from outside North America, indicating the company's international expansion strategy.

💡Content Slate

A content slate refers to the lineup of shows and movies that a streaming service offers. The video emphasizes the importance of Netflix's compelling content slate, including hits like 'Stranger Things' and 'Bridgerton,' in driving subscriber growth and maintaining its competitive edge.

💡Pricing Power

Pricing power is the ability of a company to increase its prices without losing a significant number of customers. Netflix is celebrated for its pricing power, as it has raised prices regularly over the years, which is a strategy that has helped the company grow its average revenue per membership.

💡Churn

Churn refers to the rate at which subscribers cancel their subscriptions. The video notes that despite temporary increases in churn following price hikes, Netflix has maintained a lower churn rate than the industry average, demonstrating strong user retention.

💡Ad-Supported Tier

An ad-supported tier is a subscription plan that includes advertisements in exchange for a lower monthly fee. Netflix's launch of this tier is expected to attract price-sensitive consumers and potentially increase overall subscriptions, as discussed in the video.

💡Live Events

Live events are real-time broadcasts that streaming platforms can use to engage viewers. Netflix's hosting of a livestream media event for 'Love is Blind' is mentioned as an example of the company exploring this format to draw in audiences, despite technical issues that caused delays.

💡Gaming Strategy

Gaming strategy refers to the approach a company takes to incorporate gaming into its services. Netflix's gaming strategy, as discussed, involves offering free games on mobile devices and exploring options like using an iPhone as a controller for TV games, aiming to retain subscribers within its ecosystem.

💡Market Share

Market share is the portion of the total available market that a company controls. The video notes that despite competition, Netflix has maintained a consistent market share, indicating its strong position in the streaming industry.

💡Engagement

Engagement refers to the level of interest and interaction that users have with a service or content. The video emphasizes that while content is crucial, engagement is equally important for Netflix's success, as seen with the creation of pop culture moments like 'Squid Games'.

Highlights

Netflix was founded in 1997 and is now a leader in the streaming industry.

Netflix pioneered binge-watching and has become a cultural phenomenon.

In Q1, FY 23, Netflix reached over 232 million subscribers globally.

Most of Netflix's subscriber growth in the past two years came from outside North America.

Netflix's success is attributed to its compelling content slate, including hits like Stranger Things and Bridgerton.

The Night Agent became the sixth most popular show ever released on Netflix.

Netflix has raised its prices regularly, demonstrating its pricing power.

In Q1, average revenue per membership grew by 4% year over year.

Netflix experienced a challenging start to 2022 with a decline in subscribers for two consecutive quarters.

Netflix's revenue grew 4% year over year to $8.16 billion in Q1, FY 23.

Operating margin was 21%, ahead of guidance, primarily due to the timing of hiring.

Netflix has been cashflow positive since 2020, with expectations to reach $3.5 billion in FY 23.

Netflix is transitioning from aggressive original content spending to a more stable financial position.

Netflix's long-term targets include sustained double-digit growth, expanding operating margins, and improving free cash flow.

Netflix is limiting account sharing to one household and introducing an extra fee for additional households.

Netflix launched an ad-supported plan at a lower price point to attract more subscribers.

Netflix's ad-supported plan already has a higher average revenue per membership than the standard plan in the U.S.

Netflix is exploring live events and has hosted a successful reunion for the show Love is Blind.

Netflix is expanding its gaming strategy with plans for a high budget triple-A PC game.

Netflix's co-CEO expressed reluctance towards entering the live sports market due to its short-term nature.

Netflix maintains a 7-8% market share in the U.S. despite competition from other platforms.

Netflix has one of the lowest churn rates in the industry, indicating strong user retention.

The streaming market is still growing, with regions like LATAM and APAC offering potential for expansion.

Netflix's content strategy focuses on creating pop culture moments and high engagement.

The total addressable market for paid TV and streaming is $300 billion, suggesting room for multiple players.

Transcripts

All right. Is anyone here watching this video

old enough to remember when Netflix actually delivered DVDs to your doorstep?

Yeah. Now it's just us, cool cool cool. All right.

Well without a doubt, everyone knows that since Netflix

was founded in 1997, it's now at the top of the streaming world.

Netflix not only pioneered the concept of binge watching,

but also turned into a verb forever altering the way we chill.

But how does Netflix actually make money,

especially as it adapts to the competition today?

These are lessons that you, as a business leader or investor need to know.

So let's find out.

Hi there.

I'm Bertrand and I'm the founder of App Economy Insights.

And I'm Stephanie Tech, veteran engineer and creator.

Okay, so Wall Street has always measured

Netflix's performance using the number of paid subscribers.

And let me tell you, Netflix is doing really well.

In Q1, FY 23, they reached more than 232 million subscribers globally.

Good for a 5% year over year growth in the past two years

most of the subscriber growth came from outside of North America.

So what's the secret to their recent success?

Well, management says it's all thanks to their compelling content slate.

From Stranger Things to Wednesday to Bridgerton.

A recent release, The Night Agent

became the sixth most popular show ever released on the platform.

But it's not just about the subscriber additions anymore.

In fact, Netflix has raised its prices regularly over the years,

most recently in January 2022 and with a price hike back in

temporarily increased churn, it's usually short lived.

That's why Netflix is celebrated for its pricing power.

And in Q1, their average revenue per membership grew by 4% year over year.

The company experienced a challenging beginning to 2022

as it saw a decline in subscribers for two consecutive quarters.

But things are looking much better

now with several critical initiatives that we will discuss in detail today.

Before we dive into Netflix's financials, we have a small request.

Our content is free, but we'd love for you to hit that subscribe button.

By doing so, you'll get instant access to our weekly videos as they're released

and you'll help others discover our channel, allowing us to create

even more content on the world's most fascinating companies.

So let's get into the numbers.

In Q1, FY 23, revenue grew 4% year over year

to $8.16 billion, mostly in line with expectations.

Revenue grew 8% year over year on a currency neutral basis,

which is a better representation of the company's growth profile.

Netflix grows revenue through two leverages in the one

the number of paid members, and number two, the average revenue per members.

Also called ARM for short.

Both are critical to the company's growth.

They're operating margin was 21%, which was one percentage

point ahead of guidance, primarily due to the timing of hiring.

The margin was 21% compared to 25% a year ago,

mainly because of currency headwinds.

They've been cashflow positive since 2020 and management expects free

cash flow to improve significantly and reach $3.5 billion in FY 23.

So even though they have a net debt position of around $6 billion

on their balance sheet, it's not as concerning as it looks at first glance.

That's right.

Netflix has already transitioned through the most cash intensive part

of their growth story when they shifted aggressively to original content.

Remember House of Cards? Yeah, love that show.

Overall, management reiterated their long term target of sustained

double digit growth, expanding operating margin and improving free cash flow.

And with their focus on revenue per user and their recent launch of the cheaper

ad supported tier.

The future looks bright for Netflix, so let's go over some recent changes.

Netflix is about to limit account sharing to one household only and members

have to pay an extra $2.99

to share their account with people that they don't live with.

Now, this could affect engagement metrics, but in the long term it's expected

to increase subscriptions as password borrowers sign up

for their own Netflix accounts and then existing members

purchase that extra membership for folks that they want to share with.

Netflix also launch its ad supported plan, which includes

5 minutes of ads per hour and it's only 699 a month.

Management believes this will be a significant long term revenue and profit

opportunity, and they are already seeing good progress with user engagement.

In the U.S.

For instance, there ad plan already has a total URM

subscription plus ads greater than their standard plan.

This is important.

Netflix already makes more money from its ad supported users,

so it's in the company's best interest to make its basic plan with ads

an excellent deal for users.

They're improving it with 1080p quality and concurrent streams.

Now, Netflix could not only grow its paid member base with a lower entry

points, but also increase its revenue per member in the process.

But of course, the competition is still raging with gaming, live shows,

sports and other streaming services vying for consumers attention.

Netflix recently hosted its second livestream media event featuring a reunion

for the popular dating show Love is Blind, But fans experienced over

an hour of delay before the live show commenced on Sunday night.

Despite the hiccup, Netflix still managed to draw 6.5 million viewers

for the special, and they're probably going to keep exploring more live events.

Considering its growing focus on advertiser.

Netflix is reportedly working on bringing games to TV with the iPhone

as a controller, it's unlikely they'll start making hardware

anytime soon.

Instead, their gaming

strategy is all about making it easy for their subscribers.

Right now, their games are free and available on your phone.

The goal is to keep users in the ecosystem and improve retention.

But using your iPhone as a controller for casual games on TV is just the beginning.

Netflix is expanding their gaming strategy and they recently posted a job listing

for a game director to work on a high budget triple-A PC game.

Who knows?

We might even see games with placements for the ad supported plan.

Is Netflix going to enter the world of live sports?

In a recent response, Ted Sarandos, Netflix's co-CEO,

expressed some reluctance towards this idea.

He mentioned that paying for live sports is kind of like running on the treadmill.

You're not really going anywhere.

The value of a live sport event drops to zero as soon as it's over,

and like evergreen content that increases in value over time.

So it's more of a short term game.

If Netflix were to enter the word of big league sports,

it would require a super premium tier to be viable.

But again, that goes against the logic on building a solid back

catalog of evergreen content.

So for now,

it doesn't match with the company's strategy, but the ad supported plan

might shake things up.

The market measurement firm Nielsen regularly shares the streaming platforms

market share in percentage of TV time in the U.S.,

while YouTube is currently leading the pack.

Netflix has maintained a 7-to-8% market share despite the rise

of many platforms with aggressive content spending in the past year.

According to Antenna, the premium SVOD or streaming video on

demand market had a monthly churn rate of 5% in 2022.

Meanwhile, Netflix had a lower churn than the competition, just above 3%.

Churn as a number of existing subscribers that you lose every month.

So the lower the better.

Netflix is known for having one of the lowest churn rates in the industry.

Therefore, the best user retention.

The streaming pie is still growing with markets

like the LATAM and APAC regions still underpenetrated.

Plus, engagement is the key factor that matters in the long run

and Netflix has been successful in creating pop culture moments

and capturing the zeitgeist with shows like Squid Games or Too Hot to Handle.

By the way, I've just started watching Beef and that show is wild.

I love it. Yes. Me too! You have to watch it.

And let's not forget about

the variety of content on Netflix, from reality TV to documentaries,

standup comedy, and even fitness workouts in partnership with Nike.

So while some big releases may receive mixed reviews, the engagement from

the audience is what really counts.

And as I say, content is king, But engagement is Queen.

Okay.

So there is no doubt there is a streaming showdown going on

with YouTube, HBO, Disney, Amazon, Apple and more vying for attention.

The total addressable market for paid TV and streaming is a whopping $300 billion.

So is there enough room for them all to be winners?

Find out in our video on streaming wars.

So head there now.

See you there.