May 24, 2022
Deep Dives

How Netflix Makes Money - Why There's Blood in the Water

Did you know that Blockbuster had a chance to purchase Netflix for $50 million in 2000? Netflix reached a market cap of $267 Billion in 2021… seems pretty foolish in hindsight, right?
John Ladaga

Netflix...the Blockbuster Killer

In 2000, Blockbuster had a market cap nearing $4 Billion…Blockbuster was cash-fat and happy at the turn of the Century. Their complacency and failure to innovate with the times ultimately led to them filing for bankruptcy a decade later in 2010.

Netflix changed the consumer entertainment world, not once but twice with two big digital innovations:

  • First, disrupting the need for storefronts by shipping DVDs direct to consumers (Bye bye Blockbuster)
  • And again by disrupting their own industry by adopting digital streaming (Bye bye DVDs)

Netflix is a household name… and even though I’m extremely excited for the final season of Stranger Things to premiere on May 27, 2022, Netflix is undoubtedly in trouble. The stock dropped from it’s $700/share 52-week high in November 2021 down to $179/share today (May 24, 2022).

There’s a lot of factors at play affecting Netflix’s downturn, but I’d argue much of it has to do with complacency and failure to continually innovate against their competitors (Amazon, Apple, Hulu, HBO, etc.).

Are we seeing what happened to Blockbuster happen to Netflix? Well, history does typically tend to repeat itself…

How does Netflix make money today? (2022)

Netflix makes money by charging consumers a flat monthly fee via a Software-as-a-Service (SaaS) model.

Netflix business model today (2022):

3 Pricing Tiers:

  • Basic: $9.99/mo
  • Standard: $15.49/mo
  • Premium: $19.99/mo

They don’t have a free trial

They don’t offer discounts via an annual pricing offering - you have to pay monthly

They don’t run advertisements or commercials

They do however localize their pricing based on geography

Netflix’s pricing is 2-3x more expensive than their competitors

They spend most of their marketing spend on cross-promotion & brand partnerships

They also made some major changes to their SEO and saw a huge boost in organic traffic in 2017

🚨 Here’s an example 🚨 of what their business model might look like today if they were a new startup just starting out

A few other interesting tidbits that I included in the example model above regarding Netflix:

  • Their churn rate is extremely is on the rise due to the increase in competition but it was reported at 3.3% in 2022
  • Their user growth rate has been steadily around 2.5% Month over Month (10% quarterly)...although they drastically missed their mark in Q1 2022

How does Netflix plan to restore their company to their former glory?

It seems they’ve outlined a couple of strategies over the past few months:

  • Crack down on password sharing: If they can’t explicitly stop users from sharing passwords with family members (est. 100 million households share passwords - we’ve all done it) - maybe they can make it easier to share while charging slightly more via “sub accounts”
  • Freemium with Ads - Netflix tried this in 2020, deeming it somewhat of a failure but it seems they’re at it again with talks of offering free Netflix tiers with Ads, similar to Hulu’s model…

Will Netflix recover from their 2022 downturn?

It’s hard to say…If I had $20/mo to spend, would I spend it all on Netflix or would I go for Apple plus ($4.99/mo) AND HBO streaming ($9.99/mo) AND Hulu ($6.99/mo)?

At the end of the day I believe it comes down to whether Netflix can continually innovate both with their business model and product…will Netflix be able to get ahead of the “next big thing in consumer streaming entertainment”?

One emerging market is e-Sports…Amazon has a leg up in this fight with their purchase of Twitch in 2014 for $970M but I wouldn’t be surprised if Netflix went down this route too.

Don't end up like Blockbuster (or Netflix)

Your startup or small business needs to have a strong financial plan and model rooted in reality. You need to be able to quickly test new ideas/assumptions and tack control of your financial future. At Sturppy, our platform makes it easy to build models for any business, brick and mortar to SaaS, regardless of if you’re just starting out or startup veteran.

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