How Does Netflix Make Money? 2022 In-Depth Guide

How Does Netflix Make Money

Netflix has pioneered TV and video streaming as the world’s largest on-demand streaming service for paid subscribers. Netflix Inc. (NFLX) is by far the most popular streaming video service.

It is not only the largest but also the most successful, raking in billions of dollars in revenue year after year. That’s capital B for billion. 

How does Netflix make money? You might be wondering. The explanation isn’t too farfetched. To understand how Netflix makes money, you must first comprehend the business strategy that this big player employs in the video streaming industry.

If you’re interested in starting a media company like Netflix or just need inspiration in general, or if you’re a binge-watcher curious about how Netflix makes money, this article is for you. For an in-depth guide on how Netflix makes money in 2022, read this article carefully.

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Netflix’s Current Business Model In 2022

To begin with, Netflix is a video streaming service provider that specializes in entertainment. It did not, however, begin with this business venture. On the contrary, its initial commercial venture was a DVD rental system that was mailed across the United States. 

Perhaps you’re wondering, did Netflix make money back then? Yes, however, it pales in comparison to what we have now. Let’s start with a basic understanding of how Netflix got here.

Netflix was pioneered in California by Marc Randolph and Reed Hastings in 1997. Their first business was selling and renting physical copies of films, shows, video games, and other media via the American standard mailing system on a pay-per-use basis. 

The following year, they switched to a subscription model for DVD rentals while DVD sales were completely discontinued. However, the DVD rental business began to decline over the next decade, and Netflix capitalized on the trend by creating a streaming media service in 2007.

How Does Netflix Make Money From Its Business Model?

Now that you have a better understanding of Netflix’s existing business model, let’s look at how Netflix makes money from this model.

Netflix’s operations are split into two categories: online video streaming (both domestic and international) and domestic DVDs.

As the company’s business model is built on subscriptions, we can say Netflix makes money from the monthly fees paid by its millions of users.

They adopt the subscription model for the two revenue-generating services, which are:

  • DVDs rentals
  • online video streaming

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Online Video Streaming – How Does Netflix Make Money From It?

Netflix is without a doubt one of the best places to watch movies and TV shows. This is due to its extensive and exclusive content library, as well as the absence of advertisements, which provide viewers with a distraction-free experience. These have had a significant impact on how Netflix makes money.

Netflix is available for streaming in all nations except five, which are China, Syria, Russia, North Korea, and Crimea, as of March 2022. That’s about 190 countries, I think that’s a lot. After the final quarter of 2021, the company’s paid subscribers totaled 221.8 million. 

Netflix does not sell ad space or consumer data on its website, unlike many other media companies. This has remained one of the company’s selling points.

So, without advertisements, how does Netflix make money? This is an interesting issue to consider. The corporation’s sole source of income is subscriptions.

Netflix offers three different monthly subscription plans, each with its pricing and features that can be changed at any moment. They are as follows:

  • Basic: For $9.99 per month, you get unlimited access to Netflix’s entire library of content, which you can stream on any device (be it laptop, TV, smartphone, or tablets). However, you can only broadcast on one screen at a time in only standard definition (SD).
  • Standard: A monthly subscription of $15.99 is required for this plan. One advantage of the standard over the basic is that you may watch videos in high definition (HD) and on two screens at the same time 
  • Premium: Netflix’s most expensive plan is $19.99 a month and includes Ultra HD content as well as the ability to view on four screens at once.

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How Netflix Makes Money From Online Video Streaming

To answer the question, how does Netflix make money? You are to note that Netflix makes money by charging fixed prices for the three plans (basic, standard, and premium), which vary by location and country. 

You have access to the complete Netflix collection when you subscribe to any of the plans. However, if the subscription is not renewed at the end of the month, access is revoked.

In the final quarter of 2021, they earned a total of $29.51 billion in revenue from online streaming! Though they have a global presence, the United States, Canada, and Scandinavia account for most of their earnings.

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Dvd Rentals – How Does Netflix Make Money From It?

Netflix has subsequently transitioned to a subscription-based model that allows consumers to view streaming television and movies online, although it continues to offer its original DVD-by-mail service in the United States.

Netflix continues to mail DVDs in the United States at dvd.netflix.com. For the DVD rental services, there are two options. They are as follows:

  • The standard plan: they set this plan at $9.99 per month and allow you to receive only one disc (DVD or Blu-ray) at a time.
  • The Premier plan: Priced at $14.99 a month and comes with the added benefit of being able to access two discs at once.

Netflix provides you discs that you can keep for as long as you want with both pricing plans. There is no limit to the number of discs you can watch over time; the only restriction is the speed with which you can watch and return discs.

Netflix no longer discloses the number of DVD.com subscribers, but one estimate puts the current figure at just under two million. Netflix’s DVD rental service had roughly 20 million subscribers at its peak (between 2010 and 2011), according to reports. 

Regardless of the facts, it’s tough to ignore the erosion of this segment of Netflix’s business, which now accounts for less than 1% of the company’s entire revenue. Although DVD.com still affects how Netflix makes money, things aren’t the same as they used to be.

It is impossible to address the question of how Netflix makes money without mentioning the cost of income. To make money, the company must incur many expenses and expenditures. The following is a list of the company’s expenses in 2021:

Licensing Cost

Netflix has to pay a licensing fee to have an exclusive viewership of various items from various sources, which accounts for its large and diverse media library. 

Netflix has to pay a fee to license and gain content to stream your favorite shows and movies in a legal environment, and the fee varies depending on the content.

Cost of Production

Netflix announced Netflix Originals (the shows commissioned, produced, and distributed by Netflix) in 2013 to avoid licensing fees and to develop Netflix-exclusive content as part of their marketing strategy. The production costs for these original shows are enormous.

Marketing Cost

Netflix isn’t the only website where you can watch movies and TV shows online. It must compete with a slew of new and existing players, like Amazon Prime, Hulu, and Apple+, among others, which necessitates a significant marketing budget. 

Advertising expenses, payments to affiliates, and device partners account for most marketing costs. 

The cost of marketing formerly included the first month’s fee for each new member, which is usually waived. This, however, has been stopped, and there is no longer a free trial for new customers.

Costs of Research and Development

Netflix is a big believer in putting money into its R&D department. This has significantly influenced how Netflix makes money. Thanks to this department that the company has progressed ‌and continues to dominate the market with its subscription-based business model.

Costs of Technology and Development

Netflix has millions of users streaming video at any given time. Netflix has partnered with hundreds of internet service providers (ISPs) to localize considerable quantities of traffic to make their experience lag-free and seamless. 

These collaborations come at a high price.

Technology charges for streaming delivery, fees for developing apps for new devices, and other infrastructure expenditures are all included in technology and development costs.

Costs of General Administration

These expenses include salary and other human resource expenses, as well as professional and partnership fees associated with the company’s management.

Miscellaneous Expenses

The corporation is also responsible for a variety of other expenses. Payment processing fees, DVD delivery costs, and amortization of the streaming content library are only a few of them.

Netflix had total revenue of $29.7 billion at the end of 2021. It made approximately $29.51 billion in 2021 by leveraging the streaming platform, with DVD revenue accounting for $182 million. The net income, on the other hand, was a mere $5.116 billion. Hence the need to consider the expenses.

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Frequently Asked Questions (FAQs)

Does Netflix use brands (advertising) on its platform to generate revenue?

No, it does not make money through advertisements.

Does Netflix make money by selling the information of its users?

Netflix does not profit from the data it collects from its users.

How does Netflix make money?

Netflix makes money by charging its subscribers a monthly fee for online video streaming and DVD rentals.

Conclusion

The Netflix subscription video on demand (SVOD) model is a risky tactic that has paid off so far. Revenue reflects this in its ranking as the ninth-largest internet corporation. 

So, I know you can now answer correctly when asked, “how does Netflix make money”, right?

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