How does the Netflix business model allow them to spend hundreds of millions of dollar on producing original movies and translate that to profit?

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For example, just announced is “The Gray Man” which Netflix is producing for $200M. Since the vast majority of the people who will watch it already have Netflix subscriptions how does Netflix actually make profit off this movie?
It’s not like it will encourage someone who’s subscription expires months after to hang on because of that one movie so where is the gain?

In: Economics

10 Answers

Anonymous 0 Comments

Not Netflix, but look at the Game of Thrones megahit on HBO. People subscribed just to see what everyone was talking about. The online providers have a cash turnaround that traditional studios/distributors/theatres can only dream of.

Anonymous 0 Comments

It technically doesn’t allow it. Netflix is absolutely drowning in debt. They have funded basically their entire business the last 5 years on 7% loans with no end in sight and revenue is not catching up as costs increase far more then they expected.

No one is really sure what the outcome here is. Their spend rate is wildly unviable to continue, but it’s also driving it’s growth. Things are gonna get weird.

Anonymous 0 Comments

Taking a quick look at their subscriber numbers:

They almost have 200 million subscribers, if we use $10/month/sub as a nice round number we have $2000 million a month. So $200 million is barely 10% of a month’s revenue.

While a movie like that won’t produce a big load of new subscribers it helps keeping old ones.

If netflix doesn’t provide originals then there would be no point to keep a subscription as most of the movies on there are also provided by other services.

So these originals keep the subscriptions going and maybe new ones coming.

Edit: also as others have pointed out. Previously this wasn’t possible and resulted in enormous debt. This money, and probably future debt as well, is used to produce content to increase subscriber numbers to such a point where it’s self sustaining.

As it seems the numbers look better for Netflix now and debt may go down in the future (or not).

Edit2: typos

Anonymous 0 Comments

the hope is to get more and more people to sign up. and netflix doesn’t distribute all of the movies/shows they make. in some countries it’s a third party distributor that pays netflix for the right. and of course, they could also start selling merch and things.

or maybe the evolution of netflix is to become a big media giant like disney/fox/etc and the streaming business takes a backseat.

Anonymous 0 Comments

If they didn’t pay to develop it, they’d have to pay others to license content. They have more control and ownership if they produce it, can optimize what they choose to produce based on analytics they get from their viewers’ habits.

Anonymous 0 Comments

Netflix’s current financial situation as of their most recent reportings is this: $26.4B in debt on $20.1B in annual revenue. That might seem pretty decent except their net profit is only $1.87B for the year.

If Netflix didn’t take on another penny of debt and their profit margins remained stable, they would pay it off in roughly 14.6 years. That’s obviously not going to happen.

Netflix essentially has two paths to sustainability as a business:

1) **Monopoly on the streaming market** – This will allow them to basically raise prices higher as the only option for streaming entertainment for the masses. In time they will pay back their debt. Combined with the fact that they are the only streaming player on the market means that their debtors will be very lenient on them and feel secure in the fact that they face no risk to obliteration.

2) **Buyout from another Media Company** – Netflix has a huge subscriber base of 200M worldwide combined with a growing original IP library. This makes them an attractive acquisition target for the other Media giants out there namely Comcast and Disney. Once the purchase is complete, these Media companies can instantly absorb the Netflix customer base into their customer base, and also monetize the audience through various means including advertising directly through the platform and selling the demographic data of their audience to others.

Scenario 1 probably won’t happen now that there’s various competing streaming options e.g. Hulu, Disney+ and more on the way.

This leaves Scenario 2 as the only feasible option for Netflix to ever make whole on its debts.

Anonymous 0 Comments

It absolutely will convince some subscribers to keep their account. Best case they have a runaway hit and their subscribers love how much value they get out of Netflix. New customers subscribe because they’ve heard about this cool movie.

Anonymous 0 Comments

people who can afford it will not care about paying monthly but they will look at the value. so if a month did not have any good originals, they wont cancel and resubscribe when there’s a good original. theyll just leave subbed forever because they dont feel like they’re overpaying. netflix actually pioneered this model because they let people binge entire series all at once. before they did this, nobody knew for sure if it was gonna work.

Anonymous 0 Comments

Netflix is the first mover that built streaming off of it’s by mail business before what most people could conceptualize streaming as a business.

Anonymous 0 Comments

It has nothing to do with Netflix itself but the industry. In most cases people don’t make money that much money from box office. I know how some love to see how the movie “flopped” or how it was successful based on the budget/box office ratio. Usually it’s the merchandise and things like that that makes the money. The amount of toys and shirts and Gifts that stranger things alone is selling till this day is insane amount of money. Disney plus had mandalorian. The money they made from baby yoda alone is enough to cover for the entire streaming service support.