Netflix has grown from a DVD rental service to become one of the largest entertainment companies in the world. The streaming giant has over 209 million subscribers globally as of 2022. But how exactly does Netflix make money with its popular on-demand video streaming service? In this article, we will discuss the various mediums through which Netflix makes its money and how well they have done in the entertainment industry.
The Origins of Netflix
Netflix was founded in 1997 by Reed Hastings and Marc Randolph. Netflix initially started as a DVD-by-mail rental service, as they were into making deliveries of DVDs to customers’ homes. Customers could browse Netflix’s library of titles online, create a queue of movies and shows they wanted to watch, and receive and return DVDs via mail. This idea was used to eliminate the movement of customers from their houses to video rental stores.
Gradually, Netflix grew its DVD library and had an increase in its number of subscribers in the early 2000s. Then, in 2007, there was a motion by the company to introduce video streaming. This created a medium for their numerous subscribers to watch movies and shows instantly on their computer devices without making DVD orders and waiting to get them in their mail. The transition began, and Netflix became primarily a streaming platform.
Today, Netflix offers an expansive on-demand library of films, TV shows, documentaries, and original programming. With internet-connected devices such as smartphones, media players, game consoles, and smart TVs, subscribers can watch unlimited content. Netflix’s catalog contains thousands of licensed titles as well as a growing slate of Netflix originals. This combination has turned Netflix into a top force in the entertainment sector.
How Does Netflix Make Money?
Netflix makes money through a straightforward subscription model. Customers pay a monthly fee to access Netflix’s content library and stream unlimited videos. As of 2022, Netflix offers three main subscription tiers in the United States:
- Basic: $9.99 per month (SD quality streams on 1 screen at a time)
- Standard: $15.49 per month (HD streams on 2 screens simultaneously)
- Premium: $19.99 per month (Ultra HD streams on 4 screens at once)
Subscription fees can be paid by customers directly to Netflix. The company no longer offers free trial periods for new members. Existing subscribers can switch between Netflix’s pricing arrangements, whichever suits their needs. It will require more money to get better video quality, which is given to those who subscribe to higher levels with more streams.
Netflix’s subscription fees make up most of the company’s revenue. It was reported that in Q3 2022 alone, Netflix made about $7.7 billion in revenue from subscription fees. Netflix reported $7.7 billion in revenue from paid memberships in Q3 2022 alone. The company had over 223 million paid subscribers globally as of October 2022. With most members paying between $10 and $20 per month, Netflix’s subscriber fees quickly add up.
2. Partnerships with Device Makers
Beyond direct customer subscriptions, Netflix earns additional revenue through partnerships with consumer electronics companies. Netflix made partnerships to integrate its streaming platform into smart TVs, digital media players, and gaming consoles.
For example, Netflix has partnerships with many smart TV makers, such as Sony, LG, and Vizio, to pre-install the Netflix app on their internet-connected TVs. New TV owners can instantly sign up for Netflix or log in to their existing accounts. This helps attract new subscribers and makes Netflix readily accessible to millions of households.
Netflix also partners with hardware makers to allow subscribers to stream videos from Netflix using devices like Roku media players, Apple TV, Amazon Fire TV, Android TV devices, and video game consoles. Pre-installing the Netflix app generates more revenue by bringing Netflix’s content to additional screens and audiences.
3. Venturing Into Advertising
Netflix has resisted showing ads to subscribers to focus on the viewing experience. They plan to start the introduction of an ad-supported subscription tier in early 2023. This cheaper tier will display ads before and during shows and movies. It aims to attract new subscribers, particularly those unwilling to pay higher monthly fees for the ad-free plans.
The ad-supported plan will increase the revenue stream on top of Netflix’s existing subscriber fees. Advertising opens up Netflix’s massive viewership data to marketers. Netflix may be able to charge a premium for highly targeted ads delivered to a fraction of its audience. Though Netflix is entering the advertising game late compared to rivals like Hulu and Peacock, ad revenue could still become a notable profit driver.
4. Original Content Investment
In addition to licencing and showing movies and shows from other studios, Netflix spends billions annually to produce high-quality original films, series, documentaries, and specials. Major hits like Stranger Things, The Crown, and Bridgerton help attract and retain subscribers.
Netflix reinvests its subscription revenue into funding more original content. In 2022, Netflix planned to release over 140 original series and movies. This exclusive arrangement gives viewers more reason to subscribe to Netflix than their competitors. Even with rising inflation and economic uncertainty, Netflix plans to continue expanding its original content catalog in the coming years.
Netflix has enjoyed tremendous success by pivoting from DVD rentals to on-demand video streaming. The company’s subscriptions and partnerships generate billions in recurring revenue. Netflix looks to support this core business model with future mediums like advertising and original content creation. As the world’s dominant player in streaming entertainment, Netflix is well-positioned to continue turning customer subscriptions into big profits.