Netflix has been one of the leading names in the online streaming services industry. The company has an online platform, through which it allows customers to watch movies, TV series, documentaries, etc. The company started as a DVD rental business model. However, it transitioned into the online streaming services platform and hasn’t looked back since then.
Netflix has experienced increased revenues each year over the past decade. The company’s profitability has come due to its exceptional performance. The company reported its highest subscribed user count in the third quarter of 2020, with over 195 million active subscribers. The company’s profits come from these customers. Therefore, it plays a significant role in Netflix’s success.
The company started with Reed Hastings and Marc Randolph who started the company as a DVD rental through mail company. At the time, Netflix’s business model was unique as it was the first time a company offered online DVD rental. However, the company soon transitioned its business, dropping the single-rental model.
Netflix has gone through several changes to reach its current business model, which is online streaming services. Once the business model took off, the company also invested in various other ventures. Similarly, Netflix started its own production house, which makes original content. While the content has had some failures, there are also some highly regard original content in it.
Netflix also has a great employee culture. The company offers lenient working conditions and considers its employees’ needs. However, the company expects high performances from them as well. The company’s employees have contributed significantly to its financial performance and success. The other reason for the company’s success is its highly regarded business model.
What is Netflix’s Business Model?
Netflix operates a relatively straightforward business model. The company transparently defines its products and services. Similarly, it reports its financial performance for each business segment or market it has. It makes it easier to dissect the company’s financial performance and, in turn, its business model.
Netflix heavily relies on its growing customer base to generate revenues. The company has a subscription-based business model, which means that its active users must pay it money. Therefore, the company can only operate if it has many active users. As of last quarter, the active customer count is 195 million customers.
The company has been highly profitable for its shareholders. The success comes through its high-quality content and outstanding services. The company generated a net income of $1,867 million in 2019. It increased by 54.17% of the $1,211 million net income it made in 2018. The company also made a net income of $559 million in 2017, which means profits increased by a significant 116.64% in 2018.
The company’s revenues have also been experiencing consistent growth over the last decade. The company generated revenues of $20,156 million in 2019. It was an increase of 27.62% from the $15,794 million it generated in 2018. The growth is mostly attributable to the rise in the platform’s customer base.
As of the third quarter of 2020, the company had generated total revenues of $18,351 million. In the same quarter last year, the company had total revenues of only $14,689 million. The company outperformed its revenue performance in 2020 for each of the three quarters. Therefore, Netflix’s revenues are expected to grow significantly at the end of 2020, as well.
Here’s a summary of the company’s performance in terms of revenues in the last few years
| Year | Revenue (in USD millions) |
| 2015 | 6,780 |
| 2016 | 8,831 |
| 2017 | 11,693 |
| 2018 | 15,794 |
| 2019 | 20,156 |
As apparent from the above table, the company has significantly increased its revenues in the last few years. Similarly, Netflix has experienced growing revenues in these years, which will predictably increase even more in 2020.
How does Netflix Make Money?
As mentioned, the primary source of revenue for Netflix is its subscription-based business model. The company depends on users to pay their subscriptions to make revenues. Similarly, the company makes money from different market segments. Each of these market segments contributes to the company’s overall profits, making it more profitable.
Given below is how Netflix makes money from its various market segments through its online platforms. It does not include the revenues the company generates from DVD sales. Netflix divides its revenues into four market segments. These include the United States and Canada (UCAN), Europe, Latin America (LATAM), Middle East and Africa (EMEA), and Asia Pacific (APAC).
The United States and Canada (UCAN)
The United States and Canada (UCAN) market segment is the largest segment for Netflix. The company generated $10,051 million from this market segment in 2019. Similarly, the company experienced an increase of 21.36% of this market segment in 2019. In 2018, Netflix generated $8,282 million from this segment. Overall, these sales accounted for 49.87% and 52.44% of the company’s total revenues in 2019 and 2018, respectively.
Europe, Middle East and Africa (EMEA)
Europe, Middle East, and Africa market segment is the company’s second-largest revenue-generating segment. These include countries such as Belgium, France, Germany, Spain, Portugal, Italy, etc. Netflix generated revenues of $5,543 million and $3,964 million from this segment in 2019 and 2018, respectively. It experienced an increase of 39.83% over the year. Similarly, this segment accounted for 27.50% and 25.10% of the company’s total revenues.
Latin America (LATAM)
The Latin American (LATAM) segment is the company’s third-largest segment. These include countries such as Argentina, Chile, Colombia, and Mexico. The company generated $2,795 million and $2,238 million in revenues from this segment in 2019 and 2018, respectively. The segment saw an increase of 24.89% over the year. Similarly, this segment contributed 13.87% and 14.17% to the company’s overall revenues.
Asia-Pacific (APAC)
The Asia-Pacific segment is the company’s lowest revenue-generating segment. However, it is also relatively new and rapidly growing. The company generated $1,470 million from this segment in revenues in 2019. It was an increase of 55.39% over the $946 million revenues this segment generated in 2018. Overall, the segment accounted for 7.29% and 5.99% of the company’s overall revenues.
Summary
Given below is a summary of the company’s revenues from each segment. As mentioned, these only include revenues from Netflix’s primary platform. It excludes $365 million and $296 million in revenues from Netflix’s DVD sales business.
| Market Segment | 2018 (in USD millions) | 2019 (in USD millions) |
| The United States and Canada (UCAN) | 8,282 | 10,051 |
| Europe, Middle East and Africa (EMEA) | 3,964 | 5,543 |
| Latin America (LATAM) | 2,238 | 2,795 |
| Asia-Pacific (APAC) | 946 | 1,470 |
| Total | 15,430 | 19,859 |
Conclusion
Netflix is the world’s leading name in the online streaming services industry. The company has been highly profitable and experienced increasing revenues over a decade. The success behind the company has come from its highly effective business model. A description of the business model of Netflix and how it makes money is given as above.
