Netflix’s Success is Now “Risky”

Netflix: the streaming service has now reached 137 million subscribers in the world, of which over 60 only in the United States. Alone, Netflix has more subscribers in the US than the six major cable TV providers put together. But Netflix’s victory over pay TV is not as surprising as the second strategic move by the colossus founded by Reed Hastings: the conquest of Hollywood.

Over the past five years, Netflix has produced TV series, stand-up comedy shows and hugely successful documentaries; both public and critical. Only in the course of 2018, has spent something like 13 billion dollars for its original contents; a figure that puts it on the same level as Disney, Fox and Time Warner. All this, while still remaining an economic product compared to the competition, with subscriptions ranging from 8 to 14 euros per month.

In short, its business model is becoming more and more expensive: in 2017 the total expenses have reached 17.7 billion dollars; over 4 times how much spent in 2011. So how does Netflix earn? To understand something, we need to start with a number: the thousand original contents hosted on the platform; a figure exorbitant compared to the standards of its more traditional competitors (such as ABC or Fox).

But why did Netflix start producing this immense amount of original shows? At the beginning of his career, Reed Hastings limited himself to renting DVDs sent to customers via the Internet; then – with the decline of DVD rental – launched its streaming platform, buying licenses for films and TV series. Thanks to the streaming, Netflix users have risen at an impressive speed: from 7 million in 2007 to 33 in 2012. But with success, Hollywood studios have started making increasingly expensive requests to give their films and licensed tv series.”.

As you know, all this began with House of Cards: the highly acclaimed TV series on the dark side of American politics that in 2013 inaugurated with a bang the new Netflix course. An estimated cost of $ 50 million per season and that was the unmistakable sign of what Netflix was going to do in earnest. Since then, Netflix has constantly increased its offer of original products; from Japanese anime, to sports documentaries and a seemingly endless number of films with Adam Sandler.

At the same time, the platform started to cancel licensed products: nothing more How I met your mother, nothing more Lost and many more. Netflix now has full control over its destiny; but the price to pay was very high. And this leads us to a second crucial number: the aforementioned $ 13 billion spent on content in 2018 only.

A huge number, especially for a company whose business model is based on a fairly inexpensive subscription. From a technical point of view, Netflix is ​​profitable: it has a turnover that, in 2017, was 11.7 billion dollars; with a profit of 560 million. But these data do not tell the whole story: for example, producing The Crown costs 130 million dollars a season, but these expenses are spread over several years; in order to impact less on annual budgets. A normal practice, known as depreciation, but which causes a constant increase in expenses year after year.

If you look at the cash flow available, the situation is in fact much less rosy: Netflix, from this point of view, went into the red for about $ 2 billion in 2017. For now, do not worry too much about this numbers negative, as evidenced by the fact that red could rise in 2018 to 3 or 4 billion: for Reed Hastings, the only number that really matters is that of users: 137 million. Like any respected Silicon Valley company, the constant growth of subscribers for Netflix is ​​the only obsession.