Netflix - ever heard of it?
You sure did!
We use Netflix to watch shows of our own choice.
It’s so easy to just pay 9 to 16 bucks a month and just stream whatever you want.
The company’s valuation is estimated to be more than 200 Billion dollars but why are they still losing money?
Let’s discuss “Why is Netflix running in loss?” in today’s video of DiscoverZen.
Netflix Inc. is an American over-the-top content platform and production company headquartered in Los Gatos, California.
It was founded in 1997 by Reed Hastings and Marc Randolph in Scotts Valley, California.
The company's primary business is a subscription-based streaming service offering online streaming from a library of films and television series, including those produced in-house.
As of October 2020, Netflix had over 195 million paid subscriptions worldwide, including 73 million in the United States.
It is available worldwide except in mainland China (due to local restrictions), Syria, North Korea, and Crimea (due to US sanctions).
It was reported in 2020 that Netflix's operating income is $1.2 billion.
Netflix is a member of the Motion Picture Association (MPA), producing and distributing content from countries all over the globe.
Netflix's initial business model included DVD sales and rental by mail, but Hastings abandoned the sales about a year after the company's founding to focus on the initial DVD rental business.
The company expanded internationally in 2010 with streaming available in Canada, followed by Latin America and the Caribbean.
They also entered the content-production industry in 2013, debuting their first series - House of Cards.
Netflix's video-on-demand streaming service, formerly branded as Watch Now, allows subscribers to stream television series and films via the Netflix website on personal computers, or the Netflix software on a variety of supported platforms, including smartphones and tablets, digital media players, video game consoles and smart TVs.
When the streaming service was first launched, Netflix's disc rental subscribers were given access at no additional charge.
Subscribers were allowed approximately one hour of streaming per dollar spent on the monthly subscription.
A $16.99 plan, for example, entitled the subscriber to 17 hours of streaming media.
However, in January 2008, Netflix lifted this restriction, at which point virtually all rental-disc subscribers became entitled to unlimited streaming at no additional cost.
This change came in a response to the introduction of Hulu and to Apple's new video-rental services.
Netflix later split DVD rental subscriptions and streaming subscriptions into separate, standalone services, at which point the monthly caps on Internet streaming were lifted.
Since 2012, Netflix has taken more of an active role as producer and distributor for both film and television series, and to that end, offers a variety of "Netflix Original" content through it's online library.
By January 2016, their services operated in more than 190 countries.
They released an estimated 126 original series and films in 2016, more than any other network or cable channel.
Their efforts to produce new content, secure the rights for additional content, and diversify through 190 countries has resulted in the company racking up billions in debt.
On July 10, 2020, Netflix became the largest entertainment/media company by market capitalization with about 215 Billion dollars.
Netflix service plans are currently divided into three price tiers - the Basic plan offers standard-definition streaming on a single device for $8.99 per month, the Standard plan allows high definition streaming on two devices simultaneously for $13.99 per month, and the Premium plan allows simultaneous streaming on up to four devices for $17.99 per month, and 4K streaming on supported devices and Internet connections.
Netflix has emerged a star performer through the coronavirus pandemic, rising by around 25% year-to-date, as people consume more content while being confined to their homes.
The company added close to 16 million subscribers over the first quarter, handily beating its guidance of about 7 million new subscribers.
Viewed from the lens of net income, Netflix has been performing well, with its net profits growing 3x from around $0.6 billion in 2017 to $1.9 billion in 2019.
That said, the company has been burning cash, with free cash flows falling from -$2 billion in 2017 to -$3.3 billion in 2019.
The sizable difference between these two numbers is explained by how Netflix accounts for its content investments, spending only a portion of its content each year on its income statement.
The company’s cash spending on content is growing fast, rising from about $9 billion in 2017 to $14.6 billion in 2019.
In comparison, the amortization of content has been relatively lower, growing from $6.2 billion to $9.2 billion over the same period.
Netflix says that about 90% of the value of a show is spent within 4 years of its debut.
Netflix content outlays have been growing not just in absolute terms, but also in terms of content spending per active subscriber, and the company faces a paradox, in a sense.
While it needs to rein in content spending in the long-run to boost cash flows, this could prove tricky, as subscriber growth could slow or even decline if it doesn’t keep updating its library at the same pace, given the competition in the streaming space with the likes of Disney, Apple as Apple TV, and the upcoming HBO Max vying for market share.
The amount that Netflix has been spending in cash - that is, salaries, marketing, R&D, plus the cost of buying and creating content - FAR EXCEEDS the revenues it is receiving from paying subscribers.
Netflix’s net income is nonetheless positive because, under GAAP accounting rules, media companies are required to amortize the costs of movies and shows over the entire period the company expects them to generate revenues.
Since Netflix's content spending is still increasing, the amortized expense for a particular year is far less than what’s laying out in cash, which explains the gulf between cash flow and net income.
The good thing with Netflix is that their loss is not permanent.
As an example, Netflix makes its own shows but they can’t expect people to start using their services just because of one show.
But they are thinking of the long term.
Netflix is filling their libraries with as many series as they can so that it’s going to pay them off in long run.
And this is something which has been seen by many big companies that they always do their best way to just capitalize on the whole market and keep losing money unless every person starts using their services.
So, in the end, Netflix won’t be in profit any time soon but will certainly make it happen in the next 4 to 5 years.
Now let’s discuss “Why Uber is running in loss?”.
Well, that sounds like a different topic to investigate on DiscoverZen.