As one of the largest distributors of video and TV streaming online, Netflix has a strong reputation with consumers as well as among its competitors. Netflix (NFLX) offers a wide variety of TV shows, current and older movies, and premium content developed in-house and exclusively available to subscribers. While the company's core service offering of DVD-to-consumer lost momentum quickly over the last few years, its content-to-consumer product continues to grow as more buyers shift toward digitized preferences.
Since its inception, the company has operated under a subscriber business model, allowing users to pay a fee of less than $10 each month to access its television and movie offerings. Currently, Netflix remains one of the few streaming content providers that does not generate advertising revenue through its site, but is instead sustained by its loyal subscriber base and growth in domestic and international markets. While this business model has worked well for Netflix consistently over the years, shifts in the television and content industry may require an approach that includes offering up advertising space.
Current Industry Trends
Trends in mobile and online streaming position younger and more tech-savvy consumers to create an upheaval for conventional cable broadcast TV providers, as these buyers embrace cutting the cord. Consumers want to have access to quality content continuously, and they prefer to avoid paying the traditionally high costs cable companies charge to access it. As a result, Netflix and competitors, such as Hulu and Amazon Prime, are the direct benefactors of consumers opting to view television and movies online on their own time and with a much smaller cash output.
However, as more consumers transition to online viewing through sites such as Netflix, another transition is taking place. Advertising dollars slated for TV cable providers have declined rapidly over the last year as investment is now allocated more heavily to online content providers. Analysts expect this trend to continue as more consumers leave cable providers to join the millions of subscribers viewing television and movies online.
Although Netflix has strong competition in the online content and streaming marketplace, the company stands out among consumers as a low-cost, ad-free service. In 2014, the company showed revenue of $5.5 billion and a subscriber count of 57.39 million among domestic and international consumers. While the 2014 revenue and subscriber numbers are an increase over 2013, the company is growing at a slower rate than anticipated.
This slowdown is due, in part, to the rising costs of content acquisition and the creation of unique offerings, such as Netflix's "House of Cards." Similarly, the pressing need for marketing to keep up with competing streaming services costs the company millions each year, which eats away at subscriber revenue. The stagnant upward movement of subscriber numbers coupled with increased costs could result in disappointing earnings for Netflix moving forward if it fails to tap additional sources of revenue.
Competitors, such as Hulu and Amazon Prime, offer similar content for a similar monthly fee, but subscribers must watch advertisements prior to or during the movie or TV show they have selected. The revenue generated from advertising sales is a strong component of each company's earnings year to year, and subscriber numbers continue to grow despite the assumed consumer preference ad-free streaming content. Companies such as Hulu that offer space to major companies wishing to market their products to younger, more focused groups of consumers online stand in line to receive the rapid influx of advertising dollars coming from conventional broadcast TV outlets. While Netflix has no current plans to jump on that profitable bandwagon, increasing costs associated with customer acquisition may make it a necessary leap.