There’s a long answer to the question “how does Netflix make money?” And a short one. The short answer—They don't. Actually, since 2011, Netflix has not had any positive cash flow. So, the more important question is not “how does Netflix make money?”, but “how does Netflix NOT make money?” Lets back up and start with some basic information.
Netflix was founded in 1997 by Reed Hastings and Marc Rudolph as a service that allowed users to rent movies on DVD through the internet and have them mailed to their doors. Now, 21 years later, Netflix is primarily a provider of online streamable content including TV shows, movies, and documentaries.
The $141 billion company operates on a subscription-based model and now boasts over 125 million members in over 190 countries, watching more than 125 million hours of Netflix content per day. Along with 5.15 million added users in the past three months, the company announced it had 88% more original content on the site in just one year.
Netflix’s highest ever cash flow (or the amount of cash Netflix generates from its normal business operations minus what it spends on large projects).
With that many users and that many content options, Netflix accounted for 36.5% of all downstream internet bandwidth during peak periods in North America in March. Overall, Netflix consumes more bandwidth than Youtube, Amazon, and Hulu combined at their peak periods according to a report put out by Sandvine, a Canadian bandwidth-management systems vendor.
The company doesn’t sell ad space on its site, and it doesn’t sell its user data, like another large tech/media companies. Netflix’s primary source of revenue is subscriptions. The monthly membership fees from three different plans—basic, standard, and premium—is where all the money comes from.
So, most of Netflix’s revenue comes from subscriptions, and they have over 130 million subscribers, and the site alone can take up about a third of all broadband in North America, how can they be making no money? The answer to that is competition. Netflix isn’t the only company providing streamable TV and movie content on the internet. It is competing with other massive companies like Amazon, Hulu, and HBO.
In 2019, Disney is going to pull all of its content from the Netflix site and create its streaming service following Disney’s acquisition of 21st Century Fox’s film and TV assets. Even Apple announced moves towards entertainment and original content and signed up content creators including Oprah Winfrey and Steven Spielberg.
For Netflix, the best way to boost subscriptions and beat competitors is to produce Netflix exclusive content, and it has to be good, too. Netflix announced plans to spend up to $15.7 billion in 2018 on content this year on TV shows and movies to fend off competitors. The company is spending massive amounts of money on high-value creators like “Glee” and “Pose” producer, Ryan Murphy, who signed a $300 million deal with Netflix, and Shonda Rhimes, the prolific ABC producer Shonda Rhimes creator of shows like “Scandal” and "Grey’s Anatomy." Netflix also paid Barack and Michelle Obama an undisclosed amount of money to produce shows and movies for the company.
To outgrow its competitors, competitors who typically have other sources of revenue aside from streaming services, Netflix has put a lot of money into original and exclusive content creation. All in all, the company is taking a gamble and borrowing more money than its making with the hopes of future growth. So, just how much money is Netflix not making? Let's start with a basic fact: Netflix’s highest ever cash flow (or the amount of cash Netflix generates from its normal business operations minus what it spends on large projects) is $279 million. That was in 2009 before the company expanded globally. By 2012, Netflix dipped into a negative cash flow that has only gotten worse. In 2017, the cash flow was around $-2.01 billion, and by 2018, it's expected to hit $-2.79 billion.