when 192 million subscribers are not enough.

This is how you earn money … is a series of weekly SamaGame articles in which we analyze the business model of large technology companies: which divisions give them real benefits and which ones do not, which are the true nuclei of these companies that have transformed to the world. Today, the company that started by renting DVD’s at home and ended up turning the entertainment industry upside down, redefining audiovisual distribution and putting even the world of cinema in check: Netflix.

A priori, Netflix’s business is simple: it invests money in creating audiovisual material and buying the rights of others already created, it offers a single product with three price modes to access them and its users pay it religiously every month. But if we scratch a little more, it’s not that simple.

when 192 million subscribers are not enough

Subscribers top

Netflix subscribers are 100% of your business today, so as they go up, your income will go up … with some nuances. In this graph we can see the annual evolution of this figure in the green bars, while the gray line shows the year-on-year growth.

On the one hand, it is normal for explosive growth to slow down and decrease in percentage terms. At the end of the day, this is what happens even to Facebook, Instagram or WhatsApp: it is increasingly difficult to reach new people, since those who are likely to use the service are probably already within it. The problem is in what has happened since 2015.

when 192 million subscribers are not enough

The growth of countries with access to Netflix was explosive in 2016, but their growth in users since then has not

2015 was the last year that the service was not available in more than a handful of countries. At the end of that year he arrived in Spain precisely and a couple of months later he announced his international landing: the whole planet could use Netflix except China (temporarily, since there was an agreement with Baidu later), Crimea, North Korea and Syria.

when 192 million subscribers are not enough

However, growth has continued to decline in percentage terms, despite being in many more countries. This is mainly due to a heavy dependence on the United States. In fact, it only has more clients from outside the United States than from within since mid-2017. Until then, it was still the majority, despite having been present throughout Europe, Central and South America, etc. for years.

It is also worth commenting the year-on-year high experienced so far in 2020, in the context of a global pandemic with quarantines in most countries of the world. A perfect setting to sign up for Netflix. His action has kept pace with this opportunity in recent months.

when 192 million subscribers are not enough

A debt that does not stop growing

One issue about Netflix that presumably worries its managers is that This growth is sustained by a very strong investment in the creation of exclusive content (films, series, documentaries) that is not sustained by current income. Although the benefits are increasing, the investment is much greater.

Netflix already accumulates a debt of almost 15,000 million dollars, which has been growing with its income, but despite its growth, it has not been reduced. The competition has been tightening or multiplying (Netflix already rivals Disney +, Prime Video, HBO, Hulu, Apple TV + …) and at the same time, that strong competition between platforms has been inflating the cost of hiring actors and directors (¡¡ even the Dukes of Sussex!), something that in turn has been raising the cost of large productions.

Does all this mean that Netflix is ​​in financial trouble? Probably not. If Netflix has shown something in recent years, it is knowing how to plan in the long term. For example, the divorce with Disney a few years ago was anticipated five years before as something that could end up happening and for which they had to be prevented, according to Ted Sarandos, Netflix’s content director, in a Variety interview. After that divorce, Disney + arrived.

when 192 million subscribers are not enough

The point is that this panorama also explains the gradual price increases that we have seen in recent years: they respond to indebtedness that has not stopped growing.

On the other hand, Netflix has had to consolidate its international growth, among other factors, in two ways:

This also explains the increase in the percentage of its income that Netflix has allocated to investment in R&D to improve its platform. From around 5% fifteen years ago it has increased to percentages of between 8% and 10%, although in the last two full calendar years it has fallen below that 8%.

when 192 million subscribers are not enough

Netflix’s long-term challenge is to continue growing in income without having to make such high expenses to produce its contents, especially without having to resort to perpetual indebtedness. Especially thinking about if there comes a day when, for whatever reason, its mass of users is reduced and enters a vicious circle in which it does not have as much income as before and is not able to continue producing content of the same level, and hence keep losing users. Time will tell. Meanwhile, the competition tightens.

This is how you make money …

I. This is how you make money Amazon: more and more cloud and a future of audiovisual productions.

II. This is how you make money Alphabet: the absolute king of advertising has a big problem with other products and services.

III. This is how you make money Manzana: With the iPhone hitting your roof it’s time to get more money from its owners.

when 192 million subscribers are not enough

IV. This is how you make money Facebook: The other advertising giant has two aces up its sleeve.

V. This is how you earn money TwitterYour advertising and segmenting us better and better makes you profitable for the first time.

SAW. This is how you make money Microsoft: more and more cloud to compensate for the disaster in mobiles.

when 192 million subscribers are not enough

VII. This is how you make money Samsung: neither TVs nor smartphones are the basis of your business.

VIII. This is how you make money Sony: PlayStation is better in hand than Xperia flying.

XIX. This is how you make money Xiaomi: I came for the price of the smartphone and I stayed for the services.

X. This is how you earn money Netflix: when 140 million subscribers are not enough.

XI. This is how you make money Huawei: Your mobile phones are not (yet) your main activity.

XII. This is how you make money LG: The era of the smartphone did not sit well with him.

XIII. This is how you make money Dropbox: an insufficient 3% and an impeccable track record.

XIV. This is how you make money Spotify: profitable for the first time in its history and a logical focus on podcasts.

when 192 million subscribers are not enough

XV. This is how you make money HTC: the abdication of a king.

XVI. This is how you make money Disney: theme parks and merchandising take over, while streaming is (still) testimonial.