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Netflix and Prime are (I think) the two leading competitors in streaming services. Both services are releasing original movies and shows which are exclusively available in their platform. But what's the purpose? Isn't it an investment they make for the shows? How do these streaming services earn compared to traditional TV channels which can benefit from ads?

Example: The Man in the High Castle is a high-budget show exclusive for Prime, as well as many shows in Netflix.

How do streaming services earn money? Is it based exclusively on user memberships or are there other factors?

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    Prime doesn't make a profit AFAIK...it's subsidized by Amazon's other business. Netflix ix a pure subscription service. – Paulie_D Mar 28 '18 at 11:46
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    @Paulie_D Although it is worth pointing out that Prime Video may be indirectly profitable in that those with Prime memberships may be more likely to make purchases from Amazon's retail division. – Blrfl Mar 28 '18 at 20:08
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    @OldBunny2800 Hulu is US-only – Luciano Mar 29 '18 at 9:34
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    The real question is why people put up with commercials at all when watching content that they have already paid for (e.g. cable TV). – Yozarian22 Mar 29 '18 at 16:32
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    Possibly similar question: movies.stackexchange.com/questions/86068/… – wip Mar 31 '18 at 9:33

10 Answers 10

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The cash influx is pretty obvious, as these services have a subscription fee.

Both services are releasing original movies and shows which are exclusively available in their platform. But what's the purpose?

If Netflix has no original content, they have to pay for licensing for everything they have on display. But if they own the product (= Netflix originals), then they don't need to pay a licensing fee to themselves.

This is nothing more than cutting out the middle man.

Isn't it an investment they make for the shows?

It's indeed an investment, with the promise of paying dividends in the long term.

A simpler example would be to buy a bread machine instead of going to the bakery every day. While it is true that the bread machine is initially more expensive, you start saving money if you've used the bread machine for a long time (thus not continually spending money at the bakery)

How do these streaming services earn compared to traditional TV channels which can benefit from ads?

The math is simple:

Profit = money earned - money spent

If you make more money than you spend, you turn a profit. That's pretty much the definition of profit.

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    It's also possible that Amazon takes a loss on Prime streaming audio and video itself, but the services bring a lot of customers to their site and encourage both shopping with Amazon instead of other retailers (free fast shipping) and encourages purchase of other streaming items, such as digital movie and TV rentals and purchases and music purchases. – Todd Wilcox Mar 28 '18 at 19:42
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    Another benefit of original content is that they can make it exclusively available through their streaming service, drawing more people to subscribe or stay subscribed to see that content. – Jared K Mar 28 '18 at 21:44
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    "promise" and like any investment, it can go bust. Like, for example, the star of a show you've dumped 20+ million dollars into is outed as a sexual predator. – corsiKa Mar 28 '18 at 22:10
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    Doubless the accountants have a way ot selling the content to themselves and get a taxable loss or something else that helps their overall bottom line. Like the content is owned by Amazon Prime Productions but "sold" to Amazon Prime, LLC. – Criggie Mar 29 '18 at 2:17
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    Profit = money earned - money spent Ah man, I've been doing this wrong my whole life! – Möoz Mar 29 '18 at 2:25
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How do streaming services earn money?

The one you mentioned Netflix and Amazon Prime don't have ad revenue. So they are dependent on subscription fees.

Is it based exclusively on user memberships or are there other factors?

There are other factors too. Take the case of Indian Amazon Prime exclusive show Baahubali: The Lost Legends which is now run on Colors too, so streaming site does sell their exclusive shows to other networks. Even few small streaming networks sell their content to other streaming sites like in India ALTBalaji makes exclusive shows but they made a deal with JioTV too and now many of ALTBalaji shows available on JioTV.

From makeuseof:

Netflix’s main source of revenue is subscriptions, which cost between $7.99 and $13.99 per month. This totals to about $950 million per month, according to the company’s earnings report. It also earns about $30 million per month through DVD rentals. The profit, or net income, is approximately $43 million per month.

The same article also talks about Netflix debts:

Netflix’s Free Cash Flow (FCF) was around -$2 billion in 2017. The company currently has a total gross debt of $4.8 billion. That said, it is making profits each quarter, and they are growing.

Netflix says the debts are part of its strategy, as it continues to grow its original content. It’s a “spend money to make money” outlook, as Netflix tries to get people hooked to its service. If people look forward to one new show or movie every month, they are more likely to subscribe and/or continue subscriptions to the service. The strategy seems to be working, as the company is consistently adding 5 million subscribers every quarter.

For Amazon they give cheaper bundle deals, you get free delivery, prime-videos and prime-music together with single fees. In India Prime gives the whole deal for 999/- Rs only for a year. Of course it's not huge earning for now but an investment for future gains from the growing market.

And don't forget about Product placement, here is a list of product placement example from Bright.

  • If you want to have a single currency through the whole answer, then you could add that in the US, Amazon Prime (which includes the streaming video) is USD 99.00 per year. There is also a monthly plan for I believe USD 11.99. – Todd Wilcox Mar 28 '18 at 19:40
  • @ToddWilcox the currency I used is from the source I used, so don't want to play with source information. – Ankit Sharma Mar 29 '18 at 13:28
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    The shocking thing in this answer is how much Netflix is making with DVD rental; whereas I thought they stopped this service. Who is using this? Nostalgic Blockbuster fans? – Burhan Khalid Apr 1 '18 at 10:11
  • @BurhanKhalid Probably people with slow or metered internet connections, e.g. some rural areas – user568458 Apr 2 '18 at 7:20
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Netflix has a subscription fee and has more than 110 million subscribers worldwide. This resulted in more than 11 billion USB revenue and about 4 billion USD gross profit in 2017.

Prime has a subscription fee too and additionally you have to pay a couple of coins for watching of many series and films.

That's how these services earn money.

  • Not sure what financials you looked at, but NFLX operating income was less than $1B in every year it's been in operation. Gross profit is generally not something you would look at by itself in gauging how a business makes money, as there are many other factors besides cost of product that go into operating a business. – theMayer Mar 29 '18 at 14:54
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    @theMayer 1. I DID NOT say anything about operating income. 2. If you're not sure then why don't you click on links in my answer? – Mouvier Mar 29 '18 at 14:56
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    Well, the question asks about "earning money" - which depending on your interpretation either means revenue (I think you have that pretty well down) or net profit (gross profit is a long way from net). So, I'm just pointing out that this part of your answer is misleading to someone who doesn't really understand financial statements. – theMayer Mar 29 '18 at 15:15
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    @theMayer Given a set of overhead costs, gross profit is the means by which a company offsets those costs and reaches profitability. I don't see what you're disputing about this. – Acccumulation Mar 29 '18 at 18:59
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    @theMayer I don't see what assumptions I'm making. And the point is that while it would be true that "Gross profit is generally not something you would look at by itself in gauging whether business makes money", it doesn't make sense to say " Gross profit is generally not something you would look at by itself in gauging how a business makes money". – Acccumulation Mar 29 '18 at 19:21
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Netflix has 100 million or more subscribers. If they each pay 10$ per month give or take, that is 12 billion dollars per year

The total box office revenue for a blockbuster movie is on the order of 600 million dollars. For all of Hollywood, it is in the single-digit billions.

Netflix's revenue is enough that they could produce every single movie made by Hollywood.

Now, Netflix has costs. They have content to license, they have software to write, they have bandwidth to pay for. And in some areas, they have ISPs to bribe for the right to connect to their customers.

Netflix has obvious sources of revenue. Making money consists, at the first order, on spending less money than they take in.

In order to keep and gain membership, they have to offer a compelling package of shows to watch. Licensing TV shows and movies their traditional solution; originally when they started, these licenses where cheap, and they could offer a whole pile of content for little cost.

Over time these licenses are getting more expensive (partly because Netflix is showing how profitable having these licenses is).

Netflix's response has been to create more of its own content. This content both entertains current subscribers (encouraging them to stay) and excites and tempts people who are not currently subscribers. Netflix will market their shows to non-subscribers, and generate buzz, and encourage viewership in their best shows, in order to get existing subscribers to watch and enjoy them (which makes it less likely they cancel) and to get non-subscribers to sign up (which gets them new subscribers).

Netfix's doesn't make money directly from people watching their shows (unlike ad-driven network TV), but they do make money indirectly from people being happy with, or envious of, their service.

Other subscription TV works much the same way; Amazon, HBO, etc. Having a blockbuster must-see show can make them millions or billions of dollars as new people sign up to watch it, and stay around for the rest of the content.

  • Box office revenue domestically in 2017 was $11B. Worldwide box office was $40B. Just fact-checking some numbers here. I'm not sure it makes a whole lot of sense to compare TV content vs released to theater movie content. – theMayer Mar 29 '18 at 14:45
  • Also - "Netflix's revenue is enough that they could produce every single movie made by Hollywood." This illustrates a misconception. Revenue does not produce content. Capital produces content, profitability from content pays for content once produced. Comparing Netflix revenue to the cost of producing a movie is like comparing apples to used cars. – theMayer Mar 29 '18 at 14:48
  • @theMayer Compare apples to used cars? Sure: Apples cost 1$. Used cars cost 1000$. Comparison complete. Money is fungible. It may not be wise to spend money on certain things, but they still can. Money up front pays for production. The income afterwards makes that decision wise, but doesn't actually pay for the production. However, I apparently made an error in the worldwide box office; I probably found some numbers for US domestic box office that I thought where worldwide. Could you cite your sources so I can improve my answer? Thanks! – Yakk Mar 29 '18 at 14:59
  • Look @ boxofficemojo.com - as for comparing in terms of dollars, sure, you can do that. I'm simply point out that there is no logical inference that can be drawn from such a comparison. You might as well compare it to the US DoD defense budget. – theMayer Mar 29 '18 at 17:39
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Your question deals with "earning money", which by this, I will assume you mean "how do they profit?" - I'll deal with Netflix here, since it's a lot harder to figure out Amazon based on the different games they play with their money.

Fundamentally, a business profits when its revenue exceeds its expenses. Most people understand this. However, what most people don't understand is how expenses are accounted for - the financial and managerial accounting methods that tell you whether or not you're truly profitable.

Profit can't simply factor net income.

Let's say I invest $100,000 into a business. The business, in turn, makes me a net profit of $2,500 per year. Am I profitable? The answer is "it depends," but probably not. First, I have opportunity cost. What if I had invested $100,000 into the S&P 500, which returns an average of 12% over time? Or, over the last few years, it has returned 30%. I would have been much more profitable had I done that.

Further, profit is not the same as cash flow. I may generate a $2,500 profit with my business, but I have to keep sticking $3,000 per year into it. I'm cash-flow negative. This business may be turning a profit on the books, but it's a money pit. That's usually an unsustainable model.

Thus, by the standards of many investors, these services don't make money and are not tremendously good investments. Financials from NFLX show operating margin (before interest/taxes) around 4-6% on $11B in revenue, and that margin percentage has not increased year to year (in fact, it's trending downward). This is kind of a red flag when it comes to deciding whether Netflix is a good investment.

How does Netflix Stack Up?

Most solid investments are going to see operating margin around 12-20%. The Walt Disney Company, by comparison, sees operating margin of 26% on $55B in revenue. Disney happens to be a media powerhouse, owning the ABC and ESPN networks, along with its Walt Disney Studios Motion Pictures business and its theme parks. All of its businesses see unit operating margins above 15%, but its ABC and ESPN business is the most profitable by margin at around 28% (most companies group their operations such that each unit is above 15%, or whatever is industry-standard).

Compared to Disney, Netflix doesn't seem to have very good performance, at least today. While we'd all like to look in a crystal ball and predict what will happen in the future, from the immediate past, we can see that Disney has been far more efficient at converting sales revenue to profit dollars. Netflix, on the other hand, has been around long enough that it can be considered "mature technology" - and a serious investor has a reasonable risk that it will not be able to meet its financial obligations going forward.

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On the question about their exclusive shows: The purpose of those is to offer something only they are having. For many movies and series you can pick either Amazon Prime, Netflix or some other service. The only way the streaming companies there can compete is by making the service cheap.

With exclusive content they produce a monopoly for those shows. Anybody who want to see a show has to pay them, as there is no other way to get it (legally) For this to work this must attract users, thus needs some level of quality compared to competing programs.

  • I was about to post this until I scrolled all the way down and saw somebody already had. Although this doesn't address the (entire) original question, I do think the OP implied a certain "how do the original shows make money for the streaming service?" In other words, the question isn't just about streaming service in general, but about the original shows specifically. – jhocking Mar 30 '18 at 19:06
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Well, first off, they have a fee to watch, normally this fee is monthly.

This allows them to pool in massive amounts of money monthly. To add on to this, they will also host ads, which, as they are a massive streaming company, with thousands of users watching those ads, it will pool in even more money.

We also have to take in account Netflix originals, in which, they dont have to pay a fee to host it, therefore gaining them loads of profit.

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One thing that hasn't been mentioned yet is that they also release their original services on other formats, such as (believe it or not) DVD. My parents originally watched "House of Cards" on DVD from their library. The vast majority of users watch it on streaming, but original content can be licensed. This adds to the revenue stream.

Netflix also sells subscription cards which also are profitable even though they're a less steady stream. Add all of these channels up and the revenue stream gets pretty high. Plus I'm sure you'll eventually see product placement ads in original shows.

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Television is a world market

And those foreign markets matter. That impacts (with force) the meaning of "Netflix Originals".

  • Yes, in some cases, a "Netflix Original" is entirely a Netflix-bankrolled production like House of Cards. However, as often --
  • "Netflix Original" describes independent productions for which Netflix only possesses the license in your market.
  • Or productions started and initially offered by someone else, for which Netflix has bought the rights and is now sustaining it. I'm not talking about restarts like Fuller House or Arrested Development.

The upshot is this foreign involvement and licensing is a big part of the total revenue for any production. When the UK or Australia airs "House of Cards", that money helps pay for the production.

For some "Netflix exclusives", Netflix doesn't even bear the financial risk of the program's success - its popularity was proven in foreign markets, and they are simply licensing a known winner.

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First off all these services provider have long business plan, today they are allowing people get the services free of cost, by collecting their data. These data are also a source of income, then after some time they will show advertisement, that is also a part of income. In last stage when they gain popularity and target audience they will charge some amount.

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    These services aren't free. – BCdotWEB Mar 29 '18 at 11:54

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