In Depth

Can Netflix's business model really work?

More than 104 million people subscribe to the streaming site, but its popularity has come at a price

Netflix has passed another milestone: it now has more than 104 million subscribers, thanks to faster-than-expected growth, much of it from territories outside the US.

Analysts say the growth has been partly driven by the streaming site's own content, with high-profile series including House of Cards, Orange Is the New Black and 13 Reasons Why. New children's film Okja has also won critical acclaim.

However, making high-quality programmes is expensive and analysts question whether the Netflix business model is sustainable.

How did Netflix start?

The firm was founded by Marc Randolph and Reed Hastings as a DVD rental company in California in 1997. Ten years later, it moved into online streaming, showing other company's programmes. It still provides DVD mail order rental and its founders are still involved - Hastings  is the current chief executive.

When did it start making programmes?

In 2013, with the US version of House of Cards. Despite being new to the industry, Netflix aimed high with this black-comedy drama starring acclaimed stage and film star Kevin Spacey. The show was a hit with both critics and the public.

How big is its production arm now?

Netflix released more original programming last year than any network or cable TV channel in the US. According to the Hollywood Reporter, its output in 2016 totalled 30 original series – 600 hours of scripted programming.

How much does that cost?

Around $6bn (£4.6bn) a year, says the Reporter, although that also includes purchasing programmes and films from other producers to stream. For comparison, US network HBO spends around $2bn (£1.5bn) each year.

So that's good news for programme-makers?

Many say so. "Anybody who's going to spend $6bn or $7bn a year on library and original content deserves to be applauded," says Chris Silbermann of ICM Partners. "Do you know how bad this business would be if their $6bn went away tomorrow?"  

However, there is also a small but persistent backlash against Netflix which sees the site as dictatorial and disrespectful of content creators.

Does Netflix plan to keep investing like this?

Yes. "With our content strategy paying off in strong member, revenue and profit growth, we think it's wise to continue to invest," it said today. "In continued success, we will deploy increased capital in content, particularly in owned originals, and, as we have said before, we expect to be [free cash flow] negative for many years."

Is the business model sustainable?

Netflix is spending more than it is earning. In the second quarter of this year, it had $608m (£467m) negative free cash flow. Not every investor thinks this is a good plan. In June, after the site cancelled two shows, Seeking Alpha reported that some were beginning to "question the viability" of the business and concluded that Netflix's current stock market valuation demands a "future cash flow stream that even the strongest of business models would be challenged to achieve".


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