Netflix's Subscription-Based Streaming Business Model

Executive Summary

Netflix, Inc. has evolved from a DVD rental service to become one of the world's leading entertainment streaming platforms, fundamentally transforming how audiences consume video content. The company's subscription-based business model, which provides unlimited access to a library of content for a recurring fee, has been widely studied as a case of digital disruption in the media industry. This case study examines Netflix's streaming business model using only verified, publicly available information from official company disclosures, credible news sources, and recognized industry reports.

Company Background

Netflix was founded in 1997 by Reed Hastings and Marc Randolph as a DVD-by-mail rental service. According to the company's official history, Netflix launched its streaming service in 2007, allowing subscribers to instantly watch television shows and movies on their personal computers. In 2010, Netflix expanded its streaming service to Canada, marking its first international market entry. The company announced in a 2011 blog post that it would split its DVD and streaming services, though it later reversed the decision to create separate brands following customer backlash. Netflix went public in 2002 on the NASDAQ stock exchange under the ticker symbol NFLX. The company is headquartered in Los Gatos, California. Reed Hastings served as CEO from the company's founding until January 2023, when he transitioned to Executive Chairman. Ted Sarandos and Greg Peters were named co-CEOs in January 2023, as announced in the company's shareholder letter.

The Subscription-Based Streaming Model

Core Model Components

Netflix's primary revenue model is based on monthly subscription fees paid by members in exchange for unlimited access to its content library. According to the company's Form 10-K filed with the Securities and Exchange Commission, Netflix offers different subscription plans at varying price points, typically differentiated by the number of simultaneous streams allowed and video quality (standard definition, high definition, or ultra-high definition). The company has stated in multiple shareholder letters that it does not sell advertising within its primary subscription tiers. However, Netflix announced in October 2022 that it would launch an advertising-supported subscription tier. This ad-supported plan, called "Basic with Ads," launched in November 2022 in 12 countries including the United States, as reported by Reuters. The company disclosed in its January 2023 shareholder letter that the ad-supported tier was priced lower than its other plans.

Geographic Expansion and Market Penetration

Netflix has pursued an aggressive international expansion strategy. The company announced in a January 2016 press release that it had launched service in 130 new countries, bringing its total global presence to over 190 countries. According to CEO Reed Hastings at the Consumer Electronics Show in Las Vegas, as reported by The Wall Street Journal, the company aimed to have a global service available nearly worldwide. Netflix's SEC filings segment its business into distinct geographic regions for reporting purposes. The company has acknowledged in shareholder letters that different markets present varying levels of broadband penetration, competitive intensity, and content preferences, which affect both acquisition costs and content strategy.

Content Strategy and Investment

A defining characteristic of Netflix's business model is its substantial investment in content, both licensed and original productions. The company began investing in original content with the 2013 release of "House of Cards," as widely reported in media outlets including The New York Times. Netflix Chief Content Officer Ted Sarandos stated in interviews with The Hollywood Reporter that the company committed approximately $100 million to the first two seasons of the political drama. According to Netflix's official blog post in September 2020, the company announced a partnership with Shonda Rhimes, creator of Grey's Anatomy and Scandal, in what The New York Times reported as a deal estimated to be worth more than $100 million. Such partnerships represent Netflix's strategy to secure exclusive content from proven creative talent. The company has disclosed in shareholder letters that it produces content in multiple languages and for diverse global audiences. In a September 2021 announcement reported by Variety, Netflix stated it would invest $500 million in content production in South Korea. Similarly, Bloomberg reported in November 2021 that Netflix planned to invest $300 million in original Indian content.

Technology and User Experience

Netflix has emphasized the importance of its recommendation algorithm in driving member satisfaction and engagement. The company has published technical blog posts describing its recommendation system, which uses viewing history and ratings to personalize content suggestions for each user. In 2006, Netflix announced the "Netflix Prize," a competition offering $1 million to anyone who could improve the company's recommendation algorithm by 10%, as reported by Wired. The prize was awarded in 2009 to team BellKor's Pragmatic Chaos. The company has invested in streaming technology to deliver content across multiple devices. According to Netflix's technology blog, the company uses adaptive bitrate streaming technology that adjusts video quality based on available bandwidth. Netflix announced partnerships with device manufacturers including smart TV makers, game console producers, and mobile device companies to make its app available across platforms, as documented in various press releases.

Pricing Strategy and Plan Modifications

Netflix has adjusted its subscription pricing multiple times across different markets. In October 2023, The Wall Street Journal reported that Netflix raised prices on some of its U.S. subscription plans, with the ad-free Premium plan increasing from $19.99 to $22.99 per month. The company has stated in shareholder letters that pricing decisions are based on the value delivered to members and investments in content and product improvements. The introduction of the ad-supported tier in November 2022 represented a significant shift in Netflix's business model. According to a company announcement reported by CNBC, the "Basic with Ads" tier was priced at $6.99 per month in the United States, featuring four to five minutes of advertising per hour. Netflix co-CEO Greg Peters stated in the company's April 2023 earnings call, as transcribed by Seeking Alpha, that the ad-supported tier was attracting subscribers and represented an incremental revenue opportunity.

Competitive Landscape

Market Competition

Netflix operates in an increasingly competitive streaming market. The Walt Disney Company launched Disney+ in November 2019, achieving 10 million sign-ups on its first day according to a company press release reported by CNBC. WarnerMedia (now Warner Bros. Discovery) launched HBO Max in May 2020, and NBCUniversal launched Peacock in July 2020, as reported by Variety and The Hollywood Reporter respectively. Apple entered the streaming market with Apple TV+ in November 2019, and Amazon has operated Prime Video as part of its Amazon Prime bundle. According to a September 2021 SEC filing by Amazon, the company had more than 200 million Prime members worldwide, though it did not break out specific Prime Video viewership figures.

Password Sharing and Account Management

Netflix has publicly addressed the issue of account sharing, which the company defines as sharing accounts with people outside one's household. In an April 2022 shareholder letter, Netflix acknowledged that password sharing was impacting its revenue, estimating that in addition to its paying households, Netflix was being shared with over 100 million additional households. In response, Netflix announced measures to address password sharing. In May 2023, The New York Times reported that Netflix began rolling out paid sharing features in the United States, allowing primary account holders to add "extra members" for an additional fee. According to the company's July 2023 shareholder letter, Netflix stated that paid sharing led to an increase in both revenue and paid memberships in countries where it had been implemented.

Business Model Challenges and Adaptations

Member Growth Fluctuations

Netflix experienced periods of both rapid subscriber growth and unexpected declines. The company reported in its April 2022 shareholder letter that it lost 200,000 subscribers in the first quarter of 2022, the first subscriber loss in more than a decade. This announcement led to a significant decline in Netflix's stock price, as reported by Bloomberg and The Wall Street Journal. The COVID-19 pandemic initially accelerated subscriber growth. Netflix disclosed in its April 2020 shareholder letter that it added 15.8 million paid memberships in the first quarter of 2020, nearly double its forecast. However, the company also noted that this growth represented pulling forward some growth that would have otherwise occurred later.

Content Costs and Cash Flow

Netflix has acknowledged in SEC filings that its content obligations represent substantial financial commitments. The company reports content liabilities on its balance sheet and provides information about streaming content obligations in the notes to its financial statements in Form 10-K filings. The company's approach to content investment has evolved over time. In a 2016 interview with Recode, CEO Reed Hastings discussed the company's willingness to invest heavily in content, stating that Netflix aimed to become HBO before HBO could become Netflix—a reference to competing for premium content and subscribers.

Regulatory and Market-Specific Challenges

Netflix has faced regulatory challenges in various markets. In September 2021, Reuters reported that South Korean lawmakers were pushing for legislation requiring content providers like Netflix to pay network usage fees to internet service providers. The issue arose after Netflix's popular Korean series "Squid Game" generated massive traffic. In India, Netflix competes in a market with lower average revenue per user compared to developed markets. The company introduced mobile-only subscription plans in India, priced lower than standard plans, as reported by TechCrunch in July 2019. This represented an adaptation of Netflix's pricing strategy to local market conditions.

Strategic Initiatives and Innovations

Gaming Expansion

Netflix announced its entry into gaming in July 2021. According to a company blog post, Netflix stated that games would be included as part of members' subscriptions at no additional cost. The company initially launched mobile games for Android and iOS devices. In October 2021, The Verge reported that Netflix had begun rolling out its gaming feature globally. The gaming initiative represents an attempt to increase member engagement and differentiate Netflix's offering from competitors. However, no verified public information is available on specific subscriber engagement metrics or the financial impact of the gaming initiative.

Live Content

In 2023, Netflix began exploring live content. The company announced it would stream a live comedy special featuring Chris Rock in March 2023, as reported by Variety. This represented Netflix's first major live global streaming event. However, no verified public information is available on the long-term strategic impact of live content on Netflix's business model.

Industry Impact and Market Position

Disruption of Traditional Media

Netflix's streaming model has been widely credited with disrupting traditional television broadcasting and cable distribution. The term "cord-cutting"—referring to consumers canceling cable subscriptions in favor of streaming services—became prominent as Netflix grew. According to data from eMarketer cited by CNBC in 2021, the number of U.S. households that had canceled traditional pay-TV service and relied solely on streaming had been increasing year over year. Netflix's release strategy, making entire seasons available simultaneously for "binge-watching," challenged traditional weekly episode releases. This approach influenced other streaming services and content creators, as documented in various industry analyses published by The Hollywood Reporter and Variety.

Content Production Influence

Netflix's willingness to greenlight diverse content and provide creative freedom to filmmakers has been noted in the industry. Director Martin Scorsese's film "The Irishman" (2019) was financed and distributed by Netflix with a reported budget of over $159 million, as reported by The Wall Street Journal. The film received limited theatrical release before streaming on Netflix, representing the company's hybrid distribution approach for prestige content. Netflix's investment in non-English language content has expanded global content markets. "Squid Game," a Korean-language series released in September 2021, became what Netflix co-CEO Ted Sarandos called the company's "biggest series launch ever" in an earnings call transcribed by The Motley Fool. The company stated that 111 million accounts watched the show in its first 28 days.

Current Market Standing

Netflix remains one of the largest subscription streaming services globally. While the company reports total paid memberships in its quarterly shareholder letters, specific market share data varies by source and methodology. No verified public information is available on certain internal performance metrics such as customer acquisition cost by channel, lifetime value calculations, or detailed retention rates by subscription tier. The competitive landscape continues to evolve. According to a July 2023 report by Antenna research cited by The Wall Street Journal, industry-wide streaming subscriber growth in the United States had slowed compared to pandemic-era peaks, with consumers showing increased selectivity about which services to maintain.

Conclusion

Netflix's subscription-based streaming business model has evolved significantly since the company's 2007 launch of streaming services. The model's core principles—unlimited content access for a recurring fee, substantial investment in original content, global expansion, and technology-driven personalization—have influenced the broader media industry. The company has demonstrated adaptability through the introduction of ad-supported tiers, paid sharing mechanisms, and expansion into gaming, while navigating intense competition and varying market conditions across its global footprint. The sustainability and future evolution of Netflix's model remain subjects of industry observation, particularly regarding the balance between content investment, pricing strategy, and member growth in a mature and competitive streaming market.

MBA-Style Discussion Questions

1. Strategic Positioning and Competitive Advantage: How has Netflix's early-mover advantage in streaming translated into sustainable competitive advantages? Analyze the defensibility of Netflix's position given the entry of well-capitalized competitors with established content libraries and production capabilities (Disney, Warner Bros. Discovery, NBCUniversal). What strategic choices should Netflix prioritize to maintain differentiation?

2. Business Model Evolution and Revenue Diversification: Evaluate Netflix's decision to introduce an advertising-supported subscription tier after years of maintaining an ad-free model. What are the potential benefits and risks of this strategic shift? How might advertising impact the company's content strategy, user experience, and competitive positioning? Should Netflix pursue additional revenue streams beyond subscriptions and advertising?