The original Netflix business model was clever. You would queue up the films you wanted. They would mail you a DVD of a film that you would mail back after watching. It was easy. There were no due dates and no overdue fees. All it required for them was to purchase DVDs and stock a warehouse with them, with little other overhead since once you purchase a DVD, you can rent it out as many times as you like. It is little wonder that these low overhead costs drove the brick-and-mortar Blockbuster out of business.
But then Netflix went into the streaming business. This is trickier and more expensive since this requires negotiations with the studios for streaming rights for each film and they were only available for a limited time. Then Netflix went even further and started producing new content, which is extremely expensive. It is not surprising that the subscription rates are rising. Jason Mittell writes that the company seems to have become overextended.
Netflix needs to produce and acquire desirable content to make the service indispensable. But making original content is expensive. Hiring talent and producing movies and television series costs the company more than $15 billion annually. Netflix spends much more cash than it brings in, leading to consistent negative cash flow and a mountain of debt that amounts to more than $10 billion.
Even though it reported a record $1.2 billion in profit in 2018, those profits are based on an accounting model that ignores many costs and debts. This has led some financial analysts, like NYU professor Aswath Damodaran, to believe that Netflix’s business model is unsustainable.
I use both the streaming and DVD services but have the sense that Netflix is paying less attention to the latter and that it is not purchasing DVDs at a significant rate. Netflix is very secretive about its practices so one does not really know. Streaming is convenient but I am not one of those people who watch a lot or on impulse and so do not use that a lot. I am perfectly content to watch one DVD every few days.
Now many more companies are going into the streaming business. I don’t know how many people are like me but it seems like there might be a market for a new low-cost company that is based on the original stripped-down Netflix model that only deals with mailed DVDs. They could even allow people to get up to three DVDs at a time so that people would have one to watch every day if they wanted to, while the others were going back and forth in the mail.