- Tram Ho
Another great year for Netflix:
They increased the total number of paid subscribers to nearly 140 million worldwide, compared to 110 million in 2017.
These new subscribers allow them to increase revenue by 35% or $ 16 billion.
Their operating profits doubled to $ 1.6 billion.
They forecast an additional 8.9 million new registrations in the first quarter of 2019, bringing the total number of subscribers to nearly 150 million worldwide.
Streaming is incredibly scalable.
The number of products a company is willing to produce will depend on the cost of production and the market price of the product.
A company will continue to sell its product until the cost of producing one more unit is less than its revenue, because the revenue they get is the money they get from selling that unit.
If your company sells T-shirts, and the cost to make the shirt is 9 USD, the market price is 10 USD, then it is reasonable for you to continue to make the shirt. However, if it costs $ 11 to make a shirt and you can only sell it for $ 10, of course you will stop making the product.
In economic terms, a firm is unprofitable when marginal revenue = marginal cost.
For industrial products produced in a factory, additional costs are incurred when adding product. If you double your output, you will need to hire more labor, invest in more machines, buy a bigger warehouse, etc.If the price of the product sold doesn’t increase, then marginal costs It won’t be long before it catches up with marginal sales.
For a digital company like Netflix, the cost of adding a member is almost $ 0. Don’t get me wrong, Netflix has spent a huge amount of money and has to incur enormous debt to create the amount of content it has had over the past few years.
However, their costs barely change from having 140 million subscribers and 140 million + 1 subscriber. They don’t need a bigger factory or hire more workers to “produce” one more member.
Netflix has constant marginal costs, which means they are willing to sell as many membership cards as possible. Anyone in this world wants to register as a member, they are very willing.
This is represented by a horizontal arc.
When a company has a vertical supply curve, they are always willing to provide an additional unit of product as long as the customer is willing to buy for a certain price.
Simply put, Netflix has a fully scalable product.
Scalability allows a company to meet consumer needs in almost any situation.
Let’s go back to the T-shirt business example earlier. If you have a factory that can produce 10,000 t-shirts per month, your scalability is limited. If the demand for t-shirts doubles to 20,000 shirts per month, you won’t be able to increase production and meet demand unless you upgrade to a larger factory (and you may not have enough money to do this).
With a digital product that Netflix sells, they don’t need to worry about those limitations. They are scalable.
Investors also prefer a scalable business because they believe that as a company increases revenue over time, profits will increase. As a result, Netflix’s stock price has risen by more than 37,000% since the company launched in 2002.
Success cannot be guaranteed
Netflix has a product that is completely expandable to millions of people. Registered members, their revenues and stock prices have skyrocketed over the years and they have barely encountered any barriers in meeting consumer demand.
However, that doesn’t mean their profits will continue to increase.
As mentioned above, although their marginal costs are low, their fixed costs are huge. They have a debt of more than $ 10 billion to produce and market their film library.
In addition to Amazon, Disney, Hulu and Apple are all preparing to enter the online streaming market, Netflix will soon face greater competition than ever.
The key question for Netflix will be whether it will be able to continue growing its paid membership base in the face of stiff competition from companies that can outperform them?
The low marginal cost comes in handy only if people keep buying more of your product.
According to Medium
Source : Genk