What Netflix Costs

Last week, my column focused on the continuing dependence of many traditional pay TV players on advertising as a source of revenue. The day that column ran, Netflix reported its financial results for the second quarter and they highlighted just how good a business Netflix has built by eschewing that reliance on advertising and providing an ad-free service.

$5 per month per subscriber

That’s how much Netflix costs to run on a per-subscriber basis in the US. See the chart below, which shows Netflix’s monthly revenue per paid user in the US and its “cost of revenue” (essentially, the costs of content and content delivery) per subscriber on the same basis:

Netflix revenue and cost of revenue

Increasing margins as a result

As you can see, that cost is actually steadily falling over time – it was about $5.70 three years ago, at the beginning of 2012, but has fallen by around 70 cents since then and is likely to continue to fall. Meanwhile, Netflix’s revenue per paid subscriber was very steady at $8 (its price was $7.99) for quite some time, but recently began rising slightly as it increased the standard price for monthly subscriptions by a dollar — it’s now about $8.40. The net result? An increase in profit margins, naturally. Bear in mind Netflix’s contribution profit metric also subtracts marketing costs, the other major service-specific cost it incurs, from revenue:

US streaming contribution margin

Netflix is the company with the most predictably rising margins of any tech company I follow – aside from a couple of blips, it’s marched steadily onwards up that line and in fact is currently slightly ahead of its own projections on margin too. It has a stated goal of 40% margins by 2020, but might actually get there earlier.

The international picture is different

Internationally, the story is quite different. It is profitable on a pure cost of revenue basis, though only barely:

International rev and CoR

However, the high costs of marketing in new countries Netflix enters puts the international business into the red, where it is likely to stay as the international expansion continues. Both domestically and overseas, Netflix spends around $50 on marketing for every net new subscriber it gains.

Netflix, Hulu, and others

Why do I mention all this? Well, to make this simple point: though we’re accustomed to paying $80-100 per month to a pay TV provider for a range of content to meet our needs, many of us are increasingly paying just $8-9 per month to Netflix for a service that costs just $5 to run and, for many people, provides much of the video content they consume. How long can this situation continue? And in a world where Netflix is able to do this so cheaply without showing any ads, how sustainable is the business model for traditional pay TV providers? It’s worth noting Hulu just began testing a concept for an ad-free Hulu subscription at $12-14 per month or well under double what it charges today for its offering with ads. I suspect Hulu and its owners are beginning to recognize the challenges associated with running a paid subscription service with ads in the face of Netflix’s success. But, as I pointed out last week, others need to do so as well, especially those that currently have far heavier ad loads than Hulu.

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

7 thoughts on “What Netflix Costs”

  1. I’m not totally convinced Netflix and company are exactly comparable to traditional pay TV providers. As much as I despise Comcast, they have a lot of material infrastructure and personnel they have to invest in and maintain to get content _to_ the house. Netflix gets to take advantage of that without dishing out the investment. Should Comcast or Time Warner decide to roll it all up and call it quits, including their ISP services, (as unlikely as that is) what does Netflix do then? The hyperbole is just to demonstrate that Netflix is reliant on others’ expenditures to keep their costs so low.

    This is not to say pay TV doesn’t need to come up with a new model. Clearly they do. Or they will eventually become a dumb pipe. I don’t think the FCC will allow them to move their TV model (where the content providers pay for delivery direct to their customers) to the internet.


  2. Netflix is not quite comparable to TV though: no news, no sports… even getting a list of what films and series they carry isn’t easy, I just went to check what my 8€ would get me… they don’t say.

    1. Right. What would be more comparable (and likely just as disconcerting to the traditional payTV providers) is how do their costs compare to HBO and Showtime. They will more likely follow the Netflix model.


  3. I am totally unfamiliar with how TV works in the US, so please pardon me if I’m asking stupid questions.

    You mention that in the US, Netflix revenue per subscriber is $8.40 while the cost is $5.00. On the other hand, Internationally, revenue is about $22 per subscriber and the cost is $20. This means that it costs four times more for Netflix to provide a similar service for international customers.

    Why is this? What makes providing the service internationally so much more expensive?

    Another question. I’d like to know what the general cost for viewing TV is in other countries.

    US customers have to pay $80-100 per month to get decent TV which is, in my opinion, totally outrageous. In Japan, the cost is about $20 but that is a mandatory fee only for the two public national TV channels; we get about 5 channels for free. We don’t get the huge number of channels that a cable TV network provides, but most people don’t need them anyway. Only 25% in Japan subscribe to a paid multi-channel service.


    Selling an $8 service as a potential substitute for a $80-100 service is very different from selling a $22 service to substitute a $20 one.

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