How Does Netflix Make Money?

Netflix (NFLX -4.12%) is the undisputed leader in streaming video. The DVD-by-mail company created modern streaming as we know it and has built a massive audience by being the first mover -- more than 50% of U.S. households have the streaming service.

But how does the company turn all those eyeballs into dollar signs?

In this video from our YouTube channel, we break down how Netflix makes money and what the strategy is behind the company's huge cash burn. (A full transcript follows the video.)

Narrator: Have you ever been deeply involved in a pivotal part of your favorite show, only to be rudely ripped away by an annoying (and oftentimes irrelevant) commercial? If so, you weren't watching Netflix.

You see, Netflix doesn't rely on ads to support, grow, and source its revenue. Unlike Hulu and Amazon Prime Video, the world's leading streaming service offers every single customer a completely ad-free viewing experience. And people are into that. 

So without ads, how does Netflix manage to make money?

In this video, we're going to break down exactly how Netflix's unique business model allows it to capture such a sizable audience, and how its vision for the future could cement the streaming disruptor as a bona fide media titan.

In 2018 Netflix brought in a total of $16 billion in annual revenue, up 35% year over year. The online streaming platform also grew its net income to $1.2 billion last year, double what it was in 2017. But where does that money come from? 

All told, roughly 139 million users pay between $8 and $16 to Netflix to stream shows, documentaries, and films every single month. In fact, in the U.S., Netflix's biggest market, an estimated 54% of households now have the streaming service. That's a lot of people binge-watching in their pajamas. 

Last year alone, Netflix accounted for 10% of all overall screen time in United States, which adds up to 100 million hours of television per day. 

More eyeballs means more stream time, and for Netflix, more paying members. 

But it's not just uninterrupted reruns of The Office and Friends that keep Netflix at the front of the pack. Netflix, which started as a DVD rental company, also produces its own original content: shows you just can't find anywhere else and just can't put down. 

The company has created full-blown frenzies with its original content -- so much so that releases like Bird Box have become cultural events. The company estimates around 80 million member households watched the blockbuster in the first four weeks following its release. 

Netflix has been a steady hit maker with its originals, and created tentpole franchises with House Of Cards, Stranger Things, and Ozarks, among others. These titles build buzz, bring in new members, and keep loyal fans happy, but they don't come cheap. Instead of licensing this content, Netflix is paying the upfront cost to produce and market it. 

In 2018, the company spent around $12 billion on content, up from $9 billion a year ago. In 2019, the company is targeting a content spend of $15 billion. 

While Netflix is profitable, on a cash-flow basis, this content spend actually takes the company negative. 

In 2018, Netflix had a free cash flow of negative $3 billion. And they plan to burn through an additional $4 billion next year. You heard that right. That's billion, with a B. 

The company is taking on debt to build out its content library of originals. The plan is to eventually scale that spend down over time as the archive becomes so big that even the most avid binge-watchers can't cruise through it all. 

It's a bold strategy, but so far it's working. As of today, Netflix is the seventh-largest internet company in terms of revenue. 

Thanks for watching. If you have a company you'd like to see us break down, mention it in the comments section below, and be sure to like the video and subscribe to get more videos like this one from The Motley Fool. 

Check out the latest earnings call transcript for Netflix.