Greetings brodeur!
Netflix makes a profit by charging a monthly fee that is higher than
the costs of sending out five or so DVDs to a subscriber each month.
Their business plan seems to assume that there will not be many "power
renters" (subscribers who try to take out as many DVDs as possible).
One person writes:
"I believe Netflix starts to lose money when you rent more than six
per month. This may become five per month now that they're lowering
prices from $22 to $18. The silver lining, for them, is that a lot of
the 'power renters' are also evangelizing and giving Netflix free
advertising.
above quote from
"A Netflix Odyssey":
http://raven.phoenyx.net/netflix/2004/10/waah-waah-i-cant-get-more-than-twenty.html
Also as noted on the above page, "there's a point where a customer
starts costing Netflix money" although it's a little hard to determine
what that point is without seeing all of Netflix's accounting books.
This next site has a good summary of the Netflix business plan:
-------------------------------------------
"In essence, Hastings [the founder of Netflix] is running a
fulfillment service. Each day, he pays someone to open incoming mail,
scan and store the enclosed DVD, and someone else to pick and pack
newly selected DVD's. He also pays the postman to carry the DVD's back
and forth to his customers. At the core, that's his business. The
number of DVD handlers he hires rises and falls in direct proportion
to his business volume.
"In addition to the DVD handler costs, he has overhead costs. That
includes rent, interest, equipment, utilities and people to maintain
his website, negotiate contracts, sweep the floor, answer the phone,
write blurbs about the various DVDs, cut paychecks, pay bills and so
on. Those costs are somewhat fixed in that the expenses are needed
regardless if Netflix has one or one million customers. In any
business, you try to minimize both costs but the key to a high volume
business is to make sure you make at least some money on each
additional transaction.
"It's that last bit that's hurting Netflix and it's hurting them big
time. The average customer signs up for the three-DVD out plan which
means the customer can keep up to three DVDs indefinitely in exchange
for a $19.95 monthly fee. Netflix's problem is that the average
customer rents 7 movies a month making the average gross a little
under $3 per rental. When the customer returns one or all their
DVDs, they get new DVDs. And there's the rub. The happier the
customers are with the service, the more it costs Netflix to service
them. Since Netflix's income is fixed at an average $20 per month the
last thing they want happening is customers using their service
because that drives their operating cost up. It's a peculiar business
model in that the happier your customers are the more money you lose.
"So Netflix compensates for that quirk in their business plan. If
you're a heavy Netflix user, Netflix treats you to their
passive-aggressive service model. Instead of turning the DVDs around
as soon as one arrives, they'll delay shipping your next DVD. Remember
that huge library of DVDs that gave them a competitive advantage over
the local outlet? It doesn't do the cinephile much good if Netflix
won't ship to them."
-------------------------------------------
above text from "Netflix Bluffs A Price Increase"
http://www.kuro5hin.org/story/2004/4/18/14547/1054
One thing Netflix has had to do in the past year has been to reduce
the monthly fee to fight of competitors such as Wal-Mart and
Blockbuster. The lowering of fees will obviously have an effect on
profits in the short run. The kuro5hin.org article I linked to above
analyzes this a bit more, I highly recommend you read all the text
over there.
It seems like lots of people are trying the non-Netflix alternatives.
For example, on this page people comment on their experiences with
Netflix and Blockbuster:
"Blockbuster Lowers Price to $14.99":
http://www.hackingnetflix.com/netflix/2004/12/blockbuster_low.html
Some people, including the following guy, predict that Blockbuster and
Netflix may even merge:
"But earlier this year, when Blockbuster dropped its monthly online
DVD rental fee to $17.50, NetFlix lowered its price to $17.99. The
decision alarmed some Wall Street analysts who opined that NetFlix
could not succeed for long by shrinking revenues. Now that
Blockbuster has lowered its price again, investors will become even
more wary of NetFlix's future if it follows suit.
"But to stay competitive, NetFlix will have to lower prices again.
(Late today, NetFlix said it would not match Blockbuster's price. At
least for now.) If it doesn't, even loyal subscribers will be tempted
to shift allegiances and sign up for Blockbuster's hard-to-believe
offer. But unlike Blockbuster, NetFlix can't last for long with a
subscription rate under $15."
"Blockbuster & NetFlix Will Merge"
http://www.tvpredictions.com/blockbustermerger122204.html
Despite the recent price wars, Netflix seems to be doing fairly well.
As noted from their recent earnings report:
"Netflix ended December with 2.6 million subscribers" and "fewer
customers are canceling the service." Also, Netflix "earned $4.8
million ... during the final three months of last year. That compared
with net income of $2.3 million ... during the same 2003 period."
"Netflix Profit Doubles in Q4":
http://www.newsfactor.com/story.xhtml?story_id=29963#story-start
"Nextflix profit up":
http://money.cnn.com/2005/01/24/technology/netflix.reut/
And going back one quarter, "Netflix Inc. said Monday its
third-quarter [2004] net profit will far surpass its previous forecast
because subscribers who pay a set fee every month had rented fewer
movies than expected, leading to lower costs."
"Fewer rentals=higher Netflix profit":
http://www.videohelp.com/forum/archive/t239878.html
For more of Netflix's financials, check out Yahoo's "Summary for
NETFLIX INC" pages:
http://finance.yahoo.com/q?s=NFLX&d=t
One last thing: One article lists "Borrow a business model" as a "hot
business trend" for 2005. Specifically, they state: "Charging
members a set monthly fee to borrow an unlimited number of DVDs by
mail worked for Netflix. No wonder smart entrepreneurs have since
"borrowed" Netflix's business model to use in other industries. Los
Angeles-based GameFly rents video games by mail; Booksfree.com in
Vienna, Virginia, lends paperbacks by mail; and in perhaps the most
creative twist we've come across, Bag Borrow or Steal, in Sunny Isles,
Florida, lets its fashion-mad members borrow designer purses by mail.
Is there a smart concept you could borrow?"
"Hot business trends for 2005":
http://www.entrepreneur.com/article/0,4621,318038,00.html
I hope this information is helpful. If you would like for me to
clarify any part of my answer or further research your question,
please let me know before issuing a rating. Thanks!
leep-ga
some search strategies used:
netflix "business plan"
netflix profit |
