Sunday, November 25, 2007


Well, my first Netflix movie arrived on Friday, and I watched it tonight: Ratatouille. Fun movie, with great animation during the credits... perhaps as fun as the credits in Casino Royale. Anyway, this post is not about Ratatouille.

It amazes me to some degree how Netflix is profitable, at least for people who choose the $5 a month plan. They must do some serious evaluation of their expenses to be able to profit from a $5 service. I assume that they get DVDs for very low cost since they don't ship the cover artwork or anything else besides the disc, and that each disc lasts for a hundred customers. I guess that they also probably do so much business in bulk that they can get good rates for their shipping. Their packaging is very lightweight and efficient, and the same package is used for the initial trip to you and the return trip to their processing center. So, maybe each movie costs them 10¢ worth of DVD, and twice 40¢ worth of postage, or a little under a buck. So, my $5 service costs them a couple bucks, minus the costs of maintaining the website, the costs of hiring people and maintaining machinery to select and fulfill orders, and other miscellaneous overhead. So, I guess that they could, in theory, operate on roughly $2.50 or $3.00 so, using wild-guess figures pulled directly from my ass. I guess that's pretty good, and with a lot of people subscribing, they could be profitable on that.

I'd assume that they make more money from customers who choose more expensive plans and don't take full advantage of them, and also on fees for people who lose movies, and for the used DVDs that they sell for six bucks. By offering the cheaper plans, they make their service appeal to even cheapskates like me who are averse to renting yet don't want to pay much money, hoping to sucker me into a more full-featured subscription sometime down the line. I'd bet that they were initially quite unprofitable, but now that they operate in bulk, they can probably do pretty well for themselves.

Thinking about these sorts of things is what interests me (slightly) about business: sort of passively musing about profitability of different ventures without actually putting much thought or effort into it. I wouldn't have really thought that online DVD rentals would really be a good way to make money, but it seems that someone put a lot of effort into designing a streamlined operation, cost-efficient packaging, and the right amount of marketing to make it all work.

Either that, or Netflix is losing money.

(I cheated and looked things up. Even a year and a half ago, Netflix was quite profitable, and their margin was 37.1%, up considerably from a quarter before. So, my imaginary and nearly-baseless figures of ~50% cost are possibly actually reasonably accurate.)

No comments: