Microeconomics – Netflix



Thispaper seeks to explore the various costs that NETFLIX as faces tohelp describe the market of NETFLIX. The paper analyzes the fixed andvariable costs of the firm and how the costs have changed over timeand the manner in which the changes have impacted the overall healthand sustainability of the organization. While doing the analysis, thepaper demonstrates the market power of the firms as well as theability of the firm to influence the market. The paper will alsoanalyze the major trends in the market and those that concern the newproducts, technologies, and new entrants. Further, the future healthof the firm will be determined to help in deciding and shaping thefinal recommendations and the place of the firm.

Costsof Production

ForNetflix, the costs of production have been on the rise given that thecontent cost have risen steadily. Reviewing the trend of the contentcost, there has been an increase. The increase has been fromapproximately $7.2 billion at the end of financial year 2013 toslightly more than $8.8 billion by September 2014. This trend showsan increase of more than $1.6 billion just within the first3-quarters of the financial year 2014. Reviewing the trend, the costof revenue which is the variable cost increased by approximately $430million, with the cost standing at $2.73 billion. The increase in thecost of revenue was triggered mainly by increase in the contentexpenses that surged by more than $376 million from $1.6 billion to$1.97 billion. With the increased content costs, there is increase inthe contribution margins of both domestic and international streamingsections. The international segment has not been quite profitable andit was forecasted to be at -14.5%. Notably, with increased pressurefrom increased content costs and the high marketing costs for theinternational operations, there is likelihood of lower margins.

Interms of the expenses that the company faces, the variables costsseem to be quite high. Some of the variable costs that the companyfaces include the licensing and acquisition of streaming content,which highly depends on the content available as well as the costsassociated with paybacks of streaming content library. These costsaccount for 70% of the total expenses incurred. The technology anddevelopment expenses also increased mainly personnel related costssuch as those of supporting technological growth and increasedemployee compensation. Netflix has also witnessed increase in generaland administrative costs owing to increase in personnel relatedcosts.

OverallMarket for Netflix

Inthe binge watching TV and movies section, the main competitors ofNetflix include Hulu and Amazon Instant Video (AMZN). Netflix remainsone of the industry’s top contender with a command of 37.2 millionsubscribers in 2014 and revenue exceeding $4 billion. The growth ofNetflix is attributed to the ability to adapt to the changingenvironment in both video streaming and cable industries. Netflix isdifferent from its competitors as it provides access to originalNetflix programs like the House of Cards series. In contrast toNetflix, Hulu has approximately 6 million subscribers and generaterevenue of approximately $1 billion. The success of Hulu isattributed to the ability to supplement cable television rather thanreplacing it. In terms of market share, Netflix boasts of a goodmarket share approximately 57.5% of video streaming market by firstquarter of 2014. While operating in support of all the major cablenetworks, Hulu commands 10% of the market share. Being that AmazonInstant video replicates the functionalities of Netflix, it does notcommand approximately 13% of market share by 2014 an increase of0.16% from the previous year.

Someof the major barriers to entry in the field include acquisition,creation, and licensing of content. The other barrier that faces thenew entrants to the market is acquisition of the network capacity tohold a significant amount of video content and at the same timesupport substantial website visits without ever crashing. Thecapability is often expensive and prevents most competitors fromventuring into the market. A case in point is the first licensingdeal of Netflix with Starz that cost them $30 million dollarsannually to show their content. Every year, Netflix pays CBS and Foxapproximately $250 million dollars to air their programs. Even thoughthere are strong barriers to entry in the online video streamingindustry, Netflix has managed to sail through given the technologicaladvances.

Themarket structure in which Netflix operates is oligolistic in natureas it has very few large companies, including Hulu and Amazon InstantVideo. The setting of prices is more of inductive with one companychanging the prices and the rest does the same. Seemingly, there isstiff competition in pricing.


Tomanage future production, Netflix need to manage the production cost.Management of production cost is to entail efficient management ofcontent. The cost of content has risen and Netflix needs to go foralternative and efficient content development methods whilemaintaining quality.

Inorder to manage costs and ensure quality continuous production ofcontent, Netflix being a leader in the market needs to develop newcontent every four weeks. At the same time, the company needs tomaximize reach to its customers to ensure that it maintains loyalcustomers who will be satisfied with their content and even offerfeedback to the company in regards to any hitches or improvements tobe made to the content developed (Vigeland,2012).

Inorder for Netflix to sustain success in the industry, there is needfor the firm to study the price trends in the different market itoperates. Reviewing the products of Netflix, it is evident that theyhave elastic demand. The products from Amazon Instant Video, which isa replica of Netflix, can easily substitute the Netflix products.Netflix can consider reducing the price of their goods and a decreasein price will raise the demand and thus increase the total revenue(Vigeland, 2012).


Vigeland,E. (2012). Control and Innovation on Digital Platforms: the case ofNetflix and streaming of video content.