The feature: Netflix is a company based in California founded by Reed Hasting sand Marc Randolph
in 1997, which engages in digital streaming services for several film and television programs, including
the Netflix programs themselves. According to Statista, Netflix has 481,450 customers in Indonesia,
and the number is expected to double to 906,800 in 2020. There are three packages offered by Netflix
for customers in Indonesia who are free to choose for paying monthly subscriptions od Rp109,000,
Rp139,000, or Rp169,000. Assuming that those 481,450 Indonesian customers subscribe the
cheapest package of Rp109,000 per month, at least Netflix B.V. will definitely reap Rp52.48 billion per
month. It means that for a year the company earned a minimum income of Rp629.74 billion.
(1) How to make the Subscription Business Model work that Netflix is based upon
▪ Some of the biggest tech companies have made Software-as-a-Service (SaaS) a
pillar of their business model, take Microsoft, Oracle,
▪ One of Apple’s biggest growth areas is their service offerings. Salesforce,
Workday are prominent companies that were SaaS from day 1.
▪ The Subscription Business Model is probably the most popular revenue model
among the SaaS.
▪ Netflix, too, uses the Subscription Business Model as their revenue model
▪ There are also other revenue models within SaaS, such as pay-as-you-go, e.g.
Amazon Web Services uses both
▪ There are 12 important elements you need to know to make the Subscription
Business Model work (successfully)
(2) Netflix Economies of Scale are a crucial underpinning assumption of the
subscription business model
▪ One of the most fundamental microeconomic principle underpinning
the Subscription Business Model are Economies of Scale
▪ It means that as you scale up your company, your revenues grow faster than your
costs
▪ Especially fixed and overhead costs are assumed to be growing slower than
revenues
▪ But is this really always the case? Well, nowhere close to what you learn in your
economics 101 courses
▪ The reality is more intriguing and challenging for innovators
(3) Netflix Dis-economies of Scale: how – in reality – this key assumption doesn’t hold
true for Netflix
▪ Here is a spoiler alert: Analysing Netflix’s financials over 20 years is revealing
▪ And it shows significant examples of dis-economies of scale
▪ You may call those one-off periods of innovation or transformation
▪ But in reality, these periods stretch over more than 5 years at a time
▪ And they are due to typical challenges that all innovators face
(4) Netflix Crucial metrics: Contribution Margin or the key metric that puts an
envelope to investment decisions
▪ The Subscription Business Model is characterised by continuous investments
▪ But at the same time, you can’t ignore the need for operating profits
▪ Netflix’s key investments are in (1) Content; (2) Technology; and (3) Marketing
▪ Netflix has been pointing out the importance of the Contribution Margin metric as
their guide to investment
▪ Using their annual reports, we are diving into their 3 business segments (each
being in a different phase):
▪ (1) US DVD (sunset phase); (2) US Streaming (maturing phase); (3) International
▪ Streaming (growth phase)
Machine Learning
Using results from past manual QC checks, a supervised machine learning
(ML) approach was used to train a predictive quality control model that
predicts a “fail” (likely has content quality issue) or “pass.” If an asset is
predicted to fail QC, it is sent to manual QC. The modified supply chain
workflow with the predictive QC model is shown below.
A key goal of the model is to identify all defective assets even if this results
in extra manual checks. Hence, we tuned the model for low false-negative
rate (i.e. fewer uncaught defects) at the cost of increased false-positive
rate.
