Thought Of The Day: Netflix

Netflix have an interesting business model. From the outset, you might think that their business is all about having the best shows to get all the customers, but they’ve found a more profitable way. They make shows, run them for a bit to prove their success, make money on them, then sell them to other providers.

This seems counter-intuitive at first, because why sell the golden goose and give a competitor a chance? Well, the answer to that lies in the sale price. If they can sell the shows for (say) 10 times the annual revenue the show would generate, then they can use that money to make more shows and end up with more money than they otherwise would have earned from just running the show themselves. This way both the competitor (who invests free cash into an asset that returns 10% ROCE) and Netflix who end up earning more money.

This model is not dissimilar from business owners selling their business. If you’ve built up a successful business, you should probably consider selling it and trying something new. Alternatively, perhaps you can sell part of your business (or shares in your business) like Netflix are doing by selling their shows and listing on the stock exchange, so you can use funds to invest in growth and make your business more successful.