Netflix accounts for licensing and production costs by capitalizing them (making them an asset) and expensing them over time (amortization). These amortized costs are categorized as Cost of Revenue on the Income Statement. Cost of Revenue was just one-third of Netflix’s revenue in 2003, but it has come to dominate Netflix’s Income Statement since that time.
Cost of Revenue ate up 63% of Netflix’s revenue in the 2018 fiscal year, which reflects the increased cost of licensing and producing content over the past 15 years.
So now what?
It’s not going to become cheaper to produce or license content anytime soon. There are substantial fixed costs associated with providing content to subscribers and there isn’t much Netflix can do about this. While the fixed costs are high, the marginal cost of serving an additional subscriber is very low. If a new person signs up for a Netflix account right now, this costs Netflix next to nothing.
Netflix is a company that was built for scale.
Content costs aren’t coming down, so Netflix simply needs to continue its massive subscriber growth in the hopes that it will reach a critical mass where it becomes cash-flow positive. Whether Netflix will reach this point before lenders stop giving the company money is an open question.