How do streaming services earn money?

The cash influx is pretty obvious, as these services have a subscription fee.

Both services are releasing original movies and shows which are exclusively available in their platform. But what's the purpose?

If Netflix has no original content, they have to pay for licensing for everything they have on display. But if they own the product (= Netflix originals), then they don't need to pay a licensing fee to themselves.

This is nothing more than cutting out the middle man.

Isn't it an investment they make for the shows?

It's indeed an investment, with the promise of paying dividends in the long term.

A simpler example would be to buy a bread machine instead of going to the bakery every day. While it is true that the bread machine is initially more expensive, you start saving money if you've used the bread machine for a long time (thus not continually spending money at the bakery)

How do these streaming services earn compared to traditional TV channels which can benefit from ads?

The math is simple:

Profit = money earned - money spent

If you make more money than you spend, you turn a profit. That's pretty much the definition of profit.

How do streaming services earn money?

The one you mentioned Netflix and Amazon Prime don't have ad revenue. So they are dependent on subscription fees.

Is it based exclusively on user memberships or are there other factors?

There are other factors too. Take the case of Indian Amazon Prime exclusive show Baahubali: The Lost Legends which is now run on Colors too, so streaming site does sell their exclusive shows to other networks. Even few small streaming networks sell their content to other streaming sites like in India ALTBalaji makes exclusive shows but they made a deal with JioTV too and now many of ALTBalaji shows available on JioTV.

From makeuseof:

Netflix’s main source of revenue is subscriptions, which cost between $7.99 and $13.99 per month. This totals to about $950 million per month, according to the company’s earnings report. It also earns about $30 million per month through DVD rentals. The profit, or net income, is approximately $43 million per month.

The same article also talks about Netflix debts:

Netflix’s Free Cash Flow (FCF) was around -$2 billion in 2017. The company currently has a total gross debt of $4.8 billion. That said, it is making profits each quarter, and they are growing.

Netflix says the debts are part of its strategy, as it continues to grow its original content. It’s a “spend money to make money” outlook, as Netflix tries to get people hooked to its service. If people look forward to one new show or movie every month, they are more likely to subscribe and/or continue subscriptions to the service. The strategy seems to be working, as the company is consistently adding 5 million subscribers every quarter.

For Amazon they give cheaper bundle deals, you get free delivery, prime-videos and prime-music together with single fees. In India Prime gives the whole deal for 999/- Rs only for a year. Of course it's not huge earning for now but an investment for future gains from the growing market.

And don't forget about Product placement, here is a list of product placement example from Bright.

Netflix has a subscription fee and has more than 110 million subscribers worldwide. This resulted in more than 11 billion USB revenue and about 4 billion USD gross profit in 2017.

Prime has a subscription fee too and additionally you have to pay a couple of coins for watching of many series and films.

That's how these services earn money.

Netflix has 100 million or more subscribers. If they each pay 10$ per month give or take, that is 12 billion dollars per year

The total box office revenue for a blockbuster movie is on the order of 600 million dollars. For all of Hollywood, it is in the single-digit billions.

Netflix's revenue is enough that they could produce every single movie made by Hollywood.

Now, Netflix has costs. They have content to license, they have software to write, they have bandwidth to pay for. And in some areas, they have ISPs to bribe for the right to connect to their customers.

Netflix has obvious sources of revenue. Making money consists, at the first order, on spending less money than they take in.

In order to keep and gain membership, they have to offer a compelling package of shows to watch. Licensing TV shows and movies their traditional solution; originally when they started, these licenses where cheap, and they could offer a whole pile of content for little cost.

Over time these licenses are getting more expensive (partly because Netflix is showing how profitable having these licenses is).

Netflix's response has been to create more of its own content. This content both entertains current subscribers (encouraging them to stay) and excites and tempts people who are not currently subscribers. Netflix will market their shows to non-subscribers, and generate buzz, and encourage viewership in their best shows, in order to get existing subscribers to watch and enjoy them (which makes it less likely they cancel) and to get non-subscribers to sign up (which gets them new subscribers).

Netfix's doesn't make money directly from people watching their shows (unlike ad-driven network TV), but they do make money indirectly from people being happy with, or envious of, their service.

Other subscription TV works much the same way; Amazon, HBO, etc. Having a blockbuster must-see show can make them millions or billions of dollars as new people sign up to watch it, and stay around for the rest of the content.

Your question deals with "earning money", which by this, I will assume you mean "how do they profit?" - I'll deal with Netflix here, since it's a lot harder to figure out Amazon based on the different games they play with their money.

Fundamentally, a business profits when its revenue exceeds its expenses. Most people understand this. However, what most people don't understand is how expenses are accounted for - the financial and managerial accounting methods that tell you whether or not you're truly profitable.

Profit can't simply factor net income.

Let's say I invest $100,000 into a business. The business, in turn, makes me a net profit of $2,500 per year. Am I profitable? The answer is "it depends," but probably not. First, I have opportunity cost. What if I had invested $100,000 into the S&P 500, which returns an average of 12% over time? Or, over the last few years, it has returned 30%. I would have been much more profitable had I done that.

Further, profit is not the same as cash flow. I may generate a $2,500 profit with my business, but I have to keep sticking $3,000 per year into it. I'm cash-flow negative. This business may be turning a profit on the books, but it's a money pit. That's usually an unsustainable model.

Thus, by the standards of many investors, these services don't make money and are not tremendously good investments. Financials from NFLX show operating margin (before interest/taxes) around 4-6% on $11B in revenue, and that margin percentage has not increased year to year (in fact, it's trending downward). This is kind of a red flag when it comes to deciding whether Netflix is a good investment.

How does Netflix Stack Up?

Most solid investments are going to see operating margin around 12-20%. The Walt Disney Company, by comparison, sees operating margin of 26% on $55B in revenue. Disney happens to be a media powerhouse, owning the ABC and ESPN networks, along with its Walt Disney Studios Motion Pictures business and its theme parks. All of its businesses see unit operating margins above 15%, but its ABC and ESPN business is the most profitable by margin at around 28% (most companies group their operations such that each unit is above 15%, or whatever is industry-standard).

Compared to Disney, Netflix doesn't seem to have very good performance, at least today. While we'd all like to look in a crystal ball and predict what will happen in the future, from the immediate past, we can see that Disney has been far more efficient at converting sales revenue to profit dollars. Netflix, on the other hand, has been around long enough that it can be considered "mature technology" - and a serious investor has a reasonable risk that it will not be able to meet its financial obligations going forward.

On the question about their exclusive shows: The purpose of those is to offer something only they are having. For many movies and series you can pick either Amazon Prime, Netflix or some other service. The only way the streaming companies there can compete is by making the service cheap.

With exclusive content they produce a monopoly for those shows. Anybody who want to see a show has to pay them, as there is no other way to get it (legally) For this to work this must attract users, thus needs some level of quality compared to competing programs.

Well, first off, they have a fee to watch, normally this fee is monthly.

This allows them to pool in massive amounts of money monthly. To add on to this, they will also host ads, which, as they are a massive streaming company, with thousands of users watching those ads, it will pool in even more money.

We also have to take in account Netflix originals, in which, they dont have to pay a fee to host it, therefore gaining them loads of profit.

One thing that hasn't been mentioned yet is that they also release their original services on other formats, such as (believe it or not) DVD. My parents originally watched "House of Cards" on DVD from their library. The vast majority of users watch it on streaming, but original content can be licensed. This adds to the revenue stream.

Netflix also sells subscription cards which also are profitable even though they're a less steady stream. Add all of these channels up and the revenue stream gets pretty high. Plus I'm sure you'll eventually see product placement ads in original shows.

Television is a world market

And those foreign markets matter. That impacts (with force) the meaning of "Netflix Originals".

• Yes, in some cases, a "Netflix Original" is entirely a Netflix-bankrolled production like House of Cards. However, as often --
• "Netflix Original" describes independent productions for which Netflix only possesses the license in your market.
• Or productions started and initially offered by someone else, for which Netflix has bought the rights and is now sustaining it. I'm not talking about restarts like Fuller House or Arrested Development.

The upshot is this foreign involvement and licensing is a big part of the total revenue for any production. When the UK or Australia airs "House of Cards", that money helps pay for the production.

For some "Netflix exclusives", Netflix doesn't even bear the financial risk of the program's success - its popularity was proven in foreign markets, and they are simply licensing a known winner.