The given macroeconomics research paper will focus on the multimedia service provider Netflix. The company’s structure is a subscription-based streaming platform, where viewers have an opportunity to watch both Netflix’s original films and other contracted ones. The primary attention will be paid to the macroeconomic structure of Netflix as a multinational company. The central purpose is to analyze and assess the intricate economic components of Netflix.
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The chosen industry is multimedia, and the service is a streaming platform, which are key elements of Netflix’s business model. It is interesting due to the overall ease of access and availability of the company’s products. In addition, Netflix’s success and growth should be studied in order to understand essential macroeconomic principles. The company’s business model mainly involves individual viewers and businesses that allow it to stream their movies. Setting up a functional and profitable streaming platform is highly difficult because there is no actual scarcity for films. In addition, incentives need to be properly adjusted in order to make the company attractive to consumers. Therefore, Netflix is an outstanding example of a company finding a unique position in the market in order to draw interest.
It is important to note that there is no actual scarcity of movies on the internet. There are pirated movie websites, which can be easily accessed and non-pirated movie providers. However, Netflix became successful by delivering original content, such as Netflix’s original series or movies. This increases scarcity for these services and sets up incentives to subscribe to Netflix. The majority of comedians use Netflix to film their Netflix Specials, which is considered as a hallmark of their success. The company is not a film production company, but multimedia creators want to use Netflix due to its marketing power. The services are provided to English speaking individuals because the content on the platform is mostly in English. These choices promote both self-interest and social interest because Netflix becomes highly profitable due to its unique positions, and the society is interested in its services.
Production Possibilities Frontier
One should be aware that electronic products and services are not limited by raw materials or storage time, which makes them essentially abundant. In the case of Netflix and any other multimedia company, the primary limitation is the viewers’ attention and time. Major platforms, such as YouTube and Netflix, compete for viewership, which is an only scarce resource for these websites. Therefore, the Production Possibilities Frontier will contain Netflix movies and series as a product A and other films as product B, and the boundary is determined by the number of people that can watch the content as it is shown in Figure 1. The industry of movie and TV series production does not utilize their different products and services to the maximum, because the number of people that can potentially view the content is large. However, the main issue is the marketing element, where people’s attention and interest are scarce resources. However, in the case of streaming platforms and social media, the companies are utilizing the services to the maximum because the content is not produced by them.
In movie and TV series production, one does not primarily affect the other. The main reason is that a film is a project usually taking months at specific locations, whereas TV series are mainly ongoing long-term production activities. In the case of streaming movies and providing user access service, there is almost no production involved besides initial website development and maintenance. Therefore, there is no tradeoff of production among streaming service providers. The overall opportunity cost is challenging to determine in case of streaming service because there is no serious limitation. Netflix potentially can stream a vast number of movies and TV series. However, the opportunity cost comes in terms of viewership and content quality. Thus, the opportunity cost of streaming one movie is that another one will not get viewership. In case of costs, a streaming service can easily increase the output in terms of movies and TV series, but the marginal costs will go up. The primary reason is that viewership and content quality will go down, which will make the platform less attractive for both viewers and business partners.
Law of Demand and Changes in Demand Influence
The overall demand for a product is highly reliant on the price value. The Law of demand is influenced by two major forces, such as substitution effect and income effect. The former states that as the price of good increases, its relative price compared to substitutes also increases, which reduces demand (Botric & Tomic, 2018). The income effect states that as the price of good increases, a consumer’s income decreases, which means that he or she has fewer resources to fuel demand (Mankiw, 2018). Netflix’s primary source of income comes from subscription fees, and thus, an increase in subscription price would lower the total demand, because viewers would switch to other streaming platforms, such as HBO.
The income effect is less significant in this case, mainly due to low amounts of monthly subscription cost and high time cost of using the service. People will not buy the subscription because they will not have time to watch it and not because they have insufficient resources. Therefore, the demand for streaming platforms is primarily influenced by interest, time, and substitution effect, rather than consumer income and price of service. In other words, consumers’ demand is driven by the quality of content and availability of leisure time rather than the price of the subscription. The latter will be a determining factor if it increases significantly.
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The supply of products or services also heavily influences the price and value of a good. It is important to note that there are six supply shifters, such as the number of sellers, natural events, seller expectations, technology, returns from alternative activities, and prices of factors of production (Heijdra, 2017). In the case of a streaming service, such as Netflix, the number of sellers and prices of factors of production does not affect the supply because movies and TV series are electronic goods with no limitation of reproducing and duplicating the product. The streaming process is not similar to production, and thus, Netflix’s supply in terms of a subscription is limitless. Only natural events and technology can influence the overall supply, where a major disaster can terminate the functionality of the platform resulting in zero supply. In addition, technological advancements could potentially reduce the maintenance cost of the platform, which could lower the subscription price, but supply will not be affected.
Seller expectations and returns from alternatives sources would have a minor impact on Netflix’s supply and price relationship. It is due to the relatively low maintenance cost of the streaming platforms, which can be preserved even during a negative prognosis. The company can easily seek out other alternatives without preceding the current business. The current price of Netflix subscription is equal to $12.99, and as it was mentioned before, there is no real limitation for subscription quantity (Johnson, 2019). Thus, the current prices are determined by the interest and attention only. The service is above equilibrium due to a lack of supply and low prices.
Gross domestic product (GDP) is a macroeconomic indicator of market value derived from all products and services within a specific period of time. Netflix has 0.452B outstanding shares, and the current market price of each share is $434.05 (“Netflix, Inc. (NFLX),” 2020). Therefore, the market value of Netflix is equal to 452,000,000 * 434.05 = $196 billion. The company’s streaming service is a final good because it solely consumed without further reselling or modification. The services sold by Netflix are part of US GDP only because the company does not need operations from other countries. It is counted as part of quarterly GDP because it does not take more than a quarter to stream a piece of content.
In conclusion, it is important to understand that Netflix and other online businesses do not strictly follow major macroeconomic principles. The results mean that an electronic product or service has no real limitation of duplication, which means that the supply of subscriptions is unlimited. Therefore, the demand is determined by the overall interest and attention of viewers. The number of interested consumers defines the price of service, which is reliant on the content quality. The implication on online businesses is that marketing and attention-drawing are essential where there is no limitation for supply. The research matters because it shows that the role of marketing is becoming more vital.
Botric, V., & Tomic, I. (2018). EU-Mediterranean youths in the crisis: Substitution vs. income effect. Journal of Youth Studies, 21(5), 653-668.
Heijdra, B. (2017). Foundations of modern macroeconomics. Oxford University Press.
Johnson, D. (2019, May 30). ‘How much does Netflix cost?’: All of Netflix’s subscription plans, explained. Business Insider. Web.
Mankiw, N. G. (2018). Principles of economics. Cengage Learning.
Netflix, Inc. (NFLX). (2020). Web.