Netflix, Amazon Prime, or Hotstar. You might have heard of these popular OTT platforms. They offer unlimited content for a fixed fee. So ever wondered what these companies’ business models are?

OTT companies have two major sources of revenue. First is the conventional way of showing ads in between videos and the other being the subscription model.

The biggest cost for them is to generate content. Generating content is costly. Additionally, an OTT company has to shell out money first on producing content or by buying it from others. And later, they expect to receive money in bits from subscribers that pay a monthly or annual fee.

While these content costs are amortized over years in their books and might show the company to be profitable, the cash flow does not paint a pretty picture.

Generally, companies have a negative cash flow due to these heavy and increasing content costs every year. Companies have to generate more and more content to stay relevant in the market. In addition, they have other major expenses such as marketing costs and technology costs.

Companies thus have no choice but to look at outside debt or funding to finance these expenses. Their whole business revolves around the idea to take on debt to build their content library. The plan is to eventually scale this spend down over-time to ensure ample content for even their most avid binge-watchers.

It’s a bold strategy, but so far it’s working. OTT platforms have been gaining traction over the last few years and this trend seems to continue to be growing.