More than two decades ago, Jeff Bezos and Amazon ushered in the term “flywheel” to the modern business lexicon, describing how various components of Amazon’s e-commerce ecosystem feed off one another to propel the business forward.
Now, after Netflix’s market value surged more than $40 billion following a blowout earnings report on Tuesday that revealed record subscriber growth, it’s clearer than ever that one of Amazon’s biggest streaming rivals is doing the same.
“The virtuous cycle continues (invest to earn engagement -> lower churn -> better cash flow -> investment -> engagement …),” is how Jason Kilar, an early Amazon executive who went on to run Hulu and then WarnerMedia as CEO, put it in a tweet on Tuesday.
Jeff Wlodarczak of Pivotal Research Group had a slightly different, but nonetheless positive, take on Netflix’s flywheel in a research note following the earnings report.
“The key for NFLX going forward is to press their advantages and keep the subscriber/ARPU flywheel going,” he wrote, using an abbreviation for average revenue per user, “because the larger they get the more leverage they have over their peers/content creators, the better their product gets (allowing them to drive subscriber/ARPU growth), the more cash they have to spend on compelling content and the bigger the moat grows around their core business model.”
At Amazon for example, the flywheel worked something like this: More selection has historically led to a better customer experience; a better customer experience attracts more shoppers; more shoppers attracts more sellers; and more sellers leads to more selection. All of those components then play a role in propelling revenue growth that can be invested in warehouses that foster faster delivery speeds and increased customer ordering, or into Prime Video programming that leads to more customer engagement. Those additions result in a better customer experience that spins the flywheel faster.
Back to Netflix: Chief financial officer Spencer Neumann also highlighted his own spin on how Netflix’s version of the flywheel works on Tuesday’s earnings call. “The flywheel starts with engagement,” Neumann said. “It’s engagement, revenue, profit, and it drives the flywheel.”
The scariest part for Netflix’s legacy content rivals like Paramount Plus or Disney is that one of Netflix’s key new levers to increasing ARPU is still in its infancy: advertising.
On the company’s earnings call with Wall Street analysts, Netflix executives described the company’s ad business as just now progressing from the “crawl” phase to the “walk.”
As a reminder, Netflix introduced an ad-supported tier a little over two years ago, allowing consumers to pay a lower monthly fee in exchange for having ads interspersed in the shows and movies they watch. It was a big change for Netflix, and it’s proved popular with viewers; some 55% of the company’s nearly 19 million new subscribers in the fourth quarter joined via the advertising tier. Along the way, Netflix doubled its advertising revenue year over year, and plans to do so again in 2025, co-CEO Greg Peters told analysts on Tuesday. (Netflix doesn’t break out its advertising revenue, but Macquarie Equity Research predicts it will hit around $2 billion this year.)
Netflix has been testing out its own tech stack to serve ads in Canada, and plans to roll it out in the U.S. this year. Company executives say it will lead to better ad targeting for marketers, and more relevant ads for subscribers.
And the streaming leader is forging another big lever to attract advertisers to its platform: live events. From sports to concerts to awards shows, live events give Netflix a familiar and compelling offering for advertisers looking to move ad budgets over from traditional TV or from streaming rivals.
Even for subscribers who pay for no-ad tiers, Netflix still shows commercials during live events—like the blockbuster Mike Tyson–Jake Paul match, or during the next two women’s World Cups, whose rights Netflix has secured. And these types of appointment viewing spectacles, as Amazon has learned with its NFL and NBA deals, attract the type of big-brand ad spending that make ad sales leaders drool. And propel the flywheel further.
“With each additional big sports licensing deal the Netflix team inevitably signs, I do believe it will result in even more engagement for the service and thus, lower churn,” Kilar, the former Hulu CEO, tweeted. “Such that the flywheel can spin faster. Smart moves.”
Are you a current or former Netflix employee with thoughts on this topic or a tip to share? Contact Jason Del Rey at jason.delrey@fortune.com, jasondelrey@protonmail.com, or through messaging apps Signal and WhatsApp at 917-655-4267. You can also contact him on LinkedIn or at @delrey on X, @jdelrey on Threads, and on Bluesky.
