Evidence of Diseconomies of Scale in Subscription-Based Video on Demand Services: The Case of Netflix

This study provides evidence of diseconomies of scale in Netflix, a major subscription-based video-on-demand (SVOD) service provider. This challenges the common belief in prevalent economies of scale for such e-businesses. Our analysis is based on a comprehensive dataset, where we have collected and combined publicly available and audited financial data, primarily sourced from Netflix’s 10-K reports. A second contribution of this study is the user-cost models employed in our analysis—specifically, a baseline linear model, a power law model, an exponential model, and a logarithmic model. Despite their clear relevance, such models are largely absent from discussions on SVOD business models, a gap we address and exemplify here. Applying these mathematical models to Netflix’s financial data reveals a super-linear increase in costs relative to user growth, indicating rising per-user costs characteristic of diseconomies of scale. Management strategies differ significantly between firms operating under the assumption of economies of scale and those experiencing diseconomies of scale—an important distinction, particularly as firm size increases. Our findings offer critical insights into SVOD service scalability, challenging prevailing assumptions and informing expectations about cost dynamics in this industry.