Would a streaming service have more fixed or variable costs? How do you determine what costs could be more in a business if you don’t know much about it?
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Streaming service cost
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Are you referring to a service like Netflix? Personally, the question I would ask is “how significant is the incremental cost of each additional customer?”. In a case interview, even showing that thoughtfulness, gives the interview a very different impression - remember, they are not testing for your knowledge and more of HOW you think. For a media streaming business, one of the major costs is content purchasing or creation which is usually a “fixed cost“ and the incremental customer acquisition cost is marginal in comparison.
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Hi there,
Literally the reason why the FAANGs are dominating the market is because Tech fundamentally has extremely low variable costs!
In other words, they have huge economics of scale.
Netflix spends a lot on Fixed Costs (buying movies/show, improving their product, etc.).
One additional subscriber costs them cents in terms of variable costs (servicing them).
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A streaming service would likely have more variable costs than fixed costs. These variable costs would include content licensing fees, marketing expenses, and cloud computing costs based on the amount of traffic the service receives. Fixed costs would include salaries, rent, and equipment. If you don't know much about a business, you can start by researching the industry and looking at the financial statements of similar companies to get an idea of the typical cost structure. You can also consult with professionals in the industry or hire a consultant to help you assess the potential costs of the business.
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Thanks, why is content purchasing and creation a fixed cost? Doesn’t each movie have a different budget typically? And could get purchased at different premier rates too depending on cast, quality etc?
Yes but "variable" cost is about whether the cost varies by sales or production volume. Whether Netflix has 200M or 250M subscribers shouldn't directly impact the purchasing or creation cost of particular content.
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