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AP Business Case Study · Unit 4, Task 2

Netflix: Changing the Scoreboard

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Unit 4 · Evaluating Performance and Using KPIs

A real-company case study for Unit 4, Task 2 of AP Business with Personal Finance, written in the same format as the course's business cases. Read the case, answer each question on your own, then open the sample answers to check your thinking. Facts are current as of October 2026, and every source is listed at the bottom.

The Case

Unit & taskUnit 4, Task 2: Evaluating Performance and Using KPIs
Topic4.2
Key peopleTed Sarandos (Co-CEO (since July 2020)); Greg Peters (Co-CEO (since January 2023))
Case years2021–2026 · Evaluation case
Key questionWhich KPIs best show whether Netflix is succeeding, and why did Netflix change the numbers it reports to investors?
Business Canvas componentsFinance, Customer, Market
Snapshot
  • Business: Subscription streaming service for series and films, with ad-supported and ad-free plans
  • Industry: Media and entertainment (streaming)
  • Key people: Ted Sarandos and Greg Peters, co-CEOs; Spencer Neumann, CFO; Jay Hoag, board chairman
  • Size: Passed 325 million paid memberships in late 2025; 2025 revenue of $45.2 billion
  • Ownership/Status: Publicly traded company

The Number Everyone Watched

For years, the number most people used to judge Netflix was simple: how many paid memberships it added each quarter. Netflix reported that count every three months in its letter to shareholders, along with average revenue per membership, or ARM. The company later explained why membership growth had mattered so much. Back when Netflix was small and earned little revenue or profit, a growing member count was the clearest evidence of how big it might become. By the end of 2021, Netflix had about 222 million paid memberships and $29.7 billion in yearly revenue.

A Surprise Loss and a Rebound

Then the scoreboard flashed a warning. In its April 19, 2022, letter, Netflix reported that it had lost about 200,000 paid memberships in the first quarter of the year. Its own forecast had called for a gain of 2.5 million. Part of the drop came from suspending its service in Russia, which cost about 700,000 memberships. Netflix also pointed to slow sign-ups in every region, sluggish economic growth and rising inflation, and more competition from the many streaming services launched over the previous three years. It added that its accounts were being shared with more than 100 million additional households, which made growth harder. The company forecast that it would lose another 2 million memberships the next quarter. For all of 2022, its operating margin slipped to about 18%, down from 21% in 2021.

Netflix responded with changes to how it sold its service. In November 2022, it launched a lower-priced plan with advertising in 12 countries. In January 2023, it said it would roll out “paid sharing” more broadly, asking members who shared their account with people they didn’t live with to pay extra. CNBC later reported that the crackdown on password sharing and the cheaper ad plan helped Netflix add 9.3 million members in the first quarter of 2024. Netflix ended 2022 with about 231 million paid memberships, 2023 with 260.28 million, and 2024 with 301.63 million. Its 41 million new memberships in 2024 set a record. Revenue and profit grew too: revenue rose 16% to $39.0 billion in 2024, and operating margin jumped from 20.6% in 2023 to 26.7%.

Changing the Scoreboard

Even as its membership numbers climbed, Netflix decided to stop reporting them. In its April 18, 2024, letter, the company announced that, starting with its first-quarter 2025 results, it would no longer report quarterly membership numbers or ARM. It had already stopped forecasting quarterly memberships in 2023. Netflix gave several reasons. Its business now produced large profits and plenty of free cash flow. It was building new ways to make money, such as advertising and fees for extra members. And because it had moved from a single plan to several plans with prices that differed from country to country, one new member could be worth far more or far less to Netflix than another. From then on, Netflix said, revenue and operating margin would be its primary financial measures. For customer satisfaction, it pointed to engagement, calling time spent watching its “best proxy for customer satisfaction.” It promised to announce major membership milestones as it passed them, and in January 2026 it reported that it had crossed 325 million paid memberships during the last quarter of 2025. Netflix also publishes a twice-yearly engagement report that it says covers 99% of all viewing on the service.

Measuring Against Goals and Rivals

Netflix compares its results with several kinds of standards. One is its own forecast. In January 2025, it predicted 2025 revenue of $43.5 billion to $44.5 billion and an operating margin of 29%. Actual 2025 revenue came in at $45.2 billion, up 16% from 2024, with an operating margin of 29.5%. Another standard is the competition. Netflix cites data from Nielsen on its share of all TV viewing time in the United States, which reached an all-time high of 9.0% in December 2025, up half a percentage point from a year earlier. Netflix noted that its share of TV time was still below 10% in its major markets, that traditional TV still made up more than 40% of U.S. TV screen time, and that YouTube had been moving into TV by adding live professional sports. Engagement grew more slowly than revenue: members watched 96 billion hours in the second half of 2025, up 2% from a year earlier.

Where Things Stand

In its July 16, 2026, letter, Netflix reported second-quarter revenue of $12.56 billion, up 13% from a year earlier. Its operating margin for the quarter was 33.4%, a bit lower than the 34.1% it earned in the same quarter of 2025. Netflix narrowed its forecast for full-year 2026 revenue to $51.0 billion to $51.4 billion and kept its target of a 31.5% operating margin, up from 29.5% in 2025. It said ad revenue was on track to roughly double to about $3 billion in 2026, and that members watched more than 97 billion hours in the first half of the year, up 2%. It also said its engagement report would move from twice a year to once a year starting in 2027. Netflix, led by co-CEOs Ted Sarandos and Greg Peters, was scheduled to post its third-quarter 2026 results on October 20, 2026. Investors who once waited for a single membership number now look at a set of measures led by revenue growth and operating margin.

Exhibit 1: Netflix results, 2021–2025
YearRevenueOperating incomeOperating marginPaid memberships (end of year)
2021$29.70 billion$6.19 billion20.9%About 222 million
2022$31.62 billion$5.63 billion17.8%About 231 million
2023$33.72 billion$6.95 billion20.6%260.28 million
2024$39.00 billion$10.42 billion26.7%301.63 million
2025$45.18 billion$13.33 billion29.5%Not reported (passed 325 million during Q4)

Operating margin = operating income ÷ revenue. Source: Netflix quarterly letters to shareholders for Q4 2021, Q4 2022, Q4 2024, and Q4 2025 (full-year financial statements and membership figures).

Reading Questions

These are the same for every case. They check that you caught the basics before you analyze.

1. Which business does this case feature, and what product or service does it provide?
The case features Netflix, a streaming entertainment company. It sells monthly subscriptions that let members watch series and films, and it offers both a lower-priced plan with advertising (launched in November 2022) and ad-free plans.
2. Who are the key people named in the case, and what roles do they play? Which other stakeholders — individuals or groups — have an interest in the business?
Ted Sarandos and Greg Peters are Netflix’s co-CEOs, who share leadership of the company and its strategy for growth. Other stakeholders include shareholders and investors, who use Netflix’s KPIs to judge the company; members (customers), including people who had been sharing accounts and were asked to pay extra; advertisers buying time on the ad plan; competitors such as YouTube and traditional TV; and data firms like Nielsen, which measures Netflix’s share of TV viewing.
3. Identify an opportunity and/or a challenge the business faces in this case.
A challenge came in early 2022, when Netflix lost about 200,000 paid memberships instead of gaining the 2.5 million it forecast, partly because its accounts were being shared with more than 100 million additional households. Opportunities included turning those sharers into paying members, earning ad revenue (on track for about $3 billion in 2026), and growing its share of TV time, which was still below 10% in its major markets.

Practice Questions

These apply the Unit 4 concepts from Task 2 to the case, in the style of AP free-response prompts.

1. Describe why Netflix decided to stop reporting quarterly paid memberships and average revenue per membership (ARM), and identify the KPIs it said it would emphasize instead.Topic 4.2 · LO 4.2.A
KPIs are measurable values a business uses to track progress toward its most important goals, and they should fit how the business makes money. Netflix said membership growth was a strong indicator when it had little revenue or profit, but by 2024 it earned substantial profit and free cash flow and had new revenue sources such as advertising and extra-member fees. Because prices differed by plan and country, each new membership could be worth a very different amount to the business, so a simple membership count no longer told the full story. Netflix said its primary financial KPIs would be revenue (for growth) and operating margin (for profitability), and that engagement, or time spent watching, would be its best proxy for customer satisfaction. It still announces major membership milestones, such as passing 325 million in late 2025.
2. Using Exhibit 1, calculate (a) the percent change in Netflix’s revenue from 2023 to 2024 and (b) Netflix’s operating margin in 2022. Show your work, and explain what the two results show about Netflix’s performance.Topic 4.2 · LO 4.2.B
(a) Percent change = (new − old) ÷ old = ($39.00 billion − $33.72 billion) ÷ $33.72 billion = $5.28 billion ÷ $33.72 billion ≈ 0.157, or about 15.7%. (b) Operating margin = operating income ÷ revenue = $5.63 billion ÷ $31.62 billion ≈ 0.178, or about 17.8%. The 2022 margin was the lowest in the exhibit and fell from 20.9% in 2021, which matches the year Netflix lost members and forecast more losses. By 2024, revenue was growing about 15.7% a year and the margin had risen to 26.7%, showing that after the ad plan and paid sharing, Netflix was both growing faster and keeping more of each dollar of revenue as operating profit.
3. Explain how Netflix uses benchmarks to evaluate its performance. Identify two different types of benchmarks from the case and explain how a result above or below each one could lead to business decisions.Topic 4.2 · LO 4.2.C
One benchmark Netflix uses is its own forecast, which acts as a business goal. In the first quarter of 2022, Netflix lost about 200,000 memberships when it had forecast a gain of 2.5 million; falling below this goal signaled a problem, which led Netflix to identify account sharing as a cause and respond with an ad-supported plan in November 2022 and a broader rollout of paid sharing in 2023, after which membership growth returned. In 2025, its 29.5% operating margin beat its 29% target, signaling that its strategy was working. A second benchmark is competitors: Netflix uses Nielsen data to compare its 9.0% share of U.S. TV time with traditional TV’s share of more than 40% and with YouTube. Because Netflix is still below 10% of TV time in its major markets, the comparison shows room to grow, which supports continued investment in content and in competing for viewers’ time.

Discussion Questions

Talk these through with a partner or your class. There's more than one good answer, so back yours up with evidence from the case.

  1. Netflix stopped reporting quarterly membership counts even while they were rising. Who benefits and who might lose when a company stops reporting a KPI? Consider investors, employees, competitors, and customers.
  2. Is time spent watching a good measure of customer satisfaction? What could it miss? Suggest one other nonfinancial KPI Netflix could track.
  3. In the second quarter of 2026, Netflix’s operating margin (33.4%) was lower than a year earlier (34.1%), yet the company expected a higher full-year margin than in 2025. How can the same KPI look better or worse depending on the benchmark you choose?
  4. Netflix compares itself with YouTube and traditional TV using share of TV time, not just with other streaming services. Why might a business choose a broad group of competitors as its benchmark?
  5. Which KPI do you think best shows whether Netflix is succeeding today? Defend your choice with evidence from the case. (a) Paid memberships (b) Revenue growth (c) Operating margin (d) Engagement (hours watched)

Application Activity

Choose a subscription you or your family uses (music, gaming, a gym, a meal kit, or a phone plan). Identify three KPIs the business should track — at least one financial and one nonfinancial — and for each KPI name a benchmark it could compare against (a business goal, the previous period, an industry average, or a competitor). Explain which KPI you think matters most for that business and why.

Key Takeaways

  • KPIs should match a business’s goals and how it makes money. When Netflix earned mostly from memberships at similar prices, membership growth was a useful KPI; once it added an ad plan, extra-member fees, and prices that varied by plan and country, revenue and operating margin became better measures of growth and profitability.
  • A strong set of KPIs mixes financial and nonfinancial measures. Netflix pairs revenue and operating margin (financial) with engagement and share of TV time (nonfinancial) to monitor both its financial health and how much customers value the service.
  • Benchmarks give KPI numbers meaning. Netflix compares results with its own forecasts, with the previous year, and with competitors’ share of viewing time; missing its 2022 forecast signaled a problem that led to new plans, while beating its 2025 margin target signaled progress.

Use it in your Business Canvas Project

When your Canvas group chooses its five KPIs, follow Netflix’s lead: pick KPIs that match how your business actually makes money, include at least one nonfinancial measure of customer satisfaction, and name a specific benchmark for each KPI.

For Teachers

Opening activity: Ask students: If you wanted to know whether a streaming service is succeeding, what single number would you most want to see? Record several answers on the board (subscribers, revenue, hours watched, profit, ratings). Explain that businesses choose a few key numbers, called KPIs, to track progress toward goals, and that this case shows why Netflix changed the numbers it reports.

Tip: “Print case” prints the case and all questions with the sample answers hidden, so it works as a student handout.

Sources

  1. Netflix Q4 2021 Letter to Shareholders, Netflix, Inc., 2022-01-20
  2. Netflix Q1 2022 Letter to Shareholders, Netflix, Inc., 2022-04-19
  3. Netflix Q4 2022 Letter to Shareholders, Netflix, Inc., 2023-01-19
  4. Netflix Q1 2024 Letter to Shareholders (Form 8-K, Exhibit 99.1), Netflix, Inc. / SEC EDGAR, 2024-04-18
  5. Netflix earnings: what the subscriber reporting change means, CNBC, 2024-04-18
  6. Netflix Q4 2024 Letter to Shareholders, Netflix, Inc., 2025-01-21
  7. Netflix Q4 2025 Letter to Shareholders (Form 8-K, Exhibit 99.1), Netflix, Inc. / SEC EDGAR, 2026-01-20
  8. Netflix Q2 2026 Letter to Shareholders, Netflix, Inc., 2026-07-16
  9. Leadership & Directors, Netflix Investor Relations, 2026
  10. Netflix to Announce Third Quarter 2026 Financial Results, Netflix Investor Relations, 2026-09-14
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