Netflix Faces a Tariff-Induced Margin Squeeze: Could Operating Profit Drop to 16%?

Netflix’s operating margin, already under pressure from rising content costs and global competition, now faces a new threat: a proposed 100% U.S. tariff on foreign-produced films. If implemented, this policy could force Netflix to reallocate billions of dollars, potentially shrinking its operating margin to as low as 16%—a stark contrast to its current guidance of 29% for 2025.

The Proposed Tariff and Its Implications

The tariff, announced by the Trump administration in 2025, targets films produced outside the U.S., aiming to revive domestic production by penalizing global studios and streamers. For Netflix, which derives 70% of its subscribers from outside North America and spends 60% of its $17 billion annual content budget on international productions, this policy could upend its business model.

Cost Implications for Netflix

• Direct Cost Increases: Citigroup analysts estimate the tariff could raise Netflix’s annual costs by $3 billion, slicing earnings per share (EPS) by 20%. However, the impact depends on production shifts: if Netflix relocates content creation to the U.S., costs could rise further due to higher labor and infrastructure expenses. For instance, U.S. production costs are 35% higher than in many foreign hubs like Canada or India.
• Content Trade-Offs: To avoid tariffs, Netflix might reduce non-U.S. content or raise prices. A 7% increase in U.S. subscription fees could offset some costs, but this risks alienating price-sensitive subscribers.

Revenue Risks and Mitigation Strategies

• Subscriber Growth Challenges: While Netflix added 10 million subscribers in 2024, its international dominance relies on diverse content libraries. A reduction in non-U.S. programming could deter viewers in key markets like Latin America or Europe.
• Ad Revenue as a Buffer: Netflix’s ad-supported tier, launched in 2022, has grown steadily, contributing $2.2 billion in 2024. Scaling this to $8.5 billion by 2027 (per Visible Alpha) could offset margin pressures, but this depends on advertiser demand and global economic stability.

Regulatory and Global Risks

• Retaliatory Tariffs: Foreign governments, including France and the EU, could impose reciprocal levies on U.S. streamers. France already mandates that 30% of streaming budgets fund local content—a precedent for broader protectionism.
• Production Delays: Uncertainty around the tariff’s scope (e.g., whether co-productions qualify) could freeze international filming, disrupting Netflix’s content pipeline.

The Bottom Line: Could Margins Drop to 16%?

The worst-case scenario—$3 billion in added costs, no production cost savings, and stagnant subscriber growth—could slash Netflix’s operating margin to 16% by 2026. This compares to its Q1 2025 margin of 31.7% and its full-year guidance of 29%.

However, several factors temper this outlook:
1. Mitigation Efforts: Netflix could shift production to the U.S. or renegotiate content licensing deals.
2. Tariff Uncertainty: The policy’s implementation remains unclear, with legal challenges likely given the WTO’s moratorium on digital trade tariffs.
3. Ad Revenue Growth: Scaling its ad business could add $6 billion in annual revenue by 2027, stabilizing margins.

Conclusion: A Margin Warning, But Not Yet a Crisis

The proposed tariff poses a material risk to Netflix’s profitability, but investors should balance worst-case scenarios with the likelihood of negotiated solutions. While a 16% margin is a plausible downside, Netflix’s $300 billion market cap and $10.5 billion in Q1 revenue underscore its resilience.

For now, Netflix’s 29% margin guidance for 2025 remains intact, but investors should monitor tariff developments and the company’s content strategy. The real threat isn’t the tariff itself, but the broader geopolitical and regulatory shifts it signals—a warning that Netflix’s global growth could face headwinds for years to come.