Ever since HBO Max and Paramount+ rolled out ad-supported options in 2021, there has been a ton of pressure to compete at lower price points. Disney+ has finally softened its stance on advertising, joining its sister service Hulu with an ad-supported subscription that will launch in the U.S. in late 2022 and expand internationally in 2023. Now, the pressure is on, as Netflix is getting its metaphorical feet held to the fire.
So far, Netflix, Apple TV+, and Amazon Prime Video are the only major subscription video-on-demand (SVOD) services to not yet add advertising-supported, lower-priced options.
In addition to Disney+ becoming an increasingly powerful player in terms of streaming content, the move to join Hulu, Paramount+, discovery+, and Peacock with a tier at a fraction of Netflix’s cost could put pressure on the world’s largest streamer.
Antenna’s “Year in Streaming Report” shows that ad-supported plans accounted for 32% of all Premium SVOD sign-ups in 2021, versus just 19% in 2020.
In 2021, Hub Entertainment Research presented Netflix subscribers with a hypothetical ad-supported tier. Forty-six percent of users said that they would choose an option that includes pre-roll ads for $5 less per month. However, only 39% would choose the less expensive plan if it meant watching pre and mid-roll ads. The lowest tier that Netflix currently has is $9.99 per month.
Needham’s Laura Martin has strongly (and repeatedly) expressed that Netflix needs to offer a “separate, lower-priced, ad-driven tier, like almost all its streaming competitors.” The senior analyst also previously said, “Nothing is getting better for Netflix, and it’s not a part of the reopening trade as it is not ad-driven. And advertising is going to be huge over the next twelve months.”
In addition to the potential increased revenue, Netflix is dealing with a slowing down of subscriptions as they are nearing a saturation point. In 2021, while the streamer did eclipse 221 million subscribers, the vast majority of additions came internationally, as the North American markets are nearly tapped out.
MoffettNathanson’s Michael Nathanson believes that an ad-supported tier would make sense for the streaming pioneer as well. He argued that it could be an easier way into international markets where users have less purchasing power.
Nathanson wrote in a 2021 report, “While Netflix has a fundamental opposition to advertising, perhaps emerging pressure to find growth as well as a more developed [streaming advertising] ecosystem may make Netflix more amenable to advertising on the service.”
Netflix executives have quoted their ad-free environment as a differentiator. In the Q4 2019 earnings call, Reed Hastings said, “We want to be the safe respite where you can explore; you can get stimulated, have fun, enjoy, relax and have none of the controversy around exploiting users with advertising.”
The company argues that as a premium product, they aren’t duty-bound to big advertisers, which allows them to make riskier, edgier content. Other platforms have to keep things at varying levels of “brand safe.”
But a lower-priced option could benefit them significantly. If Netflix offered a $5 discount to watch ads, Netflix would make $30 for each ad, according to NScreenMedia. If Netflix runs three pre-roll ads per show, it will earn $2.30 per user. Thus, seven 30 second ads per 43 minutes viewed would give Netflix an ad load in line with competitor HBO Max. The platform would also be lower than any other ad-supported service on the market.
As of now, the company is sticking with its strategy to grow with more content spending and increasing tier prices. But will this new development with Disney force their hand? We’ll have to wait and see.
Netflix
Netflix is a subscription video streaming service that includes on-demand access to 3,000+ movies, 2,000+ TV Shows, and Netflix Originals like Stranger Things, Squid Game, The Crown, Tiger King, and Bridgerton. They are constantly adding new shows and movies. Some of their Academy Award-winning exclusives include Roma, Marriage Story, Mank, and Ma Rainey’s Black Bottom.