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What Would Happen if Netflix Finally Offered Ad-Supported Plan?

Lauren Forristal

Netflix has had a significant subscriber slowdown since 2020, and that for the last three quarters, subscriber growth was in the single digits. While increasing subscription costs and testing a fee for password sharing are suitable enough strategies, there are other ways that Netflix can help offset the revenue impact. A possible solution? Advertising.

Netflix is 24 years old, therefore, it is a veteran of the streaming industry. But if they were to take this advice, it’s possible that it would fix a lot of the problems that the service has encountered as it is increasingly reaching market saturation. While subscriber slowdown is a big issue, saturation is an even bigger one. Netflix has 75 million subscribers in the US and Canada, where there are approximately 132 million households. Linear TV has 84 million subscribers and putting shared passwords into consideration, penetration may be even higher. Markets with much lower household incomes like India have more room to grow, yet Netflix’s relatively high prices have been a tough barrier to break.

The service had a total of 222 million subscribers at the end of 2021. Still, according to The Information, that number isn’t increasing as quickly as it used to. Netflix had more than 20% year-over-year subscriber growth for years but hasn’t broken the 20% mark since the fourth quarter of 2020.

The goal, for now, is to figure out a way to raise prices while ensuring customers aren’t running away. Gaming has been an atypical investment for Netflix, however, it allows for new kinds of content and new IP to keep subscribers engaged. Plus, it’s a unique advantage over other services.

“Our subscription model yields some opportunities to focus on a set of game experiences that are currently underserved by the sort of dominant monetization models and games,” Netflix Chief Product Officer Greg Peters said in the company’s Q2 2021 earnings interview. “We don’t have to think about ads. We don’t have to think about in-game purchases or other monetization. We don’t have to think about per-title purchases. Really, we can do what we’ve been doing on the movie and series side, which is just hyper laser-focused on delivering the most entertaining game experiences that we can.”

However, Netflix’s games only pertain to a niche audience. So how will they continue to attract a wider target audience?

Unique content is what they do best, and it’s a major differentiator. This is the main reason that the streamer’s subscriber base is so much larger than other services, and its veteran status is another reason why they have stuck on everyone’s radar for so long. Netflix’s business model works for the most part, although they are apparentlyopen to the idea of introducing ads in the future, just likely not now. Instead, the company is focused on acquiring, licensing, and producing compelling content in order to grow its membership globally and improving the user experience; which is exactly why Netflix should build an advertising business.

First and foremost, an ad-supported tier would expand Netflix’s subscriber base, which is not only good for its long-term growth prospects but also a competitive position when it comes to acquiring content. Hulu, HBO Max, Paramount+, and other streamers already offer ad-supported options, and Disney+ has announced that they will launch one later this year as well.

According to Antenna’s “Year in Streaming Report,” ad-supported plans accounted for 32% of all Premium SVOD sign-ups in 2021, in comparison to 19% in 2020. In addition, Hub Entertainment Research found that 46% of users would choose a Netflix subscription option that includes pre-roll ads for $5 off their monthly bill. However, only 39% would choose the less expensive plan if it meant watching pre and mid-roll ads.

Not only would advertising make it a lot easier for Netflix to increase revenue and add subscribers, but it would also likely minimize churn. The plan would give an alternative for marginal customers who might otherwise ditch the service altogether. Those who don’t want ads will be happy to spend the higher price, and those who are on the fence will have an option to keep the service without the higher cost.

The advertising market has proven to be much larger than even Google or Facebook can cover. In September 2021, Hulu reported $2.1 billion in ad revenue for the year, according to a report by Kantar. Experts estimate Hulu’s ad revenue will reach $3.13 billion this year, a 44% increase from 2020.

Switching its business model is just another rung on Netflix’s ladder. The service has no problem drawing in subscribers with its content, and it will continue to do so even with ads.


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