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Analyst: Netflix Ad Tier Should Boost Business by 20% After Initial Difficulties

Joshua Thiede

As Netflix faces subscriber woes and cracks down on password sharing, its plan to incorporate advertising into its programming may be just what the media giant needs to turn things around. According to Steven Cahall, media analyst for Wells Fargo, an ad-supported video-on-demand (AVoD) tier should increase subscribers and boost revenue by 2025.

The first quarter of 2022 didn’t offer Netflix investors much in the way of good news. The streaming service lost approximately 200,000 subscribers, 64,000 of which were in the US and Canada alone. Netflix has been scrambling to find ways to bolster its viewer base thanks to its exit from Russian markets as a response to the war in Ukraine and price hikes that went into effect in January 2022.

AVoD is not a unique option for streamers. Peacock, HBO Max, discovery+, and other streamers have long offered a discounted plan with commercial support. Free streaming services like Freevee, Tubi, Pluto TV, and more rely entirely on ad revenue. On the company’s last earnings call, Netflix co-CEO Reed Hastings announced that the streamer was looking into creating an ad-based and it was recently reported that the lower-priced option might even hit devices by the end of the year.

Cahall sees a bright future for the streaming platform after noticing a trend in video-on-demand (VOD) subscribers transitioning to less expensive AVOD plans. He predicts that with a more economical pricing structure in place, Netflix could stand to gain 24 million AVOD subscribers by December 2023, quadrupling to a massive 101 million by 2025’s end.

The forecast suggests a profit increase by as much as $2.3 billion by 2025, raising earnings to about $25 per share, a 20% increase. Such numbers would stabilize Netflix and help it regain its footing as the top streamer on the market.
Unfortunately, the analyst also foresees a slow start as the service combats competitors and also contends with ad implementation across its immense library of content.

“Given Netflix‘s lack of experience with advertising and its aggressive timeline to launch the service, we think NFLX will initially start off with an asset-light approach, leveraging others’ ad-tech plumbing,” Cahall said. “This likely means lower gross margins initially as it shares revenues with ad tech partners. “

Cahall sees Netflix rebounding quickly, however, as they familiarize themselves with ad technology and incorporate the system into their service. Even so, Netflix has a lot to learn and it will take some time to get its AVOD offering off the ground. With Netflix’s plans to have an ad-supported tier in place quickly, subscribers may find Santa had put reduced subscription rates under the tree this Christmas.

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.

Netflix offers four plans — on 1 device in SD with their “Basic with Ads” ($6.99) plan, on 1 device in SD with their “Basic” ($9.99) plan, on 2 devices in HD with their “Standard” ($15.49) plan, and 4 devices in up to 4K on their “Premium” ($19.99) plan.

Netflix spends more money on content than any other streaming service meaning that you get more value for the monthly fee.

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