The imminent launch of Netflix’s new ad tier has the potential to be a streaming game changer—both for Netflix’s users and its bottom line.
Netflix reported Tuesday in its third quarter earnings that the company added nearly 2 million subscribers to the service, a significant increase from the 1 million it had predicted last quarter. For the fourth quarter, it forecasts a gain to be 4.5 millions subscribers. The Netflix new, ad-supported and lower-priced subscription plan will be rolled out in November. This is a welcome boost. In exchange for some interruptions, subscribers can cut down on their Netflix bills by up to 20%-40% using the ad-based program.
With the streaming industry becoming oversaturated with competitors, analysts say Netflix’s push into advertising is a move that could help jumpstart the streamer’s growth by enticing budget-conscious consumers to sign up for the service.
“It might hurt their revenue,” says Laura Martin, senior entertainment and internet analyst at Needham & Company. “But it should help their subscriber growth.”
Netflix said on Tuesday that the ad tier’s launch is expected to result in “meaningful incremental revenue” over time. It will also make Netflix more affordable than ever for users—provided they don’t mind watching some commercials.
What does Netflix advertising mean to users
Netflix’s ad-supported tier, Basic with Ads, will launch in Canada and Mexico on Nov. 1, followed by Australia, Brazil, France, Germany, Italy, Japan, Korea, the U.K., and the U.S. on Nov. 3, and Spain on Nov. 10.
With Netflix’s current monthly subscription model, subscribers in the U.S. can use their account on one, two, or four screens at once and prices reflect the number of screens available—ranging between $9.99 and $19.99. Subscribers can use one screen of their account at a given time with the ad-supported, cheaper plan for $6.99 per month. Netflix says there will average five minutes of ads each hour. These will appear before and during movies and series.
However, there are some catches. Like its ad-free Basic plan, Basic with Ads will have a lower video quality than Netflix’s Standard and Premium plans. Additionally, Basic with Ads subscribers won’t be able to download shows and movies to their devices for offline viewing, and won’t have access to about 5% to 10% of Netflix’s content catalog because the company doesn’t have the rights to show those programs with commercials. Subscribers to the Ad tier will need to give their birth date and gender in order to be able to view targeted ads.
At $6.99 per month, Netflix’s ad plan will be less expensive than those of several of its competitors. Disney+ and Hulu’s ad plans will both be $7.99 per month when Disney+’s ad tier launches in December, while HBO Max with ads is $9.99 per month.
Netflix advertising: What does it mean?
Recent Accenture research showed that 63% of consumers agree that it’s too expensive to pay for all the entertainment subscriptions they want. However, Netflix has ad tier that offers a brighter alternative to the more budget-conscious consumers. This is according to Michael Pachter from Wedbush Securities.
“A middle or low-income household that’s a streaming subscriber might not be able to afford five different subscriptions,” he says. “But there will be those people who say, ‘I don’t really want to pay [the Netflix Standard plan price of] $15.49. I don’t want to pay $186 a year. Sixty-nine dollars a month equals $84 annually. Maybe I’ll stay for $84 with a few ads.’”
Netflix could risk losing existing subscribers to lower-priced ads by making it more expensive. It’s banking on ad revenue offsetting that loss, says Seth Shafer, a senior research analyst for media research group Kagan.
“Netflix is balancing new ad revenue coming in with the potential of subscription revenue being lost from existing users downgrading,” he says. “But it’s going to take some time for the advertising business to fully monetize.”
On Tuesday, Netflix said in its letter to shareholders that its ad business is still in “very early days” and building up its membership base and associated ad revenue will be a process.
The most significant challenge facing Netflix’s new ad business is how dependent advertising is on what’s happening in the broader economy, Shafer says. “When you look at the economics of it, there’s this big question of are we heading into a recession?” he says. “In that context, things start to look a little bit dicey.”
Shaffer says that Netflix is a little different than the other streaming services. “For years, advertisers were clamoring for the ability to buy ads on Netflix,” he says. “So even if economic headwinds continue to grow, Netflix’s results may be different from the broader advertising market’s.”
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