- Netflix co-CEO Reed Hastings said the company will explore an ad-supported tier “over the next year or two.”
- The announcement came after Disney announced its plan to bring ads to a cheaper version of Disney+.
- But industry insiders say licensing content would take years and Netflix’s benefits could be limited.
It shocked the entertainment industry when, on the heels of an already distressing Q1 2022 earnings report that included an expected decline of 2 million subscribers in the second quarter, co-CEO Reed Hastings revealed on the call from earnings than the
The service would explore creating an ad-supported level “over the next year or two.”
“Those who have followed Netflix know that I have been against the complexity of advertising and I am a big fan of the simplicity of subscription,” Hastings said Tuesday.
“But as much of a fan of that as I am, I’m a bigger fan of consumer choice,” he continued. “Enabling consumers who would like a lower price and are tolerant of advertising [to] getting what they want makes a lot of sense.
His comments caught industry watchers off guard, even though Netflix has recently softened its stance from “never advertise” to “never say never” amid stagnant subscriber growth in the United States and Canada. Disney+, which launched in late 2019, announced on March 4 that it will add an ad-supported level.
Still, as industry insiders told Insider in the weeks leading up to Netflix’s earnings, even if the technology is easy to implement, the economics don’t necessarily support a foray into ad-supported subscriptions.
Netflix could be losing up to $9 billion a year in ad revenue
Needham analysts estimated in a January 21 investor note that Netflix was losing $9 billion per year in potential revenue by not introducing ads. That figure is based on the $40 per user per year in ad revenue Needham estimates Roku gets, multiplied by Netflix’s 222 million global paid subscribers at the time. (Netflix now has 221.6 million subscribers after losing 200,000 in the first quarter of 2022, and expects to drop to 219.6 million by the end of the current quarter.)
Of course, Roku doesn’t have the global presence of Netflix, so that estimate might be generous. CPMs are typically lower internationally than in the US.
Still, Needham suggests that adding even a lower-priced ad-supported option could make Netflix more competitive against rival streamers. Analysts in the note recommended a tier that would cost $5 to $7 per month and have 5 to 6 minutes of ads per hour.
“Nearly all of its streaming competitors have now introduced this two-tier pricing strategy,” the analysts wrote. “We believe this pricing would drive higher revenue for ‘ad-light’ subscriptions compared to NFLX’s current ad-free level.”
While Hastings would not comment on the price of a possible ad-supported offer,
The ad-free service costs $12.99 per month versus $6.99 per month for the ad-supported version.
“I think it’s pretty clear that it’s working for Hulu. Disney is doing it, HBO did it. I don’t think we have much doubt that it works, that all those companies have figured it out,” he said on the call. . “I’m sure we’ll go in and figure it out, rather than try it out and maybe do it or not do it.”
He acknowledged that an ad-supported level would not be a “short-term solution”.
“Once you start offering a lower priced plan with ads as an option, some consumers take it and we have a large installed base that is probably very happy where it is,” he said Tuesday. “Think of it like: it would be phased in over a couple of years in terms of material volume.”
He also alluded to being open to allowing a third party to implement targeted advertising on the platform.
“In terms of profit potential, the online advertising market has definitely moved on,” he said. “So we can be a direct publisher and have other people do all the fancy ad matching and integrate all the data about people so we can stay on the sidelines and really focus on our members, creating that great experience and monetizing in a way first-class by a variety of companies that offer that service.
However, the company’s infamous secrecy around its metrics and data could be a stumbling block.
“Netflix is also very stingy with its data, and to be an advertising-supported company, it would have to convince its advertisers of the effectiveness of those campaigns,” Steve Shannon, CEO of Swerve TV and a former Roku executive, said in March. “They would have to give up their data to be a good ad marketer… They would have to change that mindset.”
“It would be a monumental boost from a content licensing standpoint”
From a technical standpoint, several senior executives in the ad-supported video-on-demand space told Insider that they believe Netflix is more than capable of building an AVOD level through its own engineering team. The biggest challenge for the streamer is in its current license agreements for programming in its library.
“It would be a monumental boost from a content licensing standpoint,” Shannon said.
Netflix may have the subscription window rights to “Seinfeld” and other non-original series, for example, but it doesn’t have the contract rights to an advertising window, which might not be available for some of them.
“When CBS or Turner or anyone else unblocked their library on Netflix, it was on the condition that it not be ad-supported, because they didn’t want to sharpen the knife that was going to cut their throats,” said one. a senior AVOD executive told Insider in March. “If suddenly the Netflix engine had the exact same content library running on its platform, Y could sell advertising, the only thing that allowed these companies to make money evaporates overnight.
One analyst said the value of an ad-supported tier is around $10 a month per user.
Getting into the advertising business might not be as lucrative for Netflix as some might think.
“The only real obstacle to achieving it, beyond [Netflix co-CEO] Rush [Hastings]The reluctance to do so is that the value of an ad-supported level” – that is, the revenue it could generate – “is probably only about $10 [per user] a month,” Michael Pachter, an analyst at Wedbush, said last month, believing such a foray would deliver subscriber growth but not significant revenue growth.
Current US Netflix prices range from $9.99 a month for a one-person plan to $19.99 for a four-screen plan. Their standard tier is $15.49 per month.
“The real risk is that they will convert customers who pay $15.49 to $5.99 plus ads, and not make more money,” Pachter said, with $5.99 being a hypothetical price (Hulu’s ad-supported level is $6.99; Disney+ has not announced a price for its ad level).
And even if Netflix were to pursue that strategy outside of the US, the overseas ad market isn’t nearly as attractive.
“The thing about the international advertising business is that it’s small compared to the United States,” Shannon said. “It’s small and very fragmented and it’s not as good a business as it is in the US… The advertising business in the US is a freak of nature. It’s really unique in the world.”
Netflix could test demand for an ad tier by licensing shows for streaming or cable, but hasn’t done so yet.
While Hastings may have dropped a bombshell at the earnings call, that doesn’t mean Netflix is committed to seeing through the development of an ad-supported level for customers.
A senior AVOD executive who spoke to Insider in March said that if the company wanted to, it could first test the AVOD waters by distributing Netflix originals to linear cablers for a secondary window — that is, leasing shows and movies that have already been released. streamed on Netflix to re-run on other platforms.
“I think there are buyers for that,” the executive said of a secondary window. “And to my knowledge, that conversation hasn’t taken place. I strongly believe they’ve received requests for that.”
Presumably, this would test the market and prompt the streamer to format its library, which is no small feat for its growing catalog of original series, whose total runtimes vary widely, to the limits of a 22-minute half-hour or an hour of 42 minutes. -long linear TV format.
Either way, Netflix is now playing in a space it has previously avoided. And that will probably take some time to figure out.
“That’s something … we’re trying to figure out over the next one or two years,” Hastings said. “But think of us as quite open to offering even lower prices with advertising as a consumer option.”
Natalie Jarvey contributed to this report.