Netflix Ad Plan May Be Just Good Enough
Price undercuts rivals, but limits to the service may prevent too many existing subscribers from trading down
By Dan Gallagher
Wall Street Journal
Updated Oct. 13, 2022 4:50 pm ET
In weaving together its first entry into advertising, Netflix NFLX -1.08%? may have threaded the needle just right.
Since announcing its intentions to launch an ad-supported tier six months ago, Netflix has sparked a constant debate among investors about whether such a move would attract new customers, thus reigniting subscriber growth that has stagnated this year, or simply cause existing ones to trade down and save a few bucks. The jury is still out on that question: the new plan announced Thursday will launch in 12 markets on Nov. 3, which means the company’s fourth-quarter report in late January will be the first chance to see how its subscribers are responding.
Early signs are good. The new plan will be priced at $6.99 a month, $1 cheaper than ad-supported plans from Disney and Hulu and 30% less than the current ad tier at HBO Max. It is also 30% less than the cheapest ad-free plan that Netflix currently offers, which could be a compelling price point for those who have come to feel priced out of the service.
Netflix’s three current plans command the highest average among major streamers, and it is the only one currently offering a singular plan for $19.99 a month. That is what Disney charges for an ad-free bundle that includes Disney+, ESPN+ and Hulu. Mark Mahaney of ISI Evercore wrote Thursday that the new plan addresses “one of the biggest challenges [Netflix] has faced over the last couple of years—rising price sensitivity.”
But the new service also has some limitations unlikely to appeal to many who have grown accustomed to years of Netflix as it is. Besides the ads, which Netflix says will be limited to 4 to 5 minutes per hour, the new service won’t be available in super high-resolution formats available on the two highest tiers. It also won’t allow for shows to be downloaded to devices, a convenient option for frequent travelers. Finally, Netflix said Thursday that some shows currently on the main service won’t be available on the ad-supported one because of licensing deals, though it didn’t detail which ones.
Netflix shares rose more than 5% on Thursday following the announcement, a strong move even considering the market’s broad gains for the day. John Blackledge of Cowen predicted on Thursday that the new ad tier could add an incremental 4 million net new Netflix subscribers in the U.S. alone next year. And because Netflix has previously said a majority of programming on its service doesn’t require new licensing deals to sell ads, the new service should help lift operating margins, according to Evercore’s Mr. Mahaney.
Ultimately the success of the move as far as investors are concerned may depend on their willingness to no longer singularly focus on subscriber additions. As the largest streaming service, Netflix has to contend with the fact that there are simply fewer new customers to be had. In a report Wednesday, Michael Nathanson of MoffettNathanson noted that streaming penetration among U.S. households now sits at 81%. Netflix should ultimately be judged on whether it can reliably grow revenue, earnings and cash flow into the future. A smartly priced entry into ad-supported TV is a step in the right direction.
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