This isn't the first time that Needham analyst Laura Martin has argued that dominant video streamer Netflix (NASDAQ:NFLX) should introduce ads on its service, a topic that comes up every few years -- and a move that Netflix has long resisted. Yesterday, the Wall Street firm downgraded shares of Netflix from hold to underperform in part due to intensifying competition in the streaming wars.

Apple and Disney (NYSE:DIS) have launched competing services at extremely aggressive price points, and Martin believes that Netflix needs to come down on pricing in order to compete.

Exterior of Netflix LA headquarters

Image source: Netflix.

Add ads or lose subs

"We believe Netflix must add a second, lower priced, service to compete with Disney+, Apple+, Hulu, CBS All Access and Peacock, each of which have $5-$7/month choices," the analyst wrote in a research note to investors. Acknowledging Netflix's long-standing opposition to ads, Martin expects Netflix to lose 4 million U.S. subscribers in 2020 to rival services. That's actually a slightly improved forecast compared to the 10 million U.S. subscribers that Martin previously estimated Netflix could lose next year.

Netflix's capital structure is notoriously debt-ridden, with management regularly signaling that it plans to continue tapping debt markets to fund its original content budget. The tech company's balance sheet "cannot withstand lower revenue," according to Martin. Netflix had $12.4 billion in long-term debt at the end of the third quarter, or nearly three times the $4.4 billion in cash and cash equivalents it was sitting on.

Needham says that Netflix should introduce advertising as a way to subsidize lower price points. Netflix's most popular "Standard" plan costs $13 per month, compared to Disney+'s $7-per-month price. The company does offer a cheaper "Basic" plan at $9 per month, but it doesn't include HD streaming.

While Disney+ doesn't have ads when viewers are watching content, the House of Mouse did agree to run a brief ad after the sign-up process for Lionsgate's Starz premium channel as part of an amended licensing deal. Disney had previously licensed out many of its films to Starz, and running the ad allowed the company to reclaim streaming rights. That was a unique situation, and it doesn't appear that Disney was after ad revenue.

Martin essentially wants Netflix to look a little bit more like Roku, which monetizes its platform segment primarily via ads. The analyst is currently the biggest Roku bull on Wall Street, recently increasing her price target on Roku shares to $200.

Netflix remains "very comfortable doing no ads"

Just last month, Netflix CEO Reed Hastings reiterated his opposition to an advertising model at The New York Times' Dealbook conference. When asked by an audience member about the possibility of an ad-supported model, Hastings replied:

It's a funny thing. Disney's on the board of Hulu. Disney then bought [operational control of] Hulu. And yet when they go to launch with ads. So when you've got a lot of insight into the model, you make certain choices. We're very comfortable doing no ads, like Disney+, and we're going to compete on that basis.

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