For the first time since Netflix (NFLX 0.73%) began streaming videos all the way back in 2007, the company is seriously considering an ad-supported version of its service. During the first-quarter conference call, CEO Reed Hastings said, "Think of us as quite open to offering even lower prices with advertising as a consumer choice." The company intends to explore the idea in detail over the course of the next couple of years.
Hastings' comment is hardly a guarantee that we'll actually see a launch of a lower-cost, ad-supported video-on-demand (AVOD) platform, but it should be considered a safe bet that we'll see it come to fruition at some point. There are three reasons Netflix should do so and two reasons it practically has to.
Image source: Netflix.
3 reasons Netflix should
1. Free (actually ad-supported) streaming services are becoming common in a crowded arena: There was a time when ad-supported -- free, or subsidized -- streaming platforms were seen as a big step down in value from premium, ad-free streaming services like Netflix. That's why most consumers didn't care to tune in, opting to instead pay for one of the few ad-free options available at the time.
That's no longer the case. Estimates suggest there are on the order of 200 different streaming services up and running right now. Numbers from TiVo's Q4 Video Trends report indicate the typical household in the United States regularly uses an average of 8.9 of these, and of those, 2.4 of them are free, ad-supported platforms. Notably, TiVo's data suggests the total number of streaming services being used has nearly plateaued; the figure was a comparable 8.8 services just a couple of quarters earlier. The survey also said the typical U.S. consumer believes the number of streaming subscriptions they currently have is "just right."
This limits Netflix's ad-free service's growth potential, at least in the United States. (Keep this idea in your back pocket for just a moment.)
2. Most U.S. consumers already use a free streaming service ... because it's free: Even if they had time to watch more streaming content, most people aren't interested in paying any more for access to more on-demand shows and movies.
TiVo's fourth-quarter report adds that 74% of current ad-supported streaming users are "watching AVOD services simply because they're free." In this same vein, the average U.S. household is already shelling out around $50 per month for streaming subscriptions according to J.D. Power, arguably at the upper boundary of how much people are willing to pay. They may switch services, but that's a prospect working against Netflix as much as it's working for it. Indeed, the dynamic may be working against the company even more than it's working for it right now. Parrot Analytics says Netflix's share of the U.S. market slipped from 52.4% to 42.4% in just a couple of years, corresponding with the rise of competing services like Warner Bros. Discovery's HBO Max or Walt Disney's Disney+.
3. Most U.S. consumers aren't all that impressed by ad-supported options: While the streaming crowd living in the United States is watching more free content as part of a cost-containment plan, don't think for a minute they don't see a major quality difference. Only 59% of regular AVOD watchers consider their ad-supported service "good" or "very good." Conventional premium streaming video-on-demand (SVOD) services like Netflix or the aforementioned Disney+ still take top honors on this front, with 82% of consumers saying their quality is "good" or better, again according to TiVo's study.
Given Netflix's reputation for quality content, it could be a standout within the ad-supported or ad-subsidized streaming market.
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Key Data Points
2 reasons Netflix has to
1. The U.S. crowd using free services should eclipse paying customers this year: Whether or not Netflix wants to add an ad-supported option to the mix is largely irrelevant; this is the direction the industry is moving anyway. The company can adapt or continue to struggle. Specifically, an outlook from eMarketer suggests the nation's AVOD market will swell from last year's 129 million to 140.1 million people this year, en route to 165.4 million by 2025. At 140.1 million, 53.1% of U.S. streamers will be using free-to-watch services. Fox Corp.'s ad-supported platform Tubi adds that this year's growth should be enough to make the total AVOD audience bigger than the SVOD crowd, reflecting how the ad-supported business model is finally starting to mature.
2. The global ad-supported streaming market should eclipse premium by 2026: And it's not just more viewers. Ad-supported streaming platforms should be collectively capable of driving more revenue than premium ad-free services within the next few years. Industry research outfit Digital TV Research says the global AVOD market should be worth $66 billion by 2026, roughly half of which should be generated within the U.S. alone, and more than doubling 2020's tally of $29 billion.
For perspective, Digital Entertainment Group reports the United States SVOD market was worth $25.3 billion in 2021, up nearly 20% from 2020's figure. But, growth of the premium sliver of the streaming market is getting tougher and tougher to come by.
Image source: Getty Images.
Connect the dots
Nothing is set in stone, of course. Netflix's deeper dive into an ad-subsidized version of its service could still reveal it's better served by leaving things as they are. It's also an internationally diversified company, whereas most of the growth statistics and outlooks above are specific to the United States. Things could play out differently elsewhere.
It's also worth noting many of the ad-supported services serving as the basis for the data above are completely free to watch, whereas Netflix's tentative plan is to charge a smaller monthly fee in exchange for imposing the occasional advertisement.
It's unlikely we'll see a different evolution of the streaming industry overseas than we're seeing domestically, however. The streaming arena's getting pretty crowded everywhere, and most consumers are increasingly cost-conscious no matter where they reside. By launching an ad-supported alternative, Netflix gives itself its best shot at growth it may not otherwise be able to achieve with just its ad-free SVOD offering.
