Investors had a pretty good idea it was coming, and soon. But Netflix (NFLX 1.74%) co-CEO Ted Sarandos confirmed it last week at the Cannes Lions advertising festival: The streaming giant will launch an ad-supported tier, possibly before the end of this year.
The decision reverses the company's long-standing policy of avoiding a less-than-premium option at a less-than-premium price. But Netflix has to adapt as the streaming market is quickly changing. Two new sets of consumer data underscore this reality.
The question is, will this strategic shift be too little, too late?
None too soon, if even soon enough
Most of Netflix's streaming video rivals offer lower-priced or free tiers of their services to consumers who are willing to watch ads during their programming. But the leading streamer had always dismissed the idea ... that is, until April, when the company reported its first subscriber net loss in a decade.
Concerned this contraction might reflect more than just the fallout from the shutdown of Russian business after the country's invasion of Ukraine, co-CEO Reed Hastings conceded that "allowing consumers who would like to have a lower price and are advertising-tolerant [to] get what they want makes a lot of sense. So that's something we're looking at now [...] think of us as quite open to offering even lower prices with advertising as a consumer choice."
Investors and analysts alike took that ball and ran with it, so to speak, but the company has done the same. Sarandos' comment from last week further clarifies its plans.
And none too soon.
The streaming business isn't just changing, it's changing fast. A survey from market research outfit NPD indicates that just within the past year, cost jumped up two spots to become the second-most common reason a consumer canceled a streaming subscription. A service's content catalog remains the top reason someone might sign-up for or cancel an on-demand service. The fact that consumers are becoming noticeably more price-sensitive, however, is telling.
Credit the rise of competitors like HBO Max, Disney+, and Paramount+ for the change. When there were fewer peers (with less robust offerings) in the space, there was no meaningful price comparison to be made. With these rival streaming platforms all offering cheaper -- and often ad-supported -- plans though, cost is becoming a more obvious differentiator.
This works against Netflix more than any other service, too, as the typical monthly cost of its subscriptions is higher than alternative streaming services. In fact, fresh data from Whip Media show that it's a uniquely big problem for Netflix.
Simply put, of the eight major streaming services available in the United States, Netflix ranks last in terms of overall perceived value. The service with the highest perceived value was HBO Max, followed by Disney+. Those two boast 2022 "value satisfaction scores" of 85% and 83%, respectively, according to Whip. Hulu's up there too. Netflix's score, on the other hand, lags them all at 62%.
Image source: Whip Media.
Netflix also scores the highest on the value dissatisfaction scale, although this isn't necessarily the diametrical opposite of a satisfaction score. In this same vein, among those survey respondents who had canceled Netflix within the past few months, the majority of them specifically cited the recent price increase or the lack of value among their reasons.
Image source: Whip Media.
While 81% of Netflix subscribers surveyed still say they're likely to keep the service, that number was down from 93% last year -- the biggest drop of all the streaming platforms examined.
Buckle up
It's not the end of the world for Netflix. Despite waning perceptions of its value, it's still the service most U.S. consumers would keep if they could only keep one, according to Whip Media. And giving people the option of switching to a lower-cost, ad-supported version of the service should shore up at least some of the brewing churn.
The ad-supported learning curve could prove steep for Netflix, however. It doesn't even have access to experienced and in-house expertise on the topic. At least Walt Disney will be able to apply lessons learned from its ad-supported Hulu tier when it launches an ad-supported Disney+ tier (probably later this year), while Comcast's Peacock seems like it was built from the ground up to deliver ads. Comcast's ad-tech is so powerful, in fact, that the company is rumored to be in the running to help Netflix handle its foray into the ad-supported streaming arena, according to The Wall Street Journal. Alphabet's Google has been suggested as a contender too.
That's fine, but either choice would ultimately force Netflix to partner with a company it's also competing against. Never even mind the fact that Hastings and Sarandos will be learning the ad-supported ropes after they're already in the business.
Shareholders may want to buckle up for what could be a bumpy ride well into next year.
