Netflix (NFLX -3.92%) is getting hungry. The world's leading premium streaming video service is getting aggressive on the promotional front after experiencing back-to-back quarters of sequential declines in membership. It's hoping that a cheaper ad-based version of its platform will provide a spark to attract new subscribers, while also keeping churn in check.
We already know who will supply the ad breaks that Netflix will wedge into its platform. We're also up to speed on the timeline, as Netflix is looking to launch the new membership tier early next year. There are some third-party estimates of the amount of money that Netflix can collect by diving into the connected TV advertising market, and they're encouraging.
However, the one question that no one will be able to answer until Netflix actually flips this switch is whether it will ultimately help or hurt the company's top and bottom lines.
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The good, the bad, and the buffering
A Bloomberg article turned heads last week with a lot of unconfirmed color on the rollout. Unnamed sources familiar with the situation say that Netflix will have four minutes of commercials for every hour of content, less than most of its ad-laden peers. The new tier could also launch in test markets before the end of this year.
The most newsy of nuggets in the report is the matter of pricing. The article's source said the the ad-supported tier would cost between $7 and $9 a month, roughly half of the most popular current plan, which sets members back $15.49 a month.
Paying single-digit dollar amounts for a Netflix subscription sounds like a pretty sweet deal for subscribers. The timing couldn't be better, as rising food costs are leaving households cutting corners elsewhere. Putting up with ads to shave the price in half is going to help with the platform's churn rate. That's great, but how much will this cost the company?
Retention will be better with the different pricing tiers, but a lot of people who were willing to pay $15.49 a month are also going to trade down in the process. Netflix isn't going to generate an average of $8 a month in ad revenue from the folks on the new tier, especially with the scant number of sponsored spots it's initially loading into its content feed.
Let's also talk about perception. Netflix had long resisted the siren song of marketing missives slowing its programming. Remember the trailblazer in the realm of video streaming? Now Netflix is just ripping pages out of the playbook of all of its rivals.
Growth hasn't just stalled on the road: It's shifted into reverse. Netflix needs a new engine, and advertising is an incremental revenue stream that also allows it to gracefully lower average subscriber prices without an actual price cut. The huge lead that Netflix had over the rest of the streaming media stocks is gone, but investors need to know that following in the footsteps of everybody else isn't going to get it back.
