Netflix (NFLX 1.36%) and Walt Disney (DIS -1.67%) seem to be passing ships when it comes to pricing. Netflix held a press call on Thursday, unveiling how much its new ad-supported tier will cost. When it launches in the U.S. come Nov. 3, it will set cost-conscious subscribers back just $6.99 a month. This is on the low end of the $7 to $9 monthly rate that was reported by Bloomberg.
Disney+ plans to introduce its ad-backed plan -- at $7.99 a month -- on Dec. 8. Remember when Disney+ launched its ad-free platform three years ago for $6.99 a month, just a little more than half the $12.99 monthly rate that Netflix was commanding for its standard plan? The living room coffee tables have turned.
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Stranger things
Netflix taking a cutthroat pricing approach is interesting, but not entirely unexpected. The premium streaming leader had to be aggressive after kicking off 2022 with back-to-back quarters of sequential declines in subscriber counts. It does expect a return to sequential membership growth for the third quarter, which it will report next week, but Netflix can't mess this up. It has to make sure that it doesn't overplay its hand the way it likely did with an ill-advised price hike earlier this year. The stock has shed more than two-thirds of its value since peaking late last year.
Investors didn't flinch at the news. Netflix stock rose 5% on the announcement, and that's the real surprise here. Netflix has historically moved higher after unveiling rate increases. Now it's getting bumped higher after turning the pricing gun the other way.
Lost in the flurry of upticks, however, is that the new Netflix plan will likely come at the expense of people paying a lot more now. Putting up with four to five minutes of ads per hour to save a few bucks is pretty compelling value proposition, especially if the economy sinks and discretionary incomes start to go down.
It's also not an apples-to-apples comparison. Disney+ -- the original ad-free flavor -- will be increasing in price by 38% to $10.99 a month next month. It's still a lot less than Netflix's standard plan that is now at $15.49 a month, but it's more than the Netflix basic plan at $9.99 a month.
The ad-free Netflix offering is for the entry-level basic plan. It allows only one stream at a time, so, unlike the more popular standard plan, it can't be shared by two members of the same family wanting to catch different shows. Standard-definition quality was another thing keeping people from the basic plan, but now that is being upgraded to a more respectable high-def at 720p. Netflix is going to see people trade down to either the new $6.99 ad-supported basic plan or the ad-free $9.99 offering. All roads lead to a reduction in average revenue per user.
Ad revenue will be welcome, and Netflix's audience will be attractive to marketers. It won't make up the difference between what they will be paying and what they used to pay before trading down. The market applauded a questionable strategic move by the streaming media stocks bellwether on Thursday. It's hard to root for a new Netflix tier that you want to succeed but also hope is not too successful.
