Just six months after sharing its plans to offer an ad-supported tier, Netflix (NFLX -0.63%) is nearly ready to launch the new subscription offering. The Basic with Ads tier will launch in 12 markets at the start of November, with U.S. pricing of just $6.99 per month.
Netflix has generated a ton of buzz since announcing its advertising plans. Now that it's finally here, here are two big things investors need to watch.
1. The impact on revenue per subscriber
Netflix is being very strategic with the new ad-supported tier. Basic with Ads seems designed to only appeal to the service's most price-sensitive customers. It's severely limited in its service: it has a maximum resolution of just 720p, it's limited to a single stream at once, and it doesn't allow downloads (as is standard with ad-supported streaming services).
As such, it seems unlikely anyone on the Standard or Premium tiers (which offer higher resolutions and multiple simultaneous streams) will downgrade to the ad-supported tier. Nearly half of current subscribers said they would consider switching to an ad-supported tier, according to a recent survey from Samba TV and Harris X. But the actual number of switchers from Netflix's mid- and top-tier plans is likely to be very low after learning the details of the new ad-supported option.
As such, the vast majority of subscribers switching from ad-free to Basic with Ads will be from Netflix's existing Basic subscription, which costs $9.99 per month. Netflix COO Greg Peters said the ad-supported service is priced so that the impact on revenue is neutral to positive compared to the comparable Basic plan throughout the launch markets.
There's certainly some risk of subscribers in the upper tiers downgrading to the ad-supported plan, but that's all-around better than them cancelling the service outright.
This brings us to the second factor to watch.
2. The impact on churn and account sharing
The biggest factor Netflix has pointed to for its recent subscriber losses is the amount of password sharing it's experienced. Over 100 million households are using an account paid for by someone outside their home, according to Netflix.
Management has taken some steps to curb password sharing in some markets since the start of the year. When it identifies a password sharer, it prompts them to pay more for the service in those markets.
With the launch of Basic with Ads, Netflix could take another strategy to curb sharing. It could push subscribers it finds sharing passwords to downgrade to the new ad-supported tier. The tier is less than half the price of the standard subscription and nearly one-third of the Premium tier. It could be an equitable way for viewers to legitimately subscribe to the service.
Meanwhile, Netflix hasn't been immune to pressure from a growing number of streaming services in the media industry. As such, it's seen a slight uptick in subscriber churn, as consumers are more likely to subscription-hop or cancel outright in favor of less expensive options.
At $6.99 per month, this new flavor of Netflix is one of the least expensive premium streaming services on the market. The low price could help retain subscribers and both win back old and gain new subscribers.
More details to come
Now that investors have the plan details for Netflix's ad-supported tier, the only thing left to do is watch how it impacts Netflix's subscriber metrics and its bottom line. Based on the details of the new tier, advertising should have a very positive impact on the closely watched subscriber metrics without cannibalizing its existing subscriber base negatively. The new tier could reinvigorate subscriber growth by curbing churn and account sharing.
Netflix's management will share more details on its expectations for the new ad-supported tier when it releases earnings on Oct. 18. The release will include, as always, managements subscriber outlook for the quarter, which will give investors a better idea of what to expect from the tier. Be sure to pay close attention to management's commentary this quarter.
