Netflix (NFLX 1.98%) has revealed launch details for its new, ad-supported tier. Dubbed Basic with Ads, it will be priced at $6.99 per month and be available Nov. 3 for U.S. consumers. The plan is also being introduced in several other markets early next month, including Canada, Mexico, the U.K., and Japan.
Here's why this announcement could undermine the rollout of an ad plan from streaming rival Walt Disney's (DIS -1.07%) Disney+.
Ads as a method to reignite growth
Netflix initially announced plans for an ad-supported tier in April 2022, following its poor fiscal 2022 first-quarter results in which it revealed it had lost subscribers for the first time in more than a decade.
Speaking on the company's earnings call, Netflix founder and co-CEO Reed Hastings noted he had long been "against the complexity of advertising," but had since changed his mind because he is a "bigger fan of consumer choice." At the time, Hastings declined to specify when the new service would arrive.
Netflix's move into the ad space followed a similar decision by Disney. The House of Mouse said in March 2022 it had plans for a new, ad-based Disney+ tier that would serve as a "building block" in its efforts to reach 230 million to 260 million Disney+ subscribers by the end of fiscal 2024.
Disney steals the march
Disney was the first to disclose full launch details for its ad-supported tier. In August, the streamer said its new tier will cost $7.99 per month and launch Dec. 8. Disney noted that the ad-based offering -- which will feature four to five minutes of ads for each hour of viewed content -- will replace its current ad-free Basics plan as the entry-level product. The legacy tier will get a price bump to $10.99 a month.
Market analysts were broadly positive about the introduction of the new, ad-supported plan although there were some skeptics. Cowen analyst Doug Creutz suggested the price increase for those who didn't want to watch ads could "ruin" Disney's positive growth. "[T]he move greatly widens the range of potential outcomes for Disney over the next two years," Creutz warned.
Despite the mixed response from market experts, until recently, only Disney had clearly marked out its plans. Investors who were curious about Netflix's strategy had mixed reporting to rely upon, much of which the company dismissed as "speculation." And so, for many months, it seemed Disney had the upper hand in the next phase of the streaming wars.
Netflix undercuts Disney+, with caveats
By pricing its Basic with Ads at $6.99 per month, Netflix is now taking the streaming battle to Disney+. The company is also matching its rival by committing to just four to five minutes of ads for each hour, and as with Disney, Netflix has promised to not display marketing content alongside programming aimed at children.
However, Netflix still has some weak spots to overcome. Perhaps the most glaring issue for Netflix's ad-supported tier at launch is that it will not feature all the streamer's content. The company has cited "licensing restrictions" as the issue, but says it hopes to resolve that problem over time.
Separately, Netflix has made a choice to restrict its entry-level tier in other ways. Streams will be capped at 720 HD, and playback limited to a single device. Customers who want 1080 HD and multi-device support must choose the $15.49-per-month ad-free Standard tier, while 4K is only available to those who pay $19.99 per month. By contrast, the $7.99 Disney+ ad-supported tier includes all available content, supports 4K, and offers multiple device streams as standard.
Getting the word out
Despite the relatively stripped-back nature of Netflix's ad-supported tier, it's hard to argue with the appeal of the $6.99 sticker price. For the most price-conscious -- or even lapsed Netflix subscribers -- the price point could be enough to get them to sign up. And while Netflix will only have a little over a month before Disney rolls out its ad offering, it's surely a window of time that Netflix won't want to waste.
For investors, it's worth observing how much Netflix actively messages its new ad-supported tier over the coming weeks. If it goes hard on marketing the new $6.99 Basic with Ads plan, then there's every chance it could be the start of Netflix's return to subscriber growth.
