The upcoming launch of an ad-supported version of Netflix (NFLX -0.63%) is dividing the market into two camps. Some investors are cheering the idea that a lower-cost offering could rekindle subscriber growth. Others fear adding the option of advertisements could tarnish the brand's premium image.
The doubters have a point, to be fair. Netflix is the best-of-breed, pioneering ad-free video entertainment.
Given the current state of the streaming market though, Netflix's foray into the ad-supported arena is a brilliant move that could light a much-needed fire under the stock.
The next era of streaming is underway
The streaming market is at a tipping point. Namely, ad-supported services no longer lie outside of the mainstream. Tivo's most recent video-trends report says more than 60% of streaming customers regularly use at least one ad-supported platform like Tubi or Pluto TV, while 80% of them wish their premium/paid streaming services were offered in a free, ad-supported option.
Tivo isn't the only source to suggest demand for lower-cost (or free) streaming television is strong. Recent data collected by LG Ads Solutions indicates 80% of connected TV owners use ad-supported streaming offerings, with two-thirds of this crowd preferring these pricing options over traditional ad-free subscription-based services.
Perhaps more noteworthy to current and prospective Netflix shareholders, however, is just how quickly this interest in ad-supported alternatives has taken shape...and is still taking shape.
LG's survey adds that 30% of streaming consumers have dropped a streaming subscription within the past year, while one-fourth of them added an ad-supported service. LG's study adds that 31% of streaming customers intend to remove a subscription service within the next year, with 23% planning on signing up a new free streaming option within that same timeframe. In a similar vein, Tivo's research indicates that non-paid streaming services accounted for 32% of all services being used by U.S. consumers as of the end of June, up from 26% as of the end of last year. Follow the trend.
Netflix's new ad-supported tier won't be free. At a monthly cost of only $6.99 though, it will be an affordable alternative to Netflix's basic plan's cost of $9.99 or its standard plan's cost of $15.49. That's good enough. Consumers are just trying to lower their monthly bills, and the upcoming launch of Netflix's ad-supported tier will help them do so while offering them access to what's still considered the world's best collection of streaming content.
And many of the platform's existing customers have already reported they're going to downgrade their plan to the lower-cost option. Numbers from a poll performed by Samba TV indicates 46% of Netflix's current subscribers would consider making the switch.
Connect the dots. Now enjoying lots of choices that simply didn't exist a few years ago, consumers are using the opportunity to re-rationalize their streaming budgets.
An unquantifiable reason to buy Netflix
The potential impact on Netflix's revenue mix remains in question. MoffettNathanson forecasts Netflix will be generating $2.7 billion worth of annual advertising revenue by 2025, for instance, while LightShed Partners estimates the plausible figure is $4 billion or more.
Both outlooks seem reasonable even if relatively modest compared to the company's annualized revenue run rate of $31 billion. After all, even the ad-tier customers are still paying a small monthly fee, and many consumers have no interest in the lower-cost option.
What's not quantifiable but still bullish, however, is how the lower-cost, ad-supported alternative not only makes it easier to subscribe to Netflix but makes it easier to stick with it even when entertainment budgets get tight. That's why Netflix and its shareholders have every reason to expect solid net-subscriber growth going forward from the Nov. 3 debut of its ad-supported tier.
What's more, it's a reason for sidelined investors to start moving back into Netflix again while it's still down nearly 60% since November's peak. The company will be adding scale without adding nearly as much cost, widening its profit margins it says are already leading the streaming industry.
