How Ads on Netflix Will Change Your Streaming Experience
Jhe imminent launch of Netflix’s new advertising tier has the potential to be a game-changer in streaming, both for Netflix users and for its bottom line.
After losing nearly 1.2 million subscribers in the first two quarters of 2022, Netflix said in its third-quarter earnings report on Tuesday that it added 2.4 million subscribers, more than the million that the company had forecast last quarter. It also forecasts a gain of 4.5 million subscribers for the fourth quarter. This much-needed boost comes as Netflix prepares to roll out its new ad-supported discounted subscription tier in early November. The ad-based plan will allow subscribers to cut their Netflix costs by 20-40% in exchange for some additional downtime.
As the streaming industry becomes oversaturated with competitors, analysts say Netflix’s push into advertising is a move that could help kick-start the streamer’s growth by enticing budget-conscious consumers to sign up for the service.
“It could hurt their revenue,” says Laura Martin, senior entertainment and internet analyst at Needham & Company. “But it should help their subscriber growth.”
Netflix said on Tuesday that the Ad Tier launch should result in “significant incremental revenue” over time. It will also make Netflix more affordable than ever for users, as long as they don’t mind watching ads.
What Netflix Ads Mean for Users
Netflix’s ad-supported tier, Basic with Ads, will launch in Canada and Mexico on November 1, followed by Australia, Brazil, France, Germany, Italy, Japan, Korea, the United Kingdom and the United States on November 3, and Spain. November 10.
With Netflix’s current monthly subscription model, subscribers in the US can use their account on one, two or four screens at a time and prices reflect the number of screens available, ranging from $9.99 to 19. $.99. The cheaper, ad-supported plan will cost $6.99 per month and will allow subscribers to use their account on one screen at a time. Netflix said there will be an average of five minutes of commercials per hour that will air before and during movies and series.
There are also a few catches. Like its ad-free Basic plan, Basic with Ads will have lower video quality than Netflix’s Standard and Premium plans. Additionally, Basic with Ads subscribers will not be able to download shows and movies to their devices for offline viewing, and will not have access to approximately 5% to 10% of Netflix’s content catalog, as the company has no right to show these programs with advertisements. Those who sign up on the ad tier will also need to provide their date of birth and gender, as Netflix eventually plans to use those demographics to target ads.
At $6.99 per month, Netflix’s ad plan will be cheaper than many of its competitors. The Disney+ and Hulu ad plans will both cost $7.99 per month when the Disney+ ad tier launches in December, while HBO Max with ads will cost $9.99 per month.
What Netflix Ads Mean for Netflix
A recent study by Accenture showed that 63% of consumers agree that it is too expensive to pay for all the entertainment subscriptions they want. But with its level of advertising, Netflix is offering a shiny new option in front of more frugal consumers, says Michael Pachter, media analyst at Wedbush Securities.
“A middle- or low-income household that subscribes to streaming might not be able to afford five different subscriptions,” he says. “But there will be people who say, ‘I don’t really want to pay [the Netflix Standard plan price of] $15.49. I don’t want to pay $186 a year. But $6.99 a month is $84 a year. Maybe I’ll stick around for $84 with some ads. ‘”
By introducing a cheaper ad tier, Netflix runs the risk of existing subscribers dwindling to pay less each month. It’s banking on ad revenue to make up for that loss, says Seth Shafer, senior research analyst for media research group Kagan.
“Netflix balances new ad revenue with the potential for lost subscription revenue due to demotion of existing users,” he says. “But it will take some time for the advertising business to be fully monetized.”
On Tuesday, Netflix said in its letter to shareholders that its advertising business was still in its “very early days” and that building up its membership base and associated ad revenue would be a process.
The biggest challenge facing Netflix’s new advertising business is advertising’s reliance on what’s happening in the broader economy, Shafer says. “When you look at the economy, there’s this big question of are we heading into a recession?” he says. “In this context, things are starting to look a bit dicey.”
But Netflix is also a little different from other streamers, says Shaffer. “For years, advertisers have been clamoring for the ability to buy ads on Netflix,” he says. “So even as economic headwinds continue to grow, Netflix’s results may differ from those of the broader advertising market.”
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