Netflix Sets Price for Ad-Supported Tier (but There’s a Catch)

Netflix has been signaling recently that after years of resistance, the streaming giant would introduce an advertiser-supported tier. 

Now, the once invincible streaming service has said that it's ad-supported tier, "Basic with ads,” will cost $6.99 a month. 

The tier will launch on Nov. 3. 

However, a limited number of TV series and movies (it's unclear at the moment which specific titles) will initially be unavailable on the tier due to licensing restrictions, which could likely be the case for material Netflix has licensed from studios that already have brand partnerships in place. Also, users won’t be able to download shows and movies to watch offline, which they can do on Netflix’s other plans.

• Users won’t be able to download shows and movies, which they can do on Netflix’s other plans.

The commercials will be 15 or 30 seconds in length and will play before and during Netflix’s content. Brands will have the ability to opt out of content they don't wish to be associated with. This likely refers to material that is either very gory, such as the horror film "The Babysitter," or sexual in nature, like the controversial erotic thriller "365 Days."

Additionally, the ratings company Nielsen will begin to measure Netflix's digital audience starting in 2023, so brands will have a clear sense of how Netflix's titles perform. Previously, Netflix kept this information under tight lock and key.

The move comes as competition in the streaming business continues to intensify with both new entrants and deep-pocketed competitors in the fray.

At $6.99, this price tier is well below competitors such as Disney+  (DIS) - Get Free Report and HBO Max  (WBD) - Get Free Report, suggesting that Netflix plans to compete on price while it tries to grow the service.

This change comes as Netflix, which still has the highest overall subscriber totals, has begun to lose subscribers this year and has seen its stock value drop

Netflix is due to report third-quarter earnings on Tuesday, Oct. 18.

Why Did Netflix Do This?

For years, Netflix’s Co-CEOs Reed Hastings and Ted Sarandos would pish-posh the idea of Netflix ever introducing advertising. 

Part of the reason is that the company licenses TV shows and films from nearly every single studio, and advertising would complicate those deals. 

For example, let’s take the popular show “Community.”

It’s unclear at the moment if Netflix will agree to split advertising revenue with Sony  (SNEJF) , the studio that produced the sitcom “Community,” or Comcast  (CMCSA) - Get Free Report, owners of NBC, the channel that initially aired the series. (Networks usually get a few points on these sorts of deals.)

Will Netflix have a standard agreement with every studio it licenses material from, or will it have to negotiate a new deal every time it wants to add to its library? You can see the headaches this will cause, and as with much of the company’s new direction, there are  many questions we don’t have the answers to yet.

Hastings has previously noted that most of the advertising money these days is hoovered up by Facebook and Google, and as reported by TechCrunch, he feels that winning online advertising business from Amazon  (AMZN) - Get Free Report, Google  (GOOGL) - Get Free Report and Facebook is “quite challenging.” 

He also noted that he wasn’t comfortable with the idea of tracking subscriber data to give to advertisers, according to the report. “We don’t collect anything. We’re really focused on just making our members happy,” Hastings stated.

But there’s a bigger reason Netflix didn’t want to license, and you can chalk it up either to public image or vanity. Like HBO  (WBD) - Get Free Report, Netflix saw itself, and sold itself, as a premium product, even noting in a 2019 shareholder letter that not having advertising is part of its overall brand proposition. 

Sure, Netflix wasn’t free like regular TV, but you got so much more of it. It was something above and beyond. It wasn’t TV, it was Netflix, as the saying goes.

But now that HBO’s parent company Warner Bros. has merged with Discovery to become Warner Bros. Discovery, HBO will introduce an advertising-supporter tier next year, and Disney also has plans to introduce one as well.

So what happened here?

Netflix is largely responsible for popularizing the idea of streaming television and films, but it’s never really had the lane to itself. Shortly after Netflix, which famously started as a mail order rental service (which by the way, still exists), introduced its streaming option, Hulu (originally a joint venture between Fox News Corporation and NBC Universal, and now largely owned by Disney) launched. HBO and Showtime  (PARA) - Get Free Report debuted their own streaming services shortly after.

The dominance of Netflix was arguably the story of the ‘10s, but as time went on, media companies like Disney and NBC Universal realized that by licensing their material to Netflix, they had built their biggest competitor.

So they made plans to start their own streaming services, and began ending their licensing deals, eventually pulling from Netflix, in Universal’s case, popular Netflix standbys like “Parks and Recreations,” or in Disney’s case, the various Marvel Cinematic Universe, saving them for their streaming services.

By 2020, Netflix had more competition than ever, as HBO introduced HBO Max, which had broadly appealing material from across the Warner Bros. portfolio, Disney had just launched Disney+ and NBC launched Peacock. 

Now, Netflix did fine for itself in 2020, reaching new height of subscriber totals during the pandemic. But by Spring of 2021, investors began whispering of a “Netflix ceiling,” which is the idea that everyone who was going to get a Netflix subscriptions has gotten one by now, and at this point the natural order of things is that some customers will stay long-term, and some will join for a month, watch whatever TV show they are interested in, and then quit for a while, an activity known as churning.

Once Netflix had more competition and less recognizable TV shows, losing popular programs such as “Friends” to HBO Max and “The Office” to Peacock, its bad habits began to catch up with it. 

Put simply, Netflix employed a development process that can be described as “throw it all against the wall to see what sticks.” It made a lot of TV shows and movies. Some of them were great, like “Bojack Horseman.” Some of them were huge, like “Stranger Things.” Most of them were just forgettable.

This year, Netflix saw its stock decline for the first time in years, and it began two rounds of layoffs. Netflix is still the biggest streaming service, with 220.67 million global paid subscribers, but Disney’s three combined streaming services (Hulu, Disney+ and ESPN+) now have 221 million total subscribers as of this summer, and Disney has said it expects Disney+ alone to surpass Netflix within the next five years.

So the plan with Netflix is that a lower-price service can lure in new and lapsed customers, while also generating revenue. Will this be enough to secure Netflix’s number one spot? That’s unlikely. But will it entice more potential customers to sign up and experience the joys of “Floor Is Lava,” the world’s greatest game show? That remains to be seen, as does so much else about the future of Netflix.