Why Netflix’s New Ad-Supported Tier Won’t Be Enough to Save the Once-Invincible Streamer | PRO Insight

In a saturated streaming market, Netflix cannot (and should not) bet on ads alone — or continuously raising monthly subscription prices

netflix ad supported tier
Photo illustration by TheWrap (Getty Images)

At long last, after years of emphatically telling the world that it would never do it (and that it would be blasphemous to think otherwise), Netflix launches its discounted $6.99 monthly ad-supported tier this week (something that I’ve predicted for years). It’s a critical “never say never” moment for the company that just recently announced a positive turnaround with 2.41 million new paid subscribers after two consecutive quarters of losses. Many pundits breathlessly cheered the Q3 news as proof that the streaming leader is alive and well once again — Forbes called it a “monster Q3” — and that its new ad-supported tier will take the company to new heights in the face of increasing hyper-competition. But will it? And will it be enough for Netflix to stay independent long-term instead of being swallowed up by a much bigger fish? (I’ve discussed that possibility in my last few columns.)

The quick answer is “no” — ads alone won’t be the great “fix” that many believe. And Netflix’s ad moves also carry significant risks. First, ads disrupt the platform’s “pure” high-quality streaming experience that we all know and love (and that co-CEOs Reed Hastings and Ted Sarandos always touted as a major differentiator). That, in turn, may adversely impact its brand and overall customer satisfaction (which can be measured by “net promoter scores” or “NPS”). For those paying subscribers who “downgrade” to the new ad-supported tier, there is a serious risk of increased churn, especially as they compare (and prune) their streaming alternatives in these tough economic times. Netflix, after all, lacks the highly marketable franchise content of others (including Disney+, HBO Max and Peacock).

Another obvious risk, of course, is that more existing subs than expected will downgrade to the new ad-supported tier and cannibalize the streamer’s solid base of existing (and higher-paying) subscriptions. Undoubtedly, the metrics and customer data-rich company mined its numbers to optimize overall tiered pricing and thought long and hard before doing what was previously unthinkable. But until now, no real-world conditions were in play. Now they are, and it’s not just increasingly tight wallets.

Netflix finds itself in a fully-saturated U.S. streaming market that Kanter pegs at about 90%, and Netflix’s seemingly stellar Q3 results bear that out. The company added only 100,000 new subs in the U.S. and Canada, not to mention 2 million fewer overall subs year-over-year. The fact that Netflix just announced that it would stop giving analysts projected subscriber numbers beginning in January 2023 seems to be a tacit acknowledgment of that reality. And its increased reliance on international expansion faces fundamental challenges as well. Many of the “ripest” territories are mobile-first, pricing-challenged and incapable of generating any revenues close to the new monthly $6.99 plan.

To be clear, Netflix’s ad-supported move is smart in terms of what it represents – the recognition that it must find new ways to grow and diversify its revenue streams. After all, it faces massive competitors with very different business realities. Netflix essentially lives on content revenues alone (paid subscriptions and now ad dollars). The company’s biggest threats, however, drive multifaceted business models that use content as marketing to drive increased customer satisfaction/NPS that, in turn, generate more sales of their core products. Apple TV+ drives more sales of iPhones and Macs. Amazon Prime Video primes the etailer’s annual Prime membership pump. Meanwhile, Disney+ is Mickey’s new portal into Disney worlds beyond film and television – notably, theme parks and merchandise. So, Netflix smartly realized that something had to be done.

But beyond ads, what more can (and should) Netflix do? Certainly, the streamer should take a hard look at cutting costs, particularly its gargantuan annual $17 billion content spend. Do we really need all those titles? Meanwhile, on the revenue side, Netflix’s expansion into the lucrative gaming market makes sense (the streamer now features about 35 games). But differentiation in the gaming world won’t be easy since the giants are already in that space. How about expanding merchandising for the few franchises it does own, including “Stranger Things” and “Squid Game”? Absolutely! But that’s not enough.

The most obvious opportunity is for Netflix to take its powerful global brand outside our living rooms and into the real world to create entirely new synergistic monetizing experiences – and it’s finally at least taking baby steps there. Just last week, the company opened its first “immersive” pop-up retail story in Los Angeles in a sign of perhaps even more things to come. Theme parks, anyone? No, don’t build them. Just license “Stranger Things” – like Warner Bros. did with “Harry Potter” to Universal Studios parks – and they (more customers) will come (and stay with the brand).

Perhaps the most tantalizing out-of-home opportunity is to significantly expand into the physical world of movie theaters, something Netflix has done only sparingly to date. It’s certainly a good time to look hard at buying (and saving) a distressed indie theater chain. That kind of move would be welcomed for myriad reasons, not just for box office receipts and popcorn revenue. For one thing, Netflix could add another – and significantly higher – paid VIP subscription tier that includes a MoviePass-like component. Imagine Netflix also offering exclusive in-theater early screenings to originals like “Glass Onion: A Knives Out Mystery,” which hits 600 theaters for one week over Thanksgiving. Co-CEO Ted Sarandos insists that “Knives Out” is the rare exception, not the rule (he recently said “we make our movies for our members, and we really want them to watch them on Netflix”). But haven’t we heard that song before (i.e., “No ads, ever!”)?

The company’s support of theaters would also generate positive buzz for its showcased films, not to mention great public relations for Hollywood talent. That all translates into priceless marketing that would accelerate growth for every element of Netflix’s now significantly-expanded business model.

Netflix cannot (and should not) bet on ads alone, and it can’t rely on continuously raising monthly subscription prices either. Remember, the streamer’s massive Big Tech competitors boast trillion-dollar-plus valuations and hundreds of billions in cash that, notwithstanding recent price hikes of their own, give them the ability to undercut Netflix’s northward pricing moves.

Netflix’s ultimate “fix” may be M&A — from either side of the table. As a buyer, it should look to acquire a proven boutique studio like Blumhouse that would give it the franchise content that it so desperately needs for years of multi-monetization across all channels (streaming, games, merchandise, out-of-home). But at some point – which may be sooner than most think – it also may be a seller. And there’s certainly a long line of potential megabuyers that boast far more resilient, multifaceted business models and could use Netflix as one invaluable giant cog in their overall revenue-generating machines, rather than the entire cog itself.

For those of you interested in learning more, visit Peter’s firm Creative Media at creativemedia.biz and follow him on Twitter @pcsathy.