Netflix (NASDAQ:NFLX) is facing an unprecedented urgency to look beyond paid subscriptions and introduce an advertising support subscription tier. According to the latest report from J.P. Morgan, the need for a low-priced ad-supported tier, similar to Disney+ Hotstar, amid increasing pressure on the company and to ensure future subscriber growth in quarters to come, is an all-time high.
Ted Sarandos, co-CEO of Netflix, confirmed at the Cannes Lions conference that Netflix is in discussion with “all” partners to build a service level that would be cheaper due to advertising.
Now the company is working on a war-front to rollout the cheaper Netflix tier faster than expected into 2022, J.P. Morgan analyst Doug Anmuth said. However, Netflix warns that the low-cost ad-supported plans could be different from the original idea. He also noted that it’s going to be an uphill battle as the market is too crowded now and almost every OTT player is eyeing on introducing a similar plan. Hence, it will take time for Netflix’s advertising revenue ARM (essentially, its average revenue per customer) to increase to close the monetization gap.
Anmuth states that Netflix has some strategic timing to roll out such low-cost Netflix plans. It’s quite likely that the release of ads-supported plans coincides with an effort to curb password sharing. Netflix is estimated to have 100 million users on its platform which are indulged in the password-sharing practice. It could be viewed as an increase in price by tightening the belt around millions of global account sharers. The launch of the ad-supported Tier simultaneously could reduce the expected impact of the loss of members that is expected due to the suspension of password-sharing practice.
During the first quarter, Netflix lost 200,000 subscribers, which cause a huge disappointment among its investors as well as stock traders. However, the biggest concern is the loss of a whopping 2 million subscribers in the second quarter – ended June 30, 2022 – expected by Netflix itself.
Anmuth believes that both initiatives may take some time to become successful, even though investors may be concerned about execution or account trade-down risk. Unlike many of its arch-rivals, especially HBO and Disney+, Netflix does not have advertising in its DNA, but that it has several hundred million viewers and the average household still spends two-plus hours per week on the platform.
J.P. Morgan cut subscriber estimates in large part due to macro weakness. It now sees second-quarter net additions as worse than company guidance. The company might have lost 2.75 million subscribers instead of the estimated 2 million in Q2 20222. However, It is also expected that the company would end the year with a net increase of 4.3 million subscribers, primarily due to some expected improved market conditions in the second quarter. The global market is coming out from the impact of Covid, major market price increases, favorable seasonality, and an ongoing focus on original content than licensed ones are some of those factors that would help Netflix to record a much better second half o the year.
Whatsoever may be, the biggest challenge for Netflix is to crack the Asia-Pacific market, considering most of the countries are price sensitive. The lukewarm response received in India – the proven largest market for almost every business now – is the major cause of concern for the OTT leader. The region holds the key to future growth for the company but all it requires is out-of-the-box thinking and a pocket-friendly subscription package. Netflix has bet on low-priced mobile-focused subscriptions but the response from the Indian market is not very encouraging until now.
How the market will respond to Netflix’s low-priced ad-supported subscription, only time will tell, but to know that the company needs to test the water as soon as possible.