Why Netflix Should Launch An Ad-Supported Plan, Despite Its Past Reservations

by Trefis Team
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Trefis concludes from its detailed interactive dashboard Why Netflix Should Seriously Consider An Ad-Supported Tier For The U.S.  that Netflix could revive U.S. subscriber growth by launching an advertising-supported tier, given the fact that its key rival Hulu has proven that such a model can be monetized effectively.

OVERVIEW

Netflix has seen its U.S. subscriber growth slow in recent quarters due to higher competition in the streaming space with the entry of Disney+, Apple TV+, and also due to its recent price increases. We believe that the company could see further headwinds going into next year, with AT&T’s HBO Max and Comcast’s Peacock set to launch. Netflix cannot afford to see slower subscriber growth/ subscriber attrition in the U.S. given its massive content investments and growing debt. Considering this, we believe Netflix could launch an ad-supported streaming service providing a lower price point, in the range of the pricing for Hulu and Disney+. Below, we outline the rationale for launching an ad-supported tier.

Netflix U.S. Subscriber Growth Is Slowing

  • While U.S. Streaming subscribers grew from 56 million in Q2’18 to about 60 million in Q1’19, the number has flattened in recent quarters, due to mounting competition and the company’s recent price increases.
  • Netflix service also looks pricey compared to the competition. Netflix service costs $13/month for its most popular plan, while newer rivals are offering plans at roughly half as much. Disney+ is priced at $7 per month, Hulu at $6 for its ad-supported tier, and Apple TV+ costs $5 per month.

Netflix could embrace an ad supported model to drive growth. Hulu has demonstrated that the ad-supported streaming model is viable!

We estimate that Hulu earns roughly $7 per month in ad revenues per ad-supported user

  • Hulu has indicated that it made roughly $1 billion in ad revenues in 2017, with the number growing to about $1.5 billion in 2018.
  • We estimate that the company had about 12 million and 17.5 million subscribers on its ad-supported tier in 2017 and 2018, respectively.
  • This translates into advertising revenues of roughly $7 per user per month.
  • Adding this to the $6 subscription price for the ad-supported tier, it amounts to an effective ARPU of about $13 per month. This is actually ahead of the $12 the company charges for its premium ad-free tier.
  • We believe that Netflix could also do something similar by offering an ad-supported HD plan at between $7 to $10, while bolstering ARPUs via ad revenues.

For more details on how  Hulu’s monetizes its ad-supported subscription, view our detailed dashboard analysis Why Netflix Should Seriously Consider An Ad-Supported Tier For The U.S

 

Streaming audiences have favorable demographics compared to Broadcast TV, making them attractive to advertisers

  • Streaming services cater to a younger demographic and are generally skewed toward more affluent households, making them attractive to marketers.
  • For instance the median age of a Hulu viewer was 32 years versus 56 years for Broadcast TV.
  • Average household incomes are also higher for streaming. Hulu viewers had a household income of $93k in 2018, compared to a median U.S. household income of $63k.
  • While Netflix has not provided viewers age and income data, it’s safe to assume that it will be roughly on the lines of Hulu, making its platform just as attractive to marketers.

Conclusion

Considering Hulu’s favorable execution of its ad-supported plan, we believe that Netflix could launch an ad-supported tier to drive subscriber growth and improve its overall revenues.

 

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