TDG: Netflix needs a cheaper, ad-supported tier

According to the Diffusion Group, a third of Netflix (NASDAQ:NFLX) users would consider changing to a less-expensive, ad-based tier, and 17% are moderately likely to ...

Ott

According to the Diffusion Group, a third of Netflix (NASDAQ:NFLX) users would consider changing to a less-expensive, ad-based tier, and 17% are moderately likely to or definitely would switch.

While Netflix has consistently spurned ads, the decision is not entirely within its control, said Michael Greeson, president of TDG and senior vice president of Screen Engine/ASI. In the next year, much of Netflix's most-viewed video content will disappear from its library, as networks like Disney and WarnerMedia reclaim their high-value titles in order to populate their own direct-to-consumer (DTC) services.

"Netflix's response to its thinning third-party library is to spend more on originals, which it's gambling will keep subscribers from jumping ship," Greeson said. "But with half or more of its most-viewed shows being owned by three studios, each of which is launching their own DTC services, how long can you convince 55+ million U.S. consumers that your service is worth paying a premium price, especially compared with Hulu (offers an ad-based option), Amazon Prime Video (free with Prime), and Disney+ (coming in a $6.99/month)?"

Given this context, and in order to offset mounting content costs and pressure from investors to begin paying down debt, Netflix will need to (1) increase the retail prices of subscriptions (which it recently did), or (2) create a new revenue stream, such as advertising, TDG believes.

"This should not be an either/or decision, but that's what it is," said Greeson. TDG's research from late 2018 indicated that Netflix's most recent price increase strained the limit of the service's value, even before popular third-party shows are pulled from the lineup. When that happens, short-term domestic price increases will be difficult if not impossible without deleterious results.

As with Blockbuster in the 2000s, Netflix has long enjoyed dominance in its market space, producing a bit of over-confidence and an embedded resistance to change, TDG believes. Given shifting competitive conditions, however, flexibility is essential - something with which Netflix has limited experience. Like Blockbuster, it largely defined its space, set the rules, and long since reigned.

"But the stage is shifting," said Greeson, "and if, like Blockbuster, Netflix fails to evolve in a timely fashion, the company may see its domestic fortunes reversed."

On the other hand, Netflix could bend a bit and launch a less expensive ad-subsidized tier, something that Greeson expects to happen in the next 18 months.

"Ads will become an important part of a comprehensive tiering strategy that helps bullet-proof Netflix for years to come."        

More in Video