Netflix Aims to Launch Cheaper, Ad-Supported Plan in Early 2023

Netflix is angling to win over a new bloc of value-conscious consumers — and reverse its declining subscriber numbers — with a new streaming package with ads set to debut in early 2023.

The company, in announcing Q2 earnings, said it’s targeting a launch of the ad-supported plan “around the early part of 2023.”

“We’ll likely start in a handful of markets where advertising spend is significant,” Netflix said in its Q2 letter to shareholders. “Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering. So, our advertising business in a few years will likely look quite different than what it looks like on day one.”

Netflix last week announced a pact with Microsoft to serve as its exclusive advertising partner. Microsoft is “investing heavily to expand their multibillion [dollar] advertising business into premium television video, and we are thrilled to be working with such a strong global partner,” Netflix said in the letter. “We’re excited by the opportunity given the combination of our very engaged audience and high-quality content, which we think will attract premium CPMs from brand advertisers.”

Netflix has not revealed pricing for the ad-supported plan, but it’s expected to be less than the streamer’s most popular plan without any commercials, the Standard package ($15.49/month in the U.S.) that includes two HD streams.

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“Our lower priced advertising-supported offering will complement our existing plans, which will remain
ad-free,” the company said in the letter. “Our global ARM has grown at a 5% compound annual rate from 2013 to 2021, so it makes sense now to give consumers a choice for a lower priced option with advertisements, if they desire it.”

Netflix first said it planned to launch an ad-supported service in its Q1 report — a strategy to find a new source of revenue growth, along with cracking down on password-sharers.

“Over time, our hope is to create a better-than-linear-TV advertisement model that’s more seamless and relevant for consumers, and more effective for our advertising partners,” Netflix said in Tuesday’s earnings letter. “While it will take some time to grow our member base for the ad tier and the associated ad revenues, over the long run, we think advertising can enable substantial incremental membership (through lower prices) and profit growth (through ad revenues).”

Wall Street analysts have expressed confidence that Netflix’s advertising tier won’t cannibalize its existing subscriber base. Indeed, Netflix’s ad-based plan could result in Netflix adding 4.3 million incremental U.S./Canada subs in 2023 and generating “significant upside” to revenue, Cowen’s John Blackledge wrote in a July 8 research note.

Morgan Stanley estimated that Netflix could charge $10/month in the U.S. for the ad-based plan, which could generate $7/month per subscriber in ad revenue. And the company could see ad revenue quickly ramp from $150 million in 2023 to $1.8 billion in 2025, according to projections last month by research firm MoffettNathanson.

With its move to launch a cheaper, ad-supported plan, Netflix is a bit late to the party. Streamers that already offer lower-cost options with ads include Hulu, HBO Max, Paramount+, Discovery+, and Peacock; Disney is aiming to bow an ad-supported version of Disney+ in late 2022.

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