Netflix(NASDAQ: NFLX) is working on a lower-cost, ad-supported tier that is widely expected to launch in early 2023. The move follows years of Netflix dismissing such an idea, with founder and co-CEO Reed Hastings noting in the past he was against the added complexity of an ad-based offering.
However, having lost a chunk of subscribers this year, the streamer has to do something to reignite growth. Fortunately for the streaming service, its upcoming ad-supported tier could have just the right limitations to do exactly that.
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The ad-supported tier might never have all the shows and movies
During a recent investor call, Netflix CFO Spencer Neumann elaborated a little more on the situation, offering a caveat that the firm might renegotiate some content agreements. "Hopefully we can supplement that," said Neumann. "But we'll be disciplined in what we do."
Netflix hasn't disclosed what will or won't be included in the ad-supported tier, but based on what they have said, we can make an educated guess. The plan will probably include Netflix Originals such as Bridgerton and Stranger Things, but anything not made by the streamer is fair game for exclusion. This could include many popular titles, such as AMC Networks' Breaking Bad, DreamWorks Animation's Kung Fu Panda franchise, and the History Channel reality series Alone.
You get what you pay for
Netflix has not previously used content as a way to differentiate between tiers. But now the company is adjusting its operating model, this may be the right time for such an approach.
One example of this is HBO Max, owned by Warner Bros. Discovery(NASDAQ: WBD). The streamer provides a $9.99 per month ad-supported tier, offering shows such as Westworld and movies like King Richard. However, when popular films such as The Batman first arrive on HBO Max, they are typically only available to customers who pay more for the ad-free plan.
Still, despite the restriction, there are signs many customers are fine with the trade-off. Warner Bros. Discovery does not break out its mix of ad-supported and non-ad-based customers, but researchers have estimated as much as 30% of HBO Max's subscriber base have opted for the cheaper plan.
For Netflix, getting the right balance of what's available with the ad-supported tier will be important. The offering should be enticing enough that lots of new subscribers (or lapsed customers) sign up for it. But make it too good, and the firm could be leaving money on the table.
Still, perhaps the biggest risk Netflix faces in rolling out an ad-based offering is that those on higher-priced plans may swap to it. After all, these customers have been exposed to what's on offer in the full Netflix. If they see the ad-based plan as good enough, it could take a bite out of the streamer's revenue.
As the launch of Netflix's ad-supported tier gets closer, expect the company to share more details of what subscribers can expect. If a significant number of popular shows or movies are missing, it might not all be about licensing. Instead, it could simply be that Netflix believes those who want more will have to pay for it.
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Tom Wilton has business dealings with Netflix, but holds no financial position in any stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
