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Ad-supported Netflix a bridge too far for Netflix execs

Analysts say Netflix could benefit from introducing an ad-supported tier. Others suggest many Netflix subscribers are ready to embrace it. Success in some demographic groups and countries may never happen without it. But an ad-supported tier is a bridge too far for Netflix executives.

Speculation mounts for a Netflix ad-supported tier

Speaking at IAB’s Newfronts earlier this year, a panel of media executives was asked if Netflix would stay ad-free. Joshua Lowcock of media agency UM commented:

“I can’t imagine a world where Netflix will be ad-free forever. If you look at their content costs … that’s where addressable advertising and new ad formats will come in.”

Other panelists supported this view. For example, JP Morgan Chase CMO Kristin Lemkau said:

“The consumer wants choice, and they want something that creates value for them. To the extent that you’ve got this subscription version versus the non-subscription version, consumers will take that trade-off.”

Last week, analysts at Nomura Instent weighed in on the topic. The analyst firm claims Netflix could make $1 billion a year from advertising with $700 million “dropping to the bottom-line.” The company basis its estimate on Netflix introducing a free ad-supported tier that quickly grows to 25% of the user base of the subscription tier.

New data suggests ads could work

Hub Research released new data last week, suggesting an ad-supported option could work for Netflix. The company tested several discounts on the subscription cost in return for watching ads. It found that a $3 discount would prompt 46% to select the ad-supported option, 44% to stay ad-free, and 10% to drop the service altogether.

A $3 discount could end up being a good deal for Netflix. Hulu recently raised the price difference for ad-free viewing to $6 a month, while CBS All Access charges $4 extra to remove the ads from on-demand viewing.

The pressure to add an ad-supported tier

There is no question that Netflix is limiting its growth by not offering a free or cheaper tier of service with ads. In India, for example, Hotstar has ten-times the users as Netflix because it offers a free ad-supported level of service. Iflix has been beating Netflix handily in SE Asia. Its mobile-first service is under half the price of Netflix. However, even iflix recognized its growth was limited with subscription only. It introduced a free ad-supported tier in 2018.

There could be a group in the US that would be similarly interested in a free ad-supported service from Netflix. Pew Research says that 17% of US adults rely exclusively on their smartphone for internet access. What’s more, this group tend to be lower income and could be more interested in free ad-supported mobile viewing.

Ad-free at the core of Netflix

Netflix executives have been very clear about what they think of advertising as a viable revenue option. When asked about advertising at a press event in Hollywood earlier this year, Netflix CEO Reed Hasting simply said: “No plans on advertising.” He and Netflix head of content Ted Sarandos have responded similarly every time they have been asked to opine on the subject.

Advertising goes to the core of how Mr. Hasting and Mr. Sarandos view the service. From the very beginning, HBO has been the model for the service, and the standard by which Mr. Hastings has judged its performance. At the same press event earlier this year, he commented:

“It used to be; we had to beat HBO. In the U.S., we’ve grown tremendously, and yet HBO has also grown. HBO has grown from 30 million to about 42 million. So, you can see that our success doesn’t determine their success.”

The way Mr. Hastings and Mr. Sarandos sees it, Netflix is a premium movie and TV show service with a simple proposition; pay the subscription fee and watch great content uninterrupted. Don’t expect them to walk away from this ideal anytime soon.

Why it matters

Analysts think Netflix must eventually introduce ads.

A substantial proportion of Netflix subscribers say they would be interested in a version with ads, for the right discount.

However, Netflix execs show no signs of introducing ads.

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