Tuesday, March 24, 2020, 12:43 PM ET|Posted by Will Richmond
VideoNuze readers will recall that several months ago I made a prediction that Netflix would launch a lower cost (around $5-$7 per month) ad-supported tier in 2020. I predicted this despite Netflix management having steadfastly resisted the model, because I believed the logic was just so compelling and straightforward that no “religious” argument to the contrary would preclude it.
However, a month after posting, on Netflix’s Q4 ’19 earnings call, management once again rejected the idea. In my and other analysts’ view, Netflix offered what seemed to amount to a “we can’t chew gum and walk at the same time” argument that focused on its perceived inability to compete effectively with the ad triopoly of Google, Facebook and Amazon. Despite CTV ad dollars being scooped up by the likes of Hulu, CBS All Access and other premium video providers, Netflix somehow concluded it simply couldn’t play.
With the coronavirus upending life and prompting a surge in stay-at-home viewing, I’d like to suggest 6 reasons why now would be the absolute perfect time for Netflix to announce a lower priced ($5-$7 per month) ad-supported tier (note to readers: feel free to let me know if I’m missing something colossally obvious that would negate my assertion).
1. Inoculate against belt-tightening by subscribers
Obviously the virus is going to prompt economic belt-tightening across millions of households around the world. Some analysts are asserting Netflix is “recession-resistant.” That may be true to an extent, but in a world where password sharing is still rampant and SVOD competition is increasing, Netflix isn’t going to get a complete pass. A lower-priced ad-supported tier would allow those tightening their belts to at least have a temporary way change their Netflix subscriptions without fully losing access. And remember - Hulu and CBS All Access which both offer lower-priced ad-supported and higher-priced ad-free tiers have repeatedly said the majority of subscribers choose the former. Simply put, there is strong demand for lower-priced services.
2. Mitigate Q1 and especially Q2 subscriber softness and upcoming SVOD competition
Related to this, giving current and new subscribers a lower-priced tier would help Netflix mitigate what was possibly going to be a subscriber loss in the U.S. and Canada in Q1 and almost certainly a bigger loss in Q2 ’20 than the one it suffered in Q2 ’19. No question, the stay-at-home viewing trend has scrambled this thesis, but the fundamentals remain: Netflix is almost fully saturated, its prices are high relative to the competition, strong new entrants are here/coming, etc. An ad-supported tier could address all of these weaknesses.
3. Capture correlated revenue increases from viewing surge
As I wrote last week, AVOD services are likely going to benefit more from stay-at-home viewing than SVOD simply because their revenue is more correlated with actual usage that is surging. With AVOD, more viewing means more ad inventory. Assuming there’s sufficient advertiser demand (more on that below), revenue rises. My hunch is we’ll see this dynamic on display in Q1 earnings reports across the adtech/OTT sector in a few weeks. Conversely, aside from reduced churn and slight increases in sub acquisition, SVOD doesn’t gain significantly from more viewing. Netflix is purely SVOD today. But it could immediately tap into the new ad revenue opportunity by creating a lower-priced tier.
4. Gain a slice of the billions of dollars of sports and Olympics ad dollars up for grabs
Today the Olympics were postponed, adding to the total blackout of live sports. Billions of dollars of advertising spending are now in a no-man’s land - will it be re-allocated elsewhere (and if so where?) or banked for second half? What happens to this spending is the biggest uncertainty related to how AVOD will capitalize on viewing spikes. Netflix has a very strong case to make that its premium, brand-safe, CTV-oriented viewing is a solid fit to migrate a slice of sports ad spending to. If you were in an agency buyer’s or DSP's shoes, suggesting to your client you’d like to experiment with moving some funds to Netflix has little risk; it’s not like you’re suggesting some unheard of UGC site. All Netflix needs to do is hang out a “We’re Open for Business” sign to agencies and demand will flow.
5. Strengthen financial position, take market share
Tough economic times are when strong companies make the biggest gains - weaker competitors are driven out or consolidated. If Netflix announced an ad-supported tier and bona fide new revenue stream, investors would cheer, improving Netflix’s ability to raise capital. It could use that capital to inexpensively pick up select SVOD and AVOD libraries and brands. Netflix will continue its regular production schedules, but this is a classic “buy vs. build” augment opportunity. I know it may sound crazy to say, but might there even be a sports play for Netflix here too?
6. Contribute to all stakeholders
I’ve long been a believer that a corporation's stakeholders include its customers, employees and communities, although I readily concede that over the past 30 years the priorty has dramatically shifted to shareholders (and management). So I was heartened that European regulators asked Netflix and other streamers to reduce their quality to preserve bandwidth. That showed regulators recognize OTT services are essential to citizens’ entertainment, but that there are still other priorities.
In a similar vein, I think a lower-priced ad-supported service would demonstrate Netflix understood its content is well-loved and valued, but that in these difficult times, making it available on a more flexible basis would have real benefits for society. Is a lower-priced Netflix alternative going to save people’s lives? No, of course not. But might it make life a little more bearable and enjoyable for millions? Yes, I believe it could.
The business reasons outlined above provide a sound rationale for Netflix to finally offer an ad-supported tier. The societal reason is an opportunity for Netflix to “do well by doing good.” I hope this is finally the moment when Netflix management recognizes all of this and acts.