LOS ANGELES — Commercials are coming soon to Netflix.
The Los Gatos streamer on Thursday said it would launch a cheaper, ad-supported plan at $6.99 a month starting on Nov. 3 in the U.S. Netflix will still offer ad-free subscriptions, but for people seeking a discount, a total of four to five minutes of ads will be spread out before and during their favorite programs each hour.
The company said a limited number of shows and movies won’t be available on its Basic with Ads plan because of licensing restrictions, and customers won’t have the ability to download programs.
The push into advertising comes years after Netflix resisted putting commercials on its programs. But as the company faced increasing competition from rivals like HBO Max that offered lower-cost, ad-supported subscriptions to customers, some analysts said it was inevitable that Netflix would do the same.
The company – which remains the dominant subscription streaming service with nearly 221 million customers worldwide – is under pressure by investors to continue to grow its business. The pandemic saw unprecedented sign-ups for streaming, but since then, Netflix has struggled.
Netflix lost subscribers in two consecutive quarters and laid off hundreds of workers earlier this year to cut costs.
Some analysts believe that Netflix’s move into advertising could increase subscribers, reduce cancellations and provide an additional revenue stream for the company.
Doug Anmuth, an analyst with J.P. Morgan, estimates that the new plans could bring Netflix around $600 million in advertising revenue next year in the U.S. and Canada and roughly $2.65 billion in 2026 in that region.
Anmuth said in a research note that given Netflix’s muted subscription growth, “advertising is critical to re-accelerating revenue” and driving more profitability.
By offering ads, Netflix may be able to reach people who aren’t subscribers. Nine out of 10 adults who don’t have Netflix watch other ad-supported streaming content, according to a recent survey of 2,500 adults by Samba TV and Harris X.
“These audiences have no aversion to watching ads in exchange for free or reduced price content and are prime candidates to turn to Netflix’s new ad-supported tier,” Samba TV Chief Executive and Co-Founder Ashwin Navin told The Times last month.
The cost of an ad-free Netflix subscription is the most expensive for any popular U.S. streaming service. Netflix monthly ad-free plans range from $9.99 to $19.99. That’s compared with ad-free HBO Max and Hulu priced at $14.99 a month.
Disney+ will launch an $8 monthly ad-supported plan on Dec. 8. At that time, the cost of an ad-free plan will go up to $11 a month. Launching its ad-supported plan before Disney+ could give Netflix an edge with courting advertisers.
For customers who opt for ads on Netflix, 15- to 30- second ads will appear before and during their programs.
Netflix’s ad-supported plans will launch next month in 12 countries, including the U.S., Australia, Brazil, Canada, France, Germany, Italy, Japan, Korea, Mexico, Spain, the United Kingdom.
“In short, Basic with Ads is everything people love about Netflix, at a lower price, with a few ads in-between,” wrote Greg Peters, Netflix’s chief operating officer in a statement. “Basic with Ads also represents an exciting opportunity for advertisers – the chance to reach a diverse audience, including younger viewers who increasingly don’t watch linear TV, in a premium environment with a seamless, high-resolution ads experience.”
Some analysts are skeptical over whether an ad-supported plan will significantly boost customer growth, or if it will cause ad-free customers to downgrade to less expensive plans.
Jeffrey Wlodarczak, a principal and analyst at Pivotal Research Group, views Netflix’s move into advertising as “defensive not offensive.”
“We also believe a lower-cost ad supported version of NFLX [Netflix] arguably taints the NFLX brand and the tech behind successful advertising delivery is very difficult … not to mention NFLX original programming is not optimized for ad breaks,” wrote Wlodarczak in a research note. He has sell recommendation on the stock.
Netflix has partnered with Microsoft on its advertising efforts. On Thursday, Peters said Netflix also teamed with DoubleVerify and Integral Ad Science “to verify the viewability and traffic validity of our ads” beginning next year.
In addition to growing competition from rival streaming services, Netflix also faces a challenging global economy.
Kenneth Leon, research director at CFRA Research, warns that there could be more headwinds ahead as consumers could cut back on spending during a recession.
“Even though video streaming is viewed to be a value, leisure thing to do, households have way too many different types of streaming from formidable competitors of Netflix besides them,” Leon said. “So we see the risk is really recession.”
Netflix will release its third-quarter earnings on Tuesday. The company has said it estimates it will add 1 million subscribers in the third quarter, compared with a gain of 4.4 million subscribers during the third quarter last year.
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