Netflix eyes lower cost ad-supported tier

As Netflix reported subscriber losses and slowed revenue growth in the first quarter alongside increased competition, executives said the streaming giant is considering introduction of an ad-supported tier – in what would be a significant shift from its long-held ad-free subscription-based model.

Netflix CEO Reed Hastings, speaking on Tuesday’s earnings call, said one way to increase Netflix’s price spread is to introduce advertising on a lower-priced plan.

“Think of us as quite open to offering even lower prices with advertising as a consumer choice,” Hastings said.

It’s a change from comments made as recently as March by CFO Spencer Neumann, who speaking at an investor conference indicated Netflix could enter the advertising space at some point, but not likely near-term.

“We think we have a great model in the subscription business. It’s scaled globally really well,” Neumann said in March. “Again, never say never, but it’s not in our plans. Other folks are learning from it so it’s hard for us to ignore that others are doing it. But for now it doesn’t make sense for us.”

However, with high levels of household penetration, more competition from other streamers and losing 200,000 subscribers in the first quarter, (with expectations to lose another 2 million in Q2) it seems as though the time may be getting closer.

Hastings on Tuesday acknowledged that he’s long been against the complexity of advertising, instead favoring the simplicity of subscription.

“But as much I’m a fan of that, I’m a bigger fan of consumer choice. And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense,” he said. “So that’s something we’re looking at now. We’re trying to figure out over the next year or two.”

Echoing that, he noted an ad-based model on a lower tier is “not a short-term fix” as there is a large installed base that is happy with no ads. A lower-cost ad-supported tier would “phase in over a couple of years in terms of being material volume.”

In terms of profit potential, Hastings said the online ad market has advanced and indicated Netflix wants to stay focused on content and experience.

“We can be a straight publisher and have other people do all of the fancy ad-matching and integrate all the data about people,” he said. “So we can stay out of that and really be focused on our members creating that great experience, and then again, getting monetized in a first-class way by a range of different companies who offer that service.”

RELATED: Netflix loses 200K subscribers in Q1, forecasts shedding another 2M

Netflix earlier this year raised prices for customers across its plans, including in the U.S. Meanwhile streaming competitor Disney+ recently announced plans to introduce ad-supported tier in the U.S. this year before expanding to international markets in 2023.

Hastings suggested Netflix likely won’t spend much time testing out an ad-supported tier, pointing to success with the model by Hulu, as well as Disney and HBO.

“I don’t think we have a lot of doubt that it works, that all those companies have figured it out,” he said. “I’m sure we’ll just get in and figure it out as opposed to test it and maybe do it or not do it.”

And it doesn’t mean Netflix’s current model isn’t going out the window, with Hastings emphasizing it ad-supported would be a plan layer like at Hulu – catering to both consumers that want that option as well as those that want to remain ad-free.

In commenting on Netflix’s vulnerabilities after earnings were released, Global Data Principal Technology analyst Tammy Parker pointed to the need for a change in pricing strategy, saying the U.S. price hikes seemed to have been especially poor timing.

“Netflix’s pricing strategy must evolve, especially as inflation eats away at consumers’ wallets, making them choosier about their streaming subscriptions,” Parker sated. “Furthermore, Netflix’s pans are poorly differentiated as they all offer the same content and only vary in terms of video quality and number of screens supported.”

“With Disney+ planning to launch a cheaper, ad-supported tier this year, it’s time for Netflix to reconsider its opposition to that approach,” Parker continued.

Netflix lost 640,000 paid net subscribers in U.S. and Canada in the first quarter, largely a result of price changes - but the company said that overall price increase is tracking in-line with expectations, is significantly revenue positive, and that retention remained at a healthy level.