Netflix Ads might lead to an increase in subscriptions.

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I started a Netflix (NASDAQ:NFLX) membership because I couldn’t stand free TV. I hate gossip, talent shows, talk shows, survival, and cookery programs. Many people enjoy unwinding after a long day by watching these shows, but it was a nightmare for me. Rarely do TVs offer a fantastic movie or domestic or foreign series, but ads are so frequent and prolonged that watching isn’t an option.

I’m not planning to quit my Netflix membership despite quality changes. I disagree with the 200,000 individuals that terminated Netflix in Q1 2022. Even if Netflix’s competitors were available where I live, I wouldn’t switch. Why?

Because, from a behavioral perspective, content quality never decreases. I think many of Netflix (NASDAQ:NFLX) headline-grabbing shows are accessible elsewhere. Once their favorite shows finish, viewers will find that these alternative platforms feature second or third-rate shows. A few years ago, HBO’s Chernobyl series got high ratings. Another flagship program was Game of Thrones. A cursory check through HBO’s programs reveals no other big names. Despite being solid and high-quality, the series has little excitement.

Limiting ads will speed recuperation.

Netflix (NASDAQ:NFLX) subscriber outflows will end sooner than many expect. The new, cheaper ad subscription package is being tested in South America. The site wants to compete with HBO, Disney+ (DIS), Hulu, etc., which provide ad subscription options. The lower subscription might allow on-demand TV lovers to subscribe to many platforms simultaneously, with personalized advertising at a fair frequency and length. The site is exploring 15- to 30-second ads before and during streaming, and the total ad duration won’t exceed 4 minutes per hour. Ad-tiered subscription plans are expected to generate more than $2 billion in the next five years.

Such an income boost would indicate a total revenue rise of about 20%. At a net income margin of 16%, this increased revenue might be converted to more than $300 million in additional profit. The firm is currently trading at 22 times its anticipated earnings. Such a profit increase might reduce this ratio down to 20x.

Therefore, I conclude that Netflix (NASDAQ:NFLX) share price decline during the previous few months is exaggerated since it was primarily based on membership counts rather than genuine revenue gain expectations. In addition, the current share price shows that the ad-tiered subscription model and its ramifications probably haven’t been factored in yet.

On the contrary, the market had allocated a relatively optimistic earnings multiple to the firm based on the absence of competition. Clearly, this isn’t the case now. But nonetheless, it is only normal for a new kid on the block to report quickly expanding subscription figures, much as Netflix (NASDAQ:NFLX) did back in the day. This can’t last forever, though.

Future may have ad-tiered plans.

With the global economy slowing down and costs increasing, customers will choose more cost-effective options wherever they can. In this scenario, cheaper on-demand TV services may appeal progressively more to lower-income consumers.

Last year, a poll by Hub Entertainment Research found that more than 8 out of 10 respondents either could accept some commercials or didn’t care about them. As I said above, the “some commercials” component is of essential importance, and I believe that they recognize this at Netflix (NASDAQ:NFLX).

Moreover, 71% of respondents in another poll stated they prefer targeted adverts instead of random ones. Netflix has worked with Microsoft to debut its ad-tiered program, so we may expect tailored adverts and increased user engagement.

Bottom line

Personally, I will continue to pay my non-ad, monthly Netflix (NASDAQ:NFLX) membership and carry on watching Better Call Saul and any other show that fulfills my requirements – and there are plenty. But I know folks that are more prone to viewing sports, that have subscriptions to on-demand sports channels but would be interested in some excellent series or movies but wouldn’t pull the trigger at the current pricing. These folks are the company’s most valued profit from the ad-tiered programs. Of course, this process works both ways. People might select the cheaper plan to use the funds left for a membership to another site. In either event, the market will get what they want: Increasing subscription numbers. Therefore, I would get Netflix at this pricing level.

Featured Image – Megapixl © Timonschneider

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About the author: I'm a financial journalist with more than 1.5 years of experience. I have worked for different financial companies and covered stocks listed on ASX, NYSE, NASDAQ, etc. I have a degree in marketing from Bahria University Islamabad Campus (BUIC), Pakistan.