Will the Ad Tier of Netflix Going to Cause a Further Stock Drop?



Initially planned for early 2023, Netflix’s (NASDAQ:NFLX) new, cheaper, ad-supported membership tier is being pushed back to a November 1 debut.

Netflix (NASDAQ:NFLX) is encouraging potential advertisers to get their bids this week since Disney (NYSE:DIS) plans to launch its own ad-supported service in December.

However, the proposal may not be as well-received by customers as Netflix (NASDAQ:NFLX) anticipates. There’s a reason Netflix has been reluctant to add advertisements to its service in the past, and there’s a chance that doing so won’t help the company reverse the subscription decline that has pushed it behind Disney. If advertisements speed up such declines, Netflix’s stock price may drop even more.

Taking a Baby Step Into the Advertising World

Launching in the United States, Canada, the United Kingdom, France, and Germany, the ad-supported tier will allegedly cost between $7 and $9 per month or about half the price of Netflix’s current basic plan.

However, the streaming service is cautious by capping the number of ads that will air per hour and the number of times any given ad will be shown to a single user in 24 hours. Additionally, Netflix (NASDAQ:NFLX) will not allow advertisements to target specific audiences based on demographics, location, or viewing history. In short, everyone will be subjected to the same commercial schedule.

Four minutes per hour of commercials is reportedly planned, which is on par with or less than what other streaming services provide but far less than the ten to twenty minutes broadcast on cable-TV channels. This may still be excessive.

An Expensive Strategy

Despite the earlier deadline, it’s clear that Netflix (NASDAQ:NFLX) is concerned about how viewers will react to the introduction of advertisements. Many viewers have abandoned their pay TV subscriptions to avoid commercials, but commercials seem to return.

It’s no secret that many streaming services rely only on advertising revenue, and recently it’s been common practice to have viewers pay to skip commercials and watch older, less appealing programming. NFLX is attempting to increase its income and subscriber base by providing a cheaper option, but in doing so, it risks angering those hoping to avoid advertisements.

Advertisements are enticing to streamers since they may generate more revenue than subscriptions alone. Reportedly charging upwards of $65 CPM, or cost per thousand viewers, Netflix (NASDAQ:NFLX), which has collaborated with Microsoft to manage the ad business, is charging a premium to reach its audience, far more than the industry norm of roughly $20 CPM. Netflix also requires that marketers spend at least $10 million yearly on advertising.

While Netflix (NASDAQ:NFLX) has been experiencing increased concerns about the quality of the material on its platform, adding them even on a limited basis might backfire since it is one of the few surviving media businesses without commercials. The addition of commercials may be seen as an indication of declining quality of service.

Worried That Things Won’t Go as Planned

Netflix (NASDAQ:NFLX) doesn’t want to deal with the same problems other networks have had with advertising before and during their programming. Some users have complained that Hulu constantly plays the same commercials. YouTube, owned by Alphabet, has become almost unwatchable due to the abundance of advertisements it displays to get users to upgrade to a paid subscription.

The potential debut of NFLX’s ad-supported tier coincides with a time when advertising companies are cutting down on their budgets in response to the impending economic downturn. Another potential expense is the cost of renegotiating the company’s rights to advertise during licensed programs.

However, audiences might be the challenge, with advertisements potentially undermining expansion goals if they fail to draw in new viewers and convince existing members to switch to the more affordable plan. If Netflix (NASDAQ:NFLX) fails to meet its subscription expectations again, its stock might be decimated.

Featured Image-  Megapixl @Lightfieldstudiosprod

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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.