The Most Pervasive Problems in Netflix Reportedly Has Launch Plans For Its Ad-Supported Tier

Advertising is a crucial part of the media and entertainment industry particularly the streaming sector, where the majority of companies rely on ads t
Jwala Gurung
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Netflix is an American media-services provider and production company headquartered in Los Gatos, California. Founded in 1997 by Reed Hastings and Marc Randolph in Scotts Valley, California, Netflix has gone on to become one of the world's leading Internet entertainment services. Netflix is a member of the Motion Picture Association (MPA), producing and distributing content from countries all over the globe. 

As of April 2019, Netflix had over 148 million paid subscriptions worldwide, including 60 million in the United States. It is available in 190 countries, with over 130 million hours of TV shows and movies per day streaming to over 150 million subscribers. Netflix's success began when it offered a DVD-by-mail service in 1998. In 2007, they introduced a streaming service which allowed instant streaming of television shows and movies on personal computers. 

The company then expanded its business with the introduction of streaming media to televisions and digital video players, like Xbox, Playstation, and Wii. The company then moved into film. Netflix is a streaming video leader but not when it comes to ads. That’s because, unlike competitors like Hulu and Amazon Prime Video, Netflix has never offered users the ability to skip ads. But that could soon change, as new reports indicate that the company is considering launching an “ad-supported” version of its streaming service. 

The news comes on the heels of a tumultuous year for Netflix one that saw the company purge its user review system of fakes, add more kid-friendly content to appease advertisers, and raise subscription prices by as much as 20 percent in some markets. The changes are already paying off: In Q3 2018, Netflix reported a net gain of 5 million subscribers

What Is An Ad-Supported Streaming Service ?

An ad-supported streaming service is one that carries ads in other words, a service where users will be exposed to advertisements between content. This is different from a free ad-supported streaming service, where the content itself is sponsored by advertisers. Netflix’s streaming service, by contrast, is ad-free but the company could launch a new service that includes advertisements between programming. 

Ad-supported streaming services are nothing new, though. Both Hulu and Amazon Prime Video have offered them for quite some time. And there’s a good reason why: Ad-supported streaming services are cheaper to produce. As a result, they allow the companies behind them to compete with premium, ad-free offerings like Netflix and HBO without breaking the bank.

Why Would Netflix Launch An Ad-Supported Tier ?

While we don’t know whether Netflix is really planning to add ads to its service, the company’s recent upheaval may suggest that it’s considering such a move. There are a few reasons why Netflix may want to launch an ad-supported tier:

  • Revenue: Even though Netflix’s ad-free business model continues to deliver excellent results, adding an ad-supported tier could further entice investors. That’s because it would expand the company’s potential revenue sources and therefore, its potential for growth.
  • Competition: As mentioned above, Hulu and Amazon Prime Video already offer ad-supported streaming tiers. With these companies becoming increasingly competitive, it could make sense for Netflix to follow suit.
  • Ease of entry: Adding an inexpensive ad-supported tier would reduce the barrier to entry for younger, more price-sensitive users. As a result, it could help Netflix appeal to more subscribers particularly those in developing markets where the company has struggled to gain a foothold.

How Might An Ad-Supported Version Of Netflix Work ?

It’s unclear exactly how such a service would work, but there are a couple of plausible scenarios:

  • Ad-Free and Ad-Supported Versions: Netflix could offer both an ad-free service and an ad-supported version of the same. This would parallel what the company does with its original content: For example, both Stranger Things and Stranger Things: Hosted by Cinnamon (an ad-supported version of the show) are available on the streaming service.
  • Channel-Based Model: Alternatively, Netflix could launch a channel-based model that offers different tiers of streaming service with different levels of interruption. For example, while one channel might be ad-free, a different channel might be ad-supported. It’s worth noting that this model would probably be closer to Hulu’s ad-supported service than Amazon Prime Video’s which means that the ads would run via a native advertising system, rather than as traditional 30-second commercials.

Will There Be A Cost To Skip Ads ?

Likely not. Though it’s possible that Netflix could leverage the option to charge users a fee to skip ads, such an approach seems unlikely. One reason for this is that people dislike advertising even if it doesn’t cost them anything. In fact, a 2018 survey found that the majority of U.S. consumers would gladly pay $5 per month to eliminate advertising from their streaming services. 

Additionally, a poll of 2000 Netflix users found that 82 percent of them would be willing to pay a monthly fee of $1 or less to remove ads from the service. Finally, Netflix’s CEO, Reed Hastings, has previously expressed a strong distaste for ads arguing that they are “disruptive” and “disrespectful to [the company’s] members.”

Bottom Line: Is This A Big Deal ?

Advertising is a crucial part of the media and entertainment industry particularly the streaming sector, where the majority of companies rely on ads to pay the bills. But ads are inherently disruptive, and most users would prefer to avoid them. Netflix has built a successful business by avoiding ads entirely. But by adding an ad-supported tier, the company could potentially expand its reach and grow even more quickly. 

With that said, we would expect any such move to be extremely carefully managed. After all, the last thing Netflix wants is for the company’s brand to be tarnished by intrusive ads or for its users to feel like they’re being treated disrespectfully.

The new tier would be cheaper than the current subscription options, and would offer a selection of TV shows and movies with ads.

The news comes from The Wall Street Journal, which cites sources familiar with the matter. Netflix has been testing an ad-supported tier in some markets, including Australia and New Zealand. The company has not yet announced any plans to launch the tier globally. Netflix has been increasingly focused on growing its subscriber base, and it is thought that an ad-supported tier could help to attract new users. The company has not commented on the reports.
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