Will Netflix’s Ad Level Send Stocks Down Even Further?

Netflix (NFLX 2.34%) is rushing to launch its new, lower-cost ad-supported subscription tier, and now intends to debut the plan on November 1 instead of its previous target date of early 2023.

Because Disney (DIS 2.22%) is planning to launch its own ad-supported plan in December, Netflix is ​​desperate to get ahead of its rival with advertisers, telling them to bid this week.

However, the plan might not be the hit with subscribers that Netflix believes. There’s a reason the streamer has loathed running ads on its platform until now, and their introduction might not help Netflix stem the subscriber losses that have left it behind Disney. The announcements could, in fact, accelerate those losses, which could cause Netflix shares to fall even further.

Family looking at laptop screen.

Image source: Getty Images.

Tentative immersion in the advertising market

Netflix reportedly plans to offer the ad-supported tier for between $7 and $9, or about half the price of its current standard plan, with release expected in the US, Canada, UK, France and Germany.

It’s a timid introduction, though, because the streamer is putting limits on the number of ads that will run each hour and how often a viewer can see an ad in a day, and Netflix will prevent any ads from targeting viewers. viewers based on demographics. geography or viewing behavior. Basically, everyone will see the same ads at the same time.

There will reportedly be just four minutes of advertising every hour, which is on par or less than what other streaming services offer, but dramatically less than the 10 to 20 minutes shown on cable TV channels. But that could still be too much.

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A costly plan of attack

Despite suddenly moving up the deadline, Netflix is ​​obviously concerned about the impact showing ads will have on viewers. Viewers cut the cord to get away from the ads, but the ads are coming back.

No doubt, there are plenty of free streaming channels that are fully ad-supported; The latest trend has been to charge subscribers to view ads, often with older, less desirable content. Netflix is ​​walking a fine line of angering consumers who wanted to escape advertising, but it offers a cheaper alternative to boost both revenue and its subscriber base.

For streamers, the allure of advertising is hard to shake; they can make more money from ads than just subscriptions. Netflix, which has partnered with Microsoft to run the ad business, it allegedly asks advertisers to pay a premium to reach its audience, more than $65 CPM, or cost per thousand viewers, well above the industry standard of around $20 CPM. Netflix also wants advertisers to commit to a minimum of $10 million in annual ad spending.

However, as it is one of the few remaining media companies without ads, running them even on a limited basis could backfire, as Netflix has also seen growing complaints about the quality of content on its platform. The ads could be seen as further evidence of the deteriorating viewing experience.

Afraid the plan will go wrong

Netflix obviously realizes that the hype surrounding its shows could be a problem and wants to avoid the problems that other channels have encountered. Hulu, for example, is criticized for running the same ads over and over again. Y AlphabetYouTube has become almost unwatchable because it bombards viewers with lots of ads in an effort to drive them to its premium channel.

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Netflix also has a problem on the advertiser side, as a looming recession means it could be launching an ad-supported tier just as spending cuts have ad agencies tightening their belts. You may also have to renegotiate your rights to licensed programs to run ads during them, which could come at a high cost.

However, viewers could be the real bottleneck, and the ads could undermine the company’s growth plans if they fail to attract new viewers and cause current subscribers to downgrade to the new cheaper tier. Another loss of subscribers could see Netflix stock wiped out again.

Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Rich Duprey has no position in any of the listed stocks. The Motley Fool holds positions and recommends Alphabet (A shares), Alphabet (C shares), Microsoft, Netflix and Walt Disney. The Motley Fool recommends the following options: $145 long calls in January 2024 at Walt Disney and $155 short calls in January 2024 at Walt Disney. The Motley Fool has a disclosure policy.

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