Netflix Could Offer Ad-Supported Plan at $7 to $9 a Month. What It Means

Dow Jones2022-08-30

Netflix is playing it safe now, and rightfully so.

That is the conclusion analysts on Wall Street are drawing from a Bloomberg report that Netflix's new ad-supported service tier will be priced at $7 to $9 a month and will be launched this year. The pricing is in line with the $6.99 and $7.99 charged by rivals Hulu and Walt Disney's Disney+ $(DIS)$ for their commercial-supported plans. The amount Netflix is charging for what has historically been a premium product signals management is taking a cautious approach as competition mounts and the company continues to lose subscribers.

The stock (ticker: NFLX) was up 1.3% to $226.07 on Monday. Bloomberg's report came after markets closed on Friday.

A Netflix spokesperson told Barron's that it is still in the early days of deciding how to launch a lower-priced, ad-supported tier. "No decisions have been made," the representative said. "So this is all just speculation at this point."

Netflix had long been resistant to offering an ad-supported version of its service even as rivals such as Warner Bros. Discovery's (WBD) HBO Max already offered one. CEO Reed Hastings changed his public stance in April, saying management was considering ways to offer ad-based service, which would likely be phased in over several years.

The disclosure came as Netflix reported its first-quarter earnings, including a net loss of 200,000 subscribers. Netflix lost 970,000 in the subsequent quarter.

Morningstar Equity Research analyst Neil Macker doesn't see ad-based streaming as a solution to all of Netflix's problems, "but it certainly helps," he said. Netflix is trying to play catch up with media companies like Warner Bros and Disney, which have film libraries going back decades, as well as to compete against giants like Apple $(AAPL)$ and Amazon, com $(AMZN)$, whose vast cash flows make it possible for them to pour money into content, he explained.

If Netflix does go ahead with an ad-based service, investors are likely to watch its average revenue per user with greater interest. If it drops considerably from the level of $15.43 recorded for the six months ended in June, that would mean that members who go from the $19.99 plan to the $7 to $9 model aren't watching enough shows, and in turn ads, to make up for the price difference, said Craig Huber, an analyst from Huber Research Partners.

At this point, investors can just hang tight. Both Jefferies’ Andrew Uerkwitz and CFRA’s Kenneth Leon say the new subscription won’t make a significant difference to Netflix’s results until sometime in 2023.

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