Netflix implies its ad-supported tier is a fallback for consumers unhappy about price hikes -- but that only marks a return to an unwelcome past
Netflix Inc. once embodied the cutting edge of media, from its early days of sending DVDs by mail to its eventual transformation into a utopia of low-cost, high-quality, ad-free entertainment.
Now the company appears to be taking a step backward. As it looks to bleed more money out of consumers with a new price hike announced Wednesday, the company promised that it would still offer affordability. Netflix's $(NFLX)$ advertising-supported tier of service -- which launched almost a year ago -- will continue to cost $6.99 a month, a price the company calls "extremely competitive with other streamers" and better than the average cost of a movie ticket.
Netflix appears to think that its rivals are doing advertising all wrong. To a degree, some streaming peers "haven't done maybe as great a job in building an ads experience," said Greg Peters, Netflix's co-chief executive, in a video interview following the company's third-quarter earnings report Wednesday. "Part of it is just educating consumers about what the actual Netflix ads experience is, so that they can think about what's the right choice for them."
But an ad environment of any sort isn't what streaming customers have come to expect. Cord-cutters once strove to save money by avoiding the costly cable bundle, and they got a better viewing experience in the process, as they were able to watch programming on demand without interruptions.
Theoretically, Netflix subscribers upset about price hikes for the company's basic and premium tiers of service could trade down to the ad-supported option, but it's tough to go back and watch entertainment the old way. The few times I have tried to watch ad-supported programming on Disney $(DIS)$-controlled Hulu, Alphabet Inc.'s $(GOOG)$ $(GOOGL)$YouTube and Amazon.com Inc.'s $(AMZN)$ Freevee, the commercials were so frequent and annoying that I gave up watching.
Streaming services are now counting on being able to hold long-term subscribers hostage. Their children, for example, may hardly remember watching any sort of programming with advertising. Meanwhile, the companies have a fallback, as budget-conscious consumers will have to suffer through ads by playing into a growing revenue stream for Netflix and its peers -- or else they'll have to give up watching streaming services altogether.
Netflix said in its shareholder letter that its programming costs will be rising to about $17 billion next year, up from $13 billion in 2023, assuming the Hollywood actors strike is resolved. So Netflix needs to get more revenue from its customers to cover those ever-rising costs amid a competitive market.
But consumers can always walk away. That may actually happen -- if the costs of streaming becomes too ridiculous, these services will see more departures. This isn't what consumers signed up for, but if too many leave or cancel some of their services, the prices may still go up to make up for lost customers.
Netflix isn't the only streamer chasing dollar signs through pricing moves. Earlier this month, Walt Disney Co. $(DIS.UK)$ raised prices on its ad-free tiers for Disney+ and Hulu, as it's been removing some content. Amazon is also raising the price of ad-free Prime Video beginning next year, when consumers will have to pay an additional $2.99 a month to avoid commercials.
Netflix shares jumped more than 12% in after-hours trading after Wednesday's earnings report, suggesting that Wall Street likes the company's recent subscriber momentum -- it smashed expectations by adding 8.76 million in the third quarter -- and its strategic direction on pricing. Investors like revenue uplifts, to be sure. But they also hate churn, and that may be in the future for Netflix and others if they overplay their hands.
With so many streamers raising prices into an uncertain economic environment, the industry may be too cocky about its ability to keep customers on board.