Raise your hand if you subscribed to Netflix for DVD rentals. Anyone?
Netflix’s infamous subscription model differentiated it from Blockbuster — may it rest in peace — and the company’s leap of faith to streaming differentiated it among media firms.
Now, amid slowing growth and ruthless competition, analysts believe Netflix may need to un-differentiate itself, and that a world with ads on Netflix might make sense.
Let’s step back
Netflix’s historically massive YoY subscriber growth has slowed, and hasn’t eclipsed the 20% mark since Q4 2020. Why? Per Stratechery:
- The pandemic pulled growth forward and Netflix neared North American market saturation (75m subs among 132m households).
- Over the same time, competition heated up across Disney+, HBO Max, Paramount+, Amazon Prime Video, and Peacock.
Despite this, Netflix has a strong business. “We were about a $20B revenue business 2 years ago… we’re $30B revenue now,” the company’s CFO, Spencer Neumann, said last month.
So why the need for ads?
True, there are other ways Netflix can grow revenue, including:
- Raising prices, which the company has regularly done over time.
- Gaming, which Netflix has prioritized, buying 3 gaming studios in the last 7 months.
- Password policing, which the company tested, and could yield $1.6B annually.
But these options have downsides. Raising prices can drive churn, it’s unclear if Netflix and gaming are a fit, and password policing will piss off half of America.
Or, there are ads…
… which Netflix is not entirely opposed to. “It’s not like we have religion against advertising,” Neumann said recently.
Many other streaming services offer ad-supported plans at lower price points, and they’re growing fast. Analysts have also said that an adless Netflix is missing out on $9B in potential revenue.
An ad-supported Netflix tier would offer price-sensitive subscribers a low-cost alternative, and if done right, the user experience wouldn’t take much of a hit. Take TikTok, for example, where ads themselves are TikToks, and sometimes go viral as a result.
Of course, hiring and building for an ad network would be a big shift — but Netflix is no stranger to pivots. Remember, once upon a time the company mailed out DVDs.
