Will Netflix’s Basic with Ads Tier kill its cheapest ad-free plan?

With the launch of the Basic with Ads tier on November 3rd in the US, Netflix will officially have four different pricing tiers. That feels like one too many — even if that service is Netflix.

“Basic with Ads” costs $6.99 per month to launch, $3 (or about 30 percent) less than the company’s existing “Basic” plan, which is ad-free. At the same time, the existing “Basic” tariff will be upgraded from a resolution of 480p to 720p without advertising and thus brought into the high-definition area; “Basic with Ads”, which will contain 4-5 minutes of commercials per hour, will also be in 720p.

Netflix’s “Standard” plan, the 1080p plan you probably have, costs $15.49 per month; It allows simultaneous streaming and/or downloading on two devices. The “Premium” tier is $19.99; For this price you can watch programs in 4K resolution and download them to four devices instead of two. A Basic subscriber can stream and download to a single device.

Basic with Ads customers will not be able to download programs – at least not initially. That’s “mainly because of some technical difficulties and how we would show ads in downloads,” Netflix COO and chief product officer Greg Peters said during a conference call with media on Thursday, adding, “We didn’t want general release.” procrastinate implement it.

Peters said Basic with Ads will “complement” the existing three options. Pricing for the existing plans won’t change – for now. Five to 10 percent of the Netflix library will not be available at the ad-free tier at launch, Peters said; They are still working on updating the old license agreements for these movies and series.

A common concern among media analysts is how many ad-free subscribers are cannibalizing Basic with Ads — but will it cannibalize Basic itself? Think about it: is it worth saving $3 a month to see ads, give up the ability to download and lose access to some of the archives? The current differences between these two tiers, both in price and features, just don’t feel consistent with the streamer’s leaps to higher tiers.

With consolidation all the rage in the media, Netflix may apply that concept to the structure of its plans. If they don’t adjust the number of offers (unfortunately another media catchphrase these days), there may be a price adjustment sooner or later. Watch a slide from the Netflix presentation below.

Netflix Advertising Plan Features

Courtesy of Netflix

Impressively, Basic with Ads launches more than a month ahead of the ad-supported Disney+ tier (on December 8th). That’s quite an achievement considering Disney+ announced its ad tier months before Netflix, and The Walt Disney Company has been selling ads for Hulu for years. Well done Microsoft.

So “Basic with Ads” will not only beat Disney+’s ad tier on the market, it’ll undercut the competition by a dollar; Disney+ with ads is $7.99 per month. That’s the old ad-free price; ad-free Disney+ will increase to $10.99 per month. So the same $3 difference – only shifted by a dollar. Incidentally, HBO Max with ads costs $9.99 per month – the same as Netflix’s ad-free “Basic” plan.

When asked about pricing on the conference call, Peters said the decision was “not really” made to get Disney’s goat. “We don’t anchor ourselves heavily outside of the competitive set,” he said. “Really, our calculus is much more about, ‘What’s the entertainment value that we’re going to bring to members at a specific time in the plan with a specific feature set in a specific country?'”

Peters said he expects the average revenue per user (ARPU) from Basic with Ads subscribers to be “neutral to positive” compared to those on the ad-free plan. His colleague, Snap alum and Netflix’s new president of global advertising, Jeremi Gorman, said hundreds of advertisers are lined up for the launch and inventory is “nearly sold out.” Yes, even with sky-high CPMs.

Evan Peters as Jeffrey Dahmer in Dahmer. Monsters: The Story of Jeffrey Dahmer.”

SER BAFFO/NETFLIX

So far, advertisers have been buying into ad-supported Netflix; investors too. Shares of NFLX are up $25 a share from Thursday morning through Friday morning. Wedbush analysts wrote on Friday that “Netflix is ​​responding appropriately to macroeconomic headwinds by cutting costs to accommodate slower revenue growth.” Their target price is $280 per share; NFLX stock closed at $230 on Friday.

Wedbush believes that 15 to 25 percent (or 11 to 18 million) of Netflix users in the US and Canada will downgrade their subscriptions to Basic with Ads. They expect up to 5 million new or returning customers to sign up. Analysts are also keen on Netflix’s plan to combat password sharing.

Not everyone on Wall Street is diving head first. Wells Fargo (price target: $300) described the speed to market of Basic with Ads as “impressive” but warned: “We believe it can take a while to scale impressions, build audiences and ultimately deploy a platform those who can do this are raking in large advertising dollars that meet the frequency and reach requirements.”

Moffett Nathanson called the AVOD details released Thursday “incrementally positive” — but her Netflix revenue and earnings estimates remain below the street consensus.

Netflix announces its third-quarter results on Tuesday afternoon.

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