Netflix’s Shift to Ad-Funded Tiering
After years of being adamantly against the idea of advertising, Netflix has now announced plans to offer a cheaper ad-supported tier. In a shocking move, Netflix’s co-founder and co-CEO Reed Hastings stated that the idea of an ad-funded tier made “a lot of sense” for “consumers who would like to have a lower price and are advertising tolerant”. In its 25-year reign, Netflix has amassed over 220 million paying subscribers, and at least another 100 million users who watch Netflix by leaching off friend’s and family’s accounts, making it the world’s largest streaming service. Such a large shift by such a prominent player in the market is bound to make significant waves across the media landscape.
Netflix is not alone in this new shift to ad-funded tiering, with rivals like Hulu, Peacock, HBO Max and most recently Disney+ introducing plans for ad-funded versions of their services. As Spotify has shown with the dual-tier model, if balanced correctly, it can be a great way to fully harness their consumer pool. With the ad-funded version being restrained enough to ensure users enjoy their experience on the service, whilst creating enough traction to encourage people to move to the more profitable subscription tier.
So why has Netflix decided to make this shift in offering a cheaper ad-supported tier? For the first time in the company’s history, Netflix has lost a reportedly 200,000 Subscribers globally, compared to quarter 4, in its first quarter of 2022. This new offering would allow Netflix to combat this shrinkage and increase its customer base, whilst also introducing a new source of revenue for the company.
Apart from a rise in competition, Netflix has stated another factor for the lack of growth is the sharing of passwords, which has eaten into its ability “to grow membership in many markets” and maximise its revenue. The company has also stated that the Russian invasion of Ukraine, and their subsequent suspension of all services in Russia, has led to a loss of around 700,000 subscribers in a booming and profitable market. The current ‘cost-of-living crisis’ has also been cited as a reason for the drop in membership, with many getting rid of luxuries like streaming services that are not deemed to be a necessity.
So, will this shift to ad-funded tiering help solve Netflix’s problems, and help them rebuild their user base once again? Netflix certainly has the infrastructure, data and in-depth understanding of User Interfaces to be able to utilise advertising effectively. Its prior experience of dynamic product placement and brand partnerships, and its inclination to ensure its advertising is not too invasive means Netflix should be able to have a strong footing and strategy in creating a user-friendly approach to targeted advertising. The shift, in theory, should allow for an increase in the number of potential customers using their service, whilst providing an alternative option for customers who may want to pause or stop their subscription, discouraging them from switching to a competitor’s streaming service.
When looking from a targeted advertising perspective, Netflix will need to ensure that advertisers can access their desired demographic, which may explain another motive behind Netflix’s new push to crack down on password sharing. Netflix will also need to make sure that they don’t have a situation where too many people switch or stay on a less-profitable advertising tier as that could eat further into their revenue.
The question of how many people would even be attracted into their ad- funded tier, and whether enough people would be encouraged to join Netflix and help combat their struggle to expand their consumer base is up for debate. Whatever path Netflix chooses to follow in their new pursuit of creating an ad-funding tier is bound to create seismic change within the Streaming world and create new opportunities for advertisers in the media landscape.
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