Netflix has always maintained that it will not generate revenue through advertisements on its streaming platform. However, as the competition gets more intense with new players like Disney+, experts believe the streaming giant will have to offer a cheaper ad-supported service sooner or later.
Netflix to lose millions of subscribers
Netflix shares dropped more than 2% on Tuesday after Needham analyst, Laura Martin, downgraded the stock's rating to "underperform," which essentially suggests investors to sell the stock. She added that if Netflix continues to hold on to its subscription prices, which range between $9 and $16 a month, the company will end up losing 4 million subscribers in the U.S. alone next year.
Although the stock was up as much as 44% on the year in May, it fell significantly in the summer after the company reported its first decline in number of paid domestic subscribers since 2011.
Netflix needs to cut down prices and run ads
The only solution that remains is for Netflix to offer a subscription for $5 to $7 a month and include advertisements of about six to eight minutes an hour. This would help Netflix fend off competition from rival platforms including Disney+, Amazon Prime TV, Apple+, Hulu and CBS All Access and new threats from AT&T's HBO Max and Comcast's Peacock, which are slated to arrive next year.
"We believe Netflix must add a second, lower-priced service," she said in the report. "Netflix's premium price tier of $9 to $16 a month is unsustainable."
These rival companies are already offering subscriptions for lower prices and although most of them do not have half as much content as Netflix, they've managed to rope in viewers with content of their own. Furthermore, Netflix will lose a lot of popular content to its rival as "Friends" moves to HBO Max next year and "The Office" to Peacock in 2021. Many of Disney-owned titles will also migrate to Disney+ from Netflix.
What others are offering?
Disney+, which raked in more than 10 million subscribers within 24 hours of its launch last month, offers shows like the "Star Wars" spinoff "The Mandalorian," and other titles from Disney-owned heavyweights like Pixar, Marvel, and others. Disney is charging subscribers just $6.99 a month, with a free one-year subscription for many Verizon customers.
Apple earned three Golden Globe nominations recently for its original series "The Morning Show" and only charges $4.99 a month for AppleTV+.
It remains to be known whether Netflix will adopt this strategy of creating a cheaper tier with ads but its executives have been very vocal about how the platform comes with fewer privacy concerns than Facebook, YouTube and other ad-supported platforms as it has no ads.
Netflix argues that original shows like "Stranger Things," "The Crown" and "Dark" and films like "The Irishman" and "Marriage Story" warrant the premium subscription fee it charges its customers.