Netflix Announces Cheap Ad Supported Version

Once again, the streaming video wars are about to heat up, with NetflixNFLX
announcing on October 13 that it will roll-out an ad supported version of Netflix on November 1 in Mexico and Canada and on November 3 in the U.S. Nine more countries will go live by month-end.

Disney announced on March 4 it will debut an ad-supported version of Disney+ for just $6.99 per month on December 8. That’s less than half of the price of its standard product, which is $15.49 per month.

After years of saying Netflix was committed to only serving up an ad free product, CEO Reed Hastings said on an earnings call in April that he was supportive of an ad-supported tier. It certainly wasn’t his long-term vision. But with subscriber growth stalling at Netflix amidst intense competition, he didn’t have much of a choice.

It must have been humiliating for Netflix executives to read the Forbes story in September which carried the headline “Disney Surpasses Netflix Subscriber Count: What Does That Means For Investors?”

The story pointed out that Netflix lost 1 million subscribers in the second quarter to reach 220 million subscribers. Disney, on the other hand, added 14.4 million households to end up with a tally of 221 million during the same time frame, although in all fairness this combines three services (Disney+, ESPN+ and Hulu) to Netflix’s one.

Going forward, however, the prospects looked better for Disney prior to Netflix announcing the launch of its ad-supported tier. That’s due in large part to the fact that ESPN’s subscribers are sinking as cord cutting and cord shaving impacts multichannel operators. Therefore, it’s likely that Disney will continue to move high-value content from ESPN to ESPN+ over time, while at the same time jacking up the price of ESPN+ to cover the high cost of sports rights.

Another factor is price—Disney is able to bundle all three streaming services at $13.99/month, which is below where standard pricing comes in for the Netflix stand-alone service.

And with many signs signaling we are already in a recession, it’s become more urgent. Hastings had said in April the product wouldn’t launch for a year or two, now it is launching before year-end. This is an impressive goal given that Netflix has no experience serving up or selling ads.

The company surprised many in July when it stated that it had partnered with Microsoft on the ad-supported tier—many had thought that GoogleGOOG
and NBCUniversal were the front runners. Timing may be an issue—if MicrosoftMSFT
can get the service up and running in so many countries by the end of November, it will be quite a feat.

Netflix has announced that it will call the new tier, which will have 4 to 5 minutes of ads per hour, “Basic With Ads.” They have held viewership numbers very close to the vest historically, but were forced to sign on as a client of Nielsen, which plans to add Netflix viewership in the U.S. to its Digital Ad Ratings service starting next year.