Netflix’s 1 Million Users Prove Ad-Supported Tiers Are Future Of Streaming

The streaming wars have reached another momentous milestone in their post-Covid adjustment period. The services are anxiously wondering if ad-supported tiers can spur the growth streamers have hoped to reignite. The answer appears to be a cautious yes—at least if the first ad tier subscription numbers from Netflix
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are any indication.

According to a report, the streamer hit 1 million active users for its ad-supporter tier in its second month. It showed tremendous month-over-month growth, expanding by 500%. Equally important to Netflix, the delivery met the baseline promised to advertisers on the new service, meaning no need to serve up makegoods (free ads to balance out underdelivery of commercials).

It’s a significant achievement for Netflix, which suffered its first year-to-year subscriber drop in over a decade in 2022. But perhaps more significantly, it signals a potentially seismic shift in the streaming wars. Up till now, conventional wisdom had suggested that streaming subscribers didn’t want ads in their content—they’d been there, done that with the broadcast and cable models, and they valued the opportunity to bypass ads while they binged, even if that meant paying more for their subscriptions.

Streaming Wars Evolve

But the pandemic changed things. Following months of gangbusters streaming video service growth when people were on lockdown in their homes at the height of the pandemic, have been dealing with subscriber declines, leading to rethinking and reworking business models.

The conventional wisdom often goes out the window in such cases—though no one expected Netflix to be the one doing the tossing. After all, Netflix co-founder Reed Hastings had always pooh-poohed the idea of adding ads to the service, preferring to focus on the appeal of the ad-free platform. But subscriber losses will make you reconsider even the closest-held beliefs. Just a couple years after Hastings declared Netflix would not welcome advertising, the service did an abrupt about-face.

And it wasn’t the only one. Disney+, Netflix’s closest competitor in subscriptions and itself suffering a subscriber bleed spurred by the loss of cricket rights in India, recently introduced its own ad-tier, piggybacking on the launch of Netflix’s.

Perhaps most importantly, analysts are pleased with the early performance of the ad tier and are looking for even better things ahead. Michael Nathanson, an analyst with MoffettNathanson, increased his target price for the company by nearly fivefold following news of the 1 million users.

With new subscribers coming at a premium, Netflix has given people a reason (lower price point than non-ad tiers) to pull out their credit cards. There are only a few ways to drive streaming subscriptions at a time when people are concerned about the economy and reluctant to increase their entertainment budgets. Paramount
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+ found one of them—offering high-demand content like Yellowstone, cable’s most popular program.

Pay Attention, Streamers: Consumers Are Open To Advertising

Lower pricing is a significant enticement. A report released Tuesday by Publicis Media and Yahoo found customers are receptive to advertising when it means paying less. And they are savvy enough to understand that ads may be a necessary compromise.

“Overall, the study found that consumers recognize the role of advertising in making less expensive programming possible and generally welcome ads in CTV environments,” concludes the report. In fact, 46% of respondents said they would rather pay less and receive some ads when adding a new streaming service.”

Another boon for the ad tier? Netflix’s password crackdown, which is forcing people who shared subscriptions to find a new way to view the content. A lower-priced tier is attractive, even with advertising. Other streaming services could learn from this carrot-stick approach.