Analyst says that Netflix needs to make a huge change to its pricing structure that some won't like
Unlike streaming rivals like Peacock, Paramount+, and Hulu, which offer lower priced service tiers that include advertisements, category leader Netflix has shied away from offering any ad-supported subscription packages. But one analyst believes that Netflix might need to offer lower priced service tiers backed by ads in order to give its business a shot in the arm. In a note sent to clients last week, Michael Nathanson of MoffettNathanson Research said that Netflix might have to reconsider its opposition to offering a tier of service subsidized by ads.
Analyst says that Netflix may need to consider offering an ad-supported tier of service to hike its growth rate
According to NextTV, Nathanson wrote in his note that "Although Netflix management continues to strongly dismiss the idea of advertising, we think that view will be seen as a strategic mistake if future rates of subscriber growth start to fall short of Street expectations." Although Netflix remains the largest video streamer globally, for the first time it faces a challenge as Disney+ has 103.6 million subscribers globally as of the end of the second quarter.
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Netflix ended the first quarter with 207.64 million subscribers worldwide (all subscription data comes from Statista). There have been some hiccups in the growth rate for Netflix even during the pandemic when you might expect the number of subscriptions to grow sharply.
Nathanson forecasts Netflix's top line to grow just 7% annually from 2022 to 2025 while International growth will slow from this year's estimated 23% to 16% for 2025. Overall, the analyst sees Netflix growing 14% annually between 2021 and 2025. Netflix has stayed away from ads because of privacy issues and because it doesn't want to spend the money to track subscribers' locations and purchases.
But even if Netflix is concerned that it might lose subscribers who prefer not to have the content that they are viewing interrupted by ads, those subscribers could simply decide to spend a little extra for a "premium" tier with no advertisements shown. And selling ads on a discounted tier could more than make up for any discount offered to subscribers who don't mind having to watch advertisements.
The numbers suggest that AVOD (Advertising Based Video on Demand) is growing rapidly with Nathanson stating that ad revenue in this category has soared from $1 billion in 2017 to $5 billion last year. The analyst says that this figure could reach $21 billion by 2025. He also notes that Netflix is responsible for 6% of the total minutes spent watching TV (compared to 3% for Hulu) which means that Netflix doesn't have to offer "hyper-targeted" ad campaigns to capture advertising revenue.
In his report, the analyst stated that "Given Netflix’s popularity, it appears they should be the best positioned to capture the emerging AVOD market if they embrace advertising. While an ad-supported tier may very well boost growth, it may also send a worrisome signal to the market that Netflix’s core SVOD (Subscription Based Video on Demand) strategy is facing its limitations. Accordingly, we believe another route Netflix could take to spur growth and also gain exposure to the strong advertising market is by adding sports content to the service."
Netflix might need to turn to live sports programming to boost its subscription growth says one analyst
Other streaming video services such as Peacock and Paramount+ are turning to sports as a way to boost subscriber growth. Nathanson says that this is something that Netflix might want to consider. "Netflix may want to add sports to a more premium tier, helping to boost ARPU (Average Revenue per User), gain exposure to in game advertising and broaden the appeal of its service in an increasingly competitive market.
The analyst says that "Although advertising or sports on Netflix is purely conjecture at this point, we believe management will need to consider more aggressive actions to drive growth to support their elevated equity valuation, especially as the core SVOD business begins to slow down." Offering consumer products is a another step that Netflix could take to enhance revenue and take the company in another direction away from subscription video streaming.