<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="There's little doubt that Netflix (NASDAQ: NFLX) has been the biggest winner in the ongoing transition from broadcast television to streaming video. Even as competitors like Amazon.com (NASDAQ: AMZN) and Hulu — now controlled by Walt Disney (NYSE: DIS) have built thriving business in the wake of Netflix’s success, no challenger has yet to achieve its massive customer rolls.” data-reactid=”11″>There’s little doubt that Netflix (NASDAQ: NFLX) has been the biggest winner in the ongoing transition from broadcast television to streaming video. Even as competitors like Amazon.com (NASDAQ: AMZN) and Hulu — now controlled by Walt Disney (NYSE: DIS) have built thriving business in the wake of Netflix’s success, no challenger has yet to achieve its massive customer rolls.
The streaming pioneer continues to increase its subscriber base: It has put up more than 25% year-over-year growth in each of the previous four quarters. This adds up to nearly 150 million subscribers, and its worldwide growth shows little signs of slowing.
Yet even in light of these stellar increases, Amazon and Hulu have been able to carve out profitable niches in an area that Netflix has thus far ignored: ad-supported streaming. That opportunity could be worth billions of dollars to Netflix.
Netflix could make billions offering an ad-supported tier. Image source: Getty Images.
Leaving money on the table?
Instinet analyst Mark Kelley posits that Netflix is missing out on a lucrative opportunity by not introducing an ad-supported tier. Kelley has run the numbers and conservatively estimates that if Netflix were to introduce a free option supported by advertising, the company would produce more than $1 billion per year in additional revenue. Most of that would drop directly to the bottom line, generating nearly $700 million in additional net income.
“An ad-supported tier could [also] provide a lift to free cash flow, reducing the need for Netflix to raise debt frequently, especially beyond 2021 into a potentially rising rate environment,” Kelley wrote in a note to clients.
Some believe that the opportunity will soon become too difficult to resist. There are a number of ways Netflix could approach advertising. While maintaining its existing service, the company could offer a completely free tier, entirely supported by ads. Netflix could also take a page from Hulu’s successful playbook and offer a lower-priced level ($5.99) that is partially supported by ads.
The evidence is clear
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Advertising is an idea Netflix has long resisted, but the demand for such an option is undeniable. Hulu recently reported that its subscriber base now exceeds 28 million. The company added 3.8 million in the first quarter alone, continuing its torrid growth from 2018, when the number of subscribers grew 48% year over year. The company offers an ad-free tier, but more than 70% of its viewers are on its ad-supported plan. ” data-reactid=”31″>Advertising is an idea Netflix has long resisted, but the demand for such an option is undeniable. Hulu recently reported that its subscriber base now exceeds 28 million. The company added 3.8 million in the first quarter alone, continuing its torrid growth from 2018, when the number of subscribers grew 48% year over year. The company offers an ad-free tier, but more than 70% of its viewers are on its ad-supported plan.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="While Amazon is best known in streaming video circles for its Prime Video — which is included as part of its Prime membership — the company also offers a free tier, via its IMDb TV (formerly IMDb Freedive). The e-commerce leader recently signaled its growing interest in the space by significantly increasing its selection of programming, saying it will triple the content on its platform, adding thousands of new titles. The company will also launch the service in Europe later this year, the clearest sign yet that it sees strong interest for a free, ad-supported offering.” data-reactid=”32″>While Amazon is best known in streaming video circles for its Prime Video — which is included as part of its Prime membership — the company also offers a free tier, via its IMDb TV (formerly IMDb Freedive). The e-commerce leader recently signaled its growing interest in the space by significantly increasing its selection of programming, saying it will triple the content on its platform, adding thousands of new titles. The company will also launch the service in Europe later this year, the clearest sign yet that it sees strong interest for a free, ad-supported offering.
Image source: Getty Images.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="There's more evidence of increasing demand for ad-supported services. Programmatic-advertising specialist The Trade Desk (NASDAQ: TTD), which uses sophisticated algorithms and high-speed computers to automate the process of ad buying, has seen demand skyrocket. One of the company’s fastest-growing segments is streaming television advertising. In the first quarter, ads placed on connected TVs grew more than 300% year over year. While that’s impressive, consider this: That growth is on top of ad revenue that grew 900% between 2017 and 2018. ” data-reactid=”49″>There’s more evidence of increasing demand for ad-supported services. Programmatic-advertising specialist The Trade Desk (NASDAQ: TTD), which uses sophisticated algorithms and high-speed computers to automate the process of ad buying, has seen demand skyrocket. One of the company’s fastest-growing segments is streaming television advertising. In the first quarter, ads placed on connected TVs grew more than 300% year over year. While that’s impressive, consider this: That growth is on top of ad revenue that grew 900% between 2017 and 2018.
Will Netflix eventually relent?
Thus far, Netflix has been insistent that advertising would never grace its platform. In an interview last year, Netflix CEO Reed Hastings reiterated the company’s stance. “Our content is our crown jewel,” he said. “It’s up to us to take [subscribers’] money and turn it into great content for their viewing benefit.” This follows an unequivocal pronouncement in 2015, when Hastings took to Facebook to say: “No advertising coming onto Netflix. Period.”
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The situation will probably be less black-and-white as time goes on. Netflix could continue to offer the ad-free service it always has, while also instituting a lower-priced (or free) ad-supported tier to augment its existing service. Not only would the move potentially reap billions of dollars in additional revenue, but it could also help the company prosper in developing nations where its $8.99-per-month plan is viewed as expensive.” data-reactid=”52″>The situation will probably be less black-and-white as time goes on. Netflix could continue to offer the ad-free service it always has, while also instituting a lower-priced (or free) ad-supported tier to augment its existing service. Not only would the move potentially reap billions of dollars in additional revenue, but it could also help the company prosper in developing nations where its $8.99-per-month plan is viewed as expensive.
So far, Netflix has balked at advertising, but the opportunity may eventually become too lucrative to resist.
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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena owns shares of Amazon, Netflix, The Trade Desk, and Walt Disney and has the following options: long January 2021 $85 calls on Walt Disney. The Motley Fool owns shares of and recommends Amazon, Netflix, The Trade Desk, and Walt Disney. The Motley Fool has a disclosure policy.” data-reactid=”62″>John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena owns shares of Amazon, Netflix, The Trade Desk, and Walt Disney and has the following options: long January 2021 $85 calls on Walt Disney. The Motley Fool owns shares of and recommends Amazon, Netflix, The Trade Desk, and Walt Disney. The Motley Fool has a disclosure policy.
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