These 2 metrics spell more bad news for Netflix’s downed stock
IInvestors had a pretty good idea it was coming, and soon. But netflix (NASDAQ:NFLX) Co-CEO Ted Sarandos confirmed it last week at the Cannes Lions advertising festival: the streaming giant will launch an ad-supported tier, possibly before the end of this year.
The decision reverses the company’s longstanding policy of avoiding a less-than-premium option at a less-than-premium price. But Netflix must adapt because the streaming market is changing rapidly. Two new sets of consumer data underscore this reality.
The question is, will this strategic shift be too little, too late?
Not too soon, if even soon enough
Most of Netflix’s streaming video rivals offer low-cost or free tiers of services to consumers who want to watch commercials while they’re programming. But the main streamer had always dismissed the idea…that is, until April, when the company reported its first net subscriber loss in a decade.
Fearing that this contraction now only reflects fallout from the shutdown of Russian businesses after the country invaded Ukraine, co-CEO Reed Hastings conceded which “enable consumers who wish to benefit from a lower price and who are tolerant of advertising [to] getting what they want makes a lot of sense. So that’s something we’re looking at now […] consider us quite willing to offer even lower prices with advertising as the consumer’s choice.”
Investors and analysts took that ball and ran with it, so to speak, but so did the company. Sarandos’ comment from last week further clarifies his plans.
And not too soon.
The streaming industry isn’t just changing, it’s evolving rapidly. A survey by market research firm NPD indicates that last year, the cost jumped two places to become the second most common reason a consumer canceled a streaming subscription. A service’s content catalog remains the main reason someone might sign up for or cancel an on-demand service. However, the fact that consumers are becoming significantly more price sensitive is telling.
Credit the rise of competitors like HBO Max, Disney+ and Paramount+ for the change. When there were fewer peers (with less robust offerings) in the space, there was no meaningful price comparison to be made. With those competing streaming platforms all offering cheaper – and often ad-supported – plans, cost becomes a more obvious differentiator.
It also works against Netflix more than any other service, as the typical monthly cost of its subscriptions is higher than that of alternative streaming services. In fact, new data from Whip Media shows this to be a particularly big issue for Netflix.
Simply put, out of the eight major streaming services available in the US, Netflix ranks last in terms of overall perceived value. The service with the highest perceived value was HBO Max, followed by Disney+. These two boast 2022 “value satisfaction scores” of 85% and 83%, respectively, according to Whip. Hulu is there too. Netflix’s score, on the other hand, lags them all at 62%.
Netflix also scores highest on the value dissatisfaction scale, although this isn’t necessarily the diametric opposite of a satisfaction score. Along the same lines, among survey respondents who had canceled Netflix in the past few months, the majority specifically cited the recent price increase or lack of value among their reasons.
While 81% of Netflix subscribers surveyed still say they are likely to keep the service, that number was down from 93% last year – the biggest drop of any streaming platform surveyed.
It’s not the end of the world for Netflix. Despite a dwindling perception of its value, it’s still the service most US consumers would keep if they could only keep one, according to Whip Media. And giving people the option to upgrade to a lower-cost, ad-supported version of the service should cement at least some of the brew.
However, the ad-supported learning curve could prove steep for Netflix. He doesn’t even have access to experienced, in-house expertise on the subject. At least waltz disney will be able to apply lessons learned from its ad-supported Hulu tier when it launches an ad-supported Disney+ tier (likely later this year), while Comcast‘s Peacock appears to have been designed from the ground up to serve ads. Comcast’s ad tech is so powerful, in fact, that the company is reportedly vying to help Netflix manage its foray into ad-supported streaming, according to The Wall Street Journal. AlphabetGoogle was also suggested as a competitor.
That’s fine, but either choice would ultimately force Netflix into partnering with a company it also competes with. Don’t even worry about the fact that Hastings and Sarandos will learn the ropes of advertising once they’re already in the business.
Shareholders may want to buckle up for what could be a bumpy ride into next year.
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