Netflix Needs Its Upcoming Ad-Supported Offering to Reignite Growth. It Might Be in Luck

Netflix Inc. shocked the entertainment world in April when it revealed plans to debut a cheaper, ad-supported subscription tier. The move went against the core of the company’s pitch as a completely ad-free streaming experience but was seen by observers as a necessary step to help restart stalled growth. After all, most consumers say they prefer a cheaper service with ads over a more expensive one without them. 

Still, the stunning reversal spurred jabs from Netflix’s competitors during May’s TV upfront presentations and raised questions about the company’s suddenly tenuous future in the battle for streaming dominance.  

A new Morning Consult survey shows that while a cheaper tier of the service may not be enough to win over the majority of Netflix holdouts, it could entice a sizable percentage of them to finally sign up for the first time. But that’s likely only if Netflix gets the advertising itself right, as consumers say they tolerate some ad formats much more than others.

Interest in Netflix’s upcoming ad-supported tier 

• Nearly 2 in 5 adults (39%) said they’d be interested in signing up for a $10-per-month ad-supported streaming tier from a service that previously offered only a $15.50-per-month tier without ads. Netflix’s current base cost is $15.49 per month, and $10 is the rumored price for its upcoming ad-supported offering. HBO Max offers its ad-supported tier for $10 per month.   
• The percentage of interested consumers climbs to 62% if the hypothetical service costs $7 per month. Hulu’s ad-supported plan costs $7 per month.
• Netflix subscribers were more likely than the general population to say they’d be interested in an ad-supported service at both price points.
• Half of frequent Netflix users (those who said they stream content on the service at least once per week) said they’d be interested in switching from a more expensive ad-free plan to a cheaper ad-supported one, with prices unspecified.

Consumers hate normal ads but tolerate other kinds 

• Respondents had the lowest opinion of standard ads that interrupt content, with 67% saying they have either a “somewhat” or “very” unfavorable view of those ads. 
• Ads that run before content (or pre-roll ads) that typically allow users to watch the rest ad-free were the most favored by survey respondents. Fifty-six percent of adults had a favorable view of pre-roll ads compared to 27% with an unfavorable view for a net rating (the share with a positive view minus the share with a negative one) of 29 — the highest among the ad formats presented. 
• Respondents also had a net positive view of “pause ads,” or ads that only play when a user pauses their TV series of film, which are increasingly being deployed by streaming services as a way to include ads without disrupting the viewing experience.

The future of Netflix and advertising

Known for its seamless streaming experience, Netflix will have to balance user expectations against a need to generate more revenue. Netflix reported a historic drop in subscribers for the first quarter of 2022 and predicted it will lose more. 

Getting the ad formats right is a crucial step toward winning over new subscribers (or converting existing ones), and that likely means using pre-roll ads that allow viewers to watch the rest of their content uninterrupted, in addition to other innovative formats like the pause ad that allow Netflix to boast that its experience remains user-friendly while simultaneously incorporating some advertising. Finding that balance is a major challenge for not just Netflix but all streaming services like HBO Max and Peacock that offer an ad-supported tier.

Walt Disney Co. Chief Financial Officer Christine McCarthy said that, based on the company’s experience with Hulu, it anticipates the majority of its subscribers will buy its upcoming Disney+ ad-supported plan. The Morning Consult survey suggests the majority of current Netflix users might not do the same, but enough could be interested to validate the embattled streaming service’s decision to abandon its longtime ethos and finally embrace advertising.

The survey was conducted May 26-28, 2022, among a representative sample of 2,210 U.S. adults, including 1,352 self-identified Netflix subscribers, with unweighted margins of error of plus or minus 2 percentage points and 3 percentage points, respectively. The sample also included 1,127 frequent Netflix users, with an unweighted margin of error of plus or minus 3 percentage points.