Netflix Announces Nov. 3 Launch for Ad-Supported Tier, $7 Price Will Not Provide Competitive Edge

Netflix (NFLX) announced on Oct. 13 that its anticipated ad-supported offering, newly dubbed Basic with Ads, will launch on Nov. 3 in 12 countries: the U.S., the U.K., France, Germany, Italy, Japan, Spain, Brazil, South Korea, Mexico, Australia, and Canada. While pricing will vary by country, the new service tier will be priced below the Basic tier with U.S. pricing at $7 per month with ads and $10 per month without. The new pricing is well below the Standard plan at $15.49 per month and Premium at $20 per month although those tiers offer higher resolutions, a larger library, offline viewing, and more concurrent streams. Given the pricing, we expect many of the ad-supported users in the U.S. will come from subscribers trading down from the more expensive Basic plan. We maintain our $280 fair value estimate as we await more details about the new service and the third-quarter earnings call on Oct. 18.

Given that the surprise announcement of an ad-supported tier happened less than six months ago, the planned launch date is quite impressive. The partnership with Microsoft likely helped to accelerate the process but does imply a lower margin for these customers due to some revenue spilt even if Netflix can generate more than $3 per user in ad revenue, that is, the price difference between the two basic plans. Possibly offsetting this split will be that some third-party billing partners may not offer the Basic with Ads plan. The ad load was disclosed to be four to five minutes per hour, in line with other streaming services, but well below the loads at broadcast or pay TV in the U.S. at around 16 minutes per hour.

By pricing at $7, Netflix is undercutting both the $8 per month ad-supported offerings at Hulu and Disney+. However, Disney is bundling the two services together at $10 per month and Hulu with ads can bought annually for $80, making the price $6.67 per month. Given these discounts, we think that Netflix’s pricing doesn’t provide any real advantage in the marketplace.