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Netflix to Launch Ad-Supported Streaming Package By 2023

With a new ad-supported streaming bundle scheduled to launch in early 2023, Netflix hopes to attract a new group of price-conscious customers and turn around its declining membership numbers.

In its Q2 earnings announcement, the company plans to introduce the ad-supported plan “around the early part of 2023.”

“We’ll likely start in a handful of markets where advertising spending is significant,” Netflix said in its Q2 letter to shareholders. “Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering. So, our advertising business in a few years will likely look quite different than what it looks like on day one.”

Netflix has not disclosed pricing for the ad-supported plan, but it is expected to be less expensive than the Standard package, which comes with two H.D. streams and is the streamer’s most popular plan without advertising ($15.49/month in the U.S.).

According to Netflix’s COO and chief product officer Greg Peters, the streamer believes the ad-supported plan’s profitability will be “neutral” compared to its traditional subscriptions.

It was announced last week that Netflix had reached a deal with Microsoft to serve as its exclusive advertising partner. Peters confirmed that Microsoft would sell Netflix ads exclusively for the foreseeable future.

As the streaming service plans its advertising-supported tier, Ted Sarandos, co-CEO, and chief content officer, acknowledged that Netflix is discussing rights issues with some content providers. Such a move would be regarded as a second-window event customarily associated with payments to studios and creative talent.

“The vast majority of what people watch on Netflix we can include in the ad-supported tier today. Some things we’re in conversations with studios on,” Sarandos said in the recorded earnings interview. “We will clear some additional content. Not all of it. I don’t think it’s a material hold-back to the business.”

The company’s CFO, Spencer Neumann, also downplayed the possibility of higher advertising costs.

“We can launch today without any content-clearance rights,” he said. Discussions are underway with outside partners, but Neumann assured analysts, “We’ll be disciplined.”

In the Q2 letter, Netflix said that Microsoft is “investing heavily to expand their multibillion [dollar] advertising business into premium television video, and we are thrilled to be working with such a strong global partner. Given the combination of our very engaged audience and high-quality content, we’re excited by the opportunity, which we think will attract premium CPMs [cost per thousand impressions] from brand advertisers.”

The streamer added, “Our lower-priced advertising-supported offering will complement our existing plans, which will remain ad-free,” the company said in the letter. Worldwide, Netflix’s average revenue per member (ARM) has grown at a 5% compound annual rate from 2013 to 2021, “so it makes sense now to give consumers a choice for a lower-priced option with advertisements if they desire it.”

As part of its strategy to discover a new source of revenue growth and to crack down on password-sharers, Netflix initially said in its Q1 report that it intended to provide an ad-supported service. Netflix’s losses for the second quarter weren’t as catastrophic as anticipated: It lost 970,000 subscribers worldwide, less than the 2 million net loss it had previously predicted. In the third quarter, the company expects to add 1 million subscribers.

“Over time, our hope is to create a better-than-linear-TV advertisement model that’s more seamless and relevant for consumers and more effective for our advertising partners,” Netflix said in Tuesday’s earnings letter. “While it will take some time to grow our member base for the ad tier and the associated ad revenues, over the long run, we think advertising can enable substantial incremental membership (through lower prices) and profit growth (through ad revenues).”

According to Morgan Stanley, Netflix might charge $10 per month in the U.S. for the ad-based option, which would bring in $7 per month from advertising. According to a forecast released last month by research company MoffettNathanson, the streaming giant could experience a rapid increase in ad revenue from $150 million in 2023 to $1.8 billion in 2025.

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