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The upcoming launch of a lower-cost, ad-supported subscription option from streaming powerhouse Netflix (NFLX -6.36%) will certainly be an interesting development. But not even the company seems to think it will be a game-changer. The Wall Street Journal reports (citing literature offered to potential advertisers) that Netflix itself is only estimating around 40 million subscribers will be using the cheaper option by late next year. For perspective, that’s less than 20% of its current customer headcount of 220 million.
The company may be understating the full potential of this new product tier, however. A few research and analytics firms suggest interest in this lower-cost service could be far greater than Netflix publicly anticipates, ultimately paving the way for renewed (and much-needed) subscriber growth.
Usage of ad-supported streaming services may be stronger than you realize.
That’s the broad takeaway from a recent survey performed by S&P Global‘s media research arm Kagan. A poll of around 2,500 U.S. adults indicated about two-thirds of subscribers to a streaming service like Discovery+ or Paramount+ are tuning in to the ad-supported version of those platforms. For Hulu and Peacock, on the order of 70% of their customers don’t mind seeing the occasional television commercial. HBO Max boasts the biggest proportion of premium users, but even so, 43% of its viewers are still signed up for the ad-supported version.
Presumably, the numbers are comparable in overseas markets where both options are offered.
To this end, Omdia is one of the first and few industry research outfits to suggest Netflix is likely to see similar trends. Omdia believes as much as 60% of Netflix’s worldwide streaming subscribers will be using the ad-supported option by 2027. Based on today’s customer count, that’s more than 130 million of Netflix’s 220 million total subscribers. Ad revenue would still make up the minority of the company’s top line under that scenario, according to Omdia, but it could still account for nearly one-quarter of U.S. revenue … too much to ignore. On a per-user basis, revenue should be around the same as Netflix’s current ad-free average revenue per user.
The kicker: Kagan’s research revealed something else quite telling about the potential of Netflix’s ad-supported tier. That is, a number of subscribers who are already using an ad-supported streaming service also subscribe to Netflix’s ad-free service. Peacock is at the low end of that scale, but a hefty 66% of its ad-supported streaming customers are still current Netflix users. At the other end of the spectrum, 84% of HBO Max’s U.S. ad-supported customers are also existing Netflix subscribers.
Having already demonstrated they’re OK with the occasional television commercial in exchange for a lower monthly bill, a relatively large portion of this group will likely make the switch to ad-supported Netflix where they’ll be more likely to stick with the more affordable option.
Again, it stands to reason the same dynamic will be in play as Netflix introduces its lower-cost offering in foreign markets.
There’s a not-so-subtle message buried within the data: People are OK with ads if it can save them a few bucks every month.
The real upside for Netflix with this evolution, however, isn’t just top- or bottom-line growth (although some will certainly be achieved). Perhaps the bigger, yet mostly unspoken, benefit of the impending ad-supported tier is customer retention. Following a series of price increases imposed over the course of the past several years, consumers appear to be balking at the monthly cost of $15.49 for Netflix’s standard plan. If the company’s ad-supported offering costs less than $10 as expected, however, it’s much easier to remain a customer of streaming’s most-proven name. The streaming giant can then turn its focus back on just bringing people into the fold, which is primarily a function of making good-quality content.
Very little of this reality is being priced into the stock. In fact, given how Netflix shares are still down 65% from their all-time high despite a recent bout of bullishness, it’s arguable that much of the ad-supported tier’s potential isn’t priced into the stock. This translates into an entry opportunity for investors who can see the bigger picture.
If you’re one of those investors, just don’t wait too long. Once the market starts connecting the dots, Netflix shares could recover as quickly as they imploded.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and S&P Global. The Motley Fool has a disclosure policy.
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