Will Netflix regret its economic plan with advertising?

Netflix (NFLX 0.32%) Y walt-disney (DIS -1.16%) They seem to be passing ships when it comes to prices. Netflix held a press call on Thursday, revealing how much its new ad-supported tier will cost. When it launches in the US on November 3, it will cost cost-conscious subscribers just $6.99 per month. This is at the low end of the $7 to $9 monthly fee reported by Bloomberg.

Disney+ plans to introduce its ad-supported plan, at $7.99 a month, on December 8. Remember when Disney+ launched its ad-free platform three years ago for $6.99 a month, just over half the $12.99 monthly fee Netflix was commanding on its standard plan? The coffee tables in the living room have been turned around.

A couple with a dog watching television on a sofa.

Image source: Getty Images.

Strange things

Netflix taking a ruthless pricing approach is interesting, but not entirely unexpected. The premium streaming leader had to be aggressive after starting 2022 with consecutive quarters of sequential declines in subscriber numbers. It expects a return to sequential membership growth for Q3, which it will report next week, but Netflix can’t mess that up. You have to make sure you don’t overdo it like you probably did with an ill-advised price hike earlier this year. The stock has lost more than two-thirds of its value since it peaked late last year.

Investors were unfazed by the news. Netflix shares were up 5% following the announcement, and that’s the real surprise here. Netflix has historically moved higher after revealing fee increases. It is now going higher after turning the price gun the other way.

However, lost in the flurry of increases, Netflix’s new plan is likely to come at the expense of people paying a lot more now. Running four to five minutes of ads an hour to save a few bucks is a pretty compelling value proposition, especially if the economy tanks and discretionary income starts to decline.

It’s also not an apples to apples comparison. Disney+, the original ad-free flavor, will increase in price by 38% to $10.99 per month next month. It’s still a lot less than the standard Netflix plan which is now $15.49/month, but it’s more than the basic Netflix plan at $9.99/month.

The Netflix ad-free offer is for the basic entry-level plan. It only allows one stream at a time, so unlike the more popular standard plan, it can’t be shared by two members of the same family who want to watch different shows. Standard definition quality was another thing that turned people away from the basic plan, but now it’s upgrading to more respectable high definition at 720p. Netflix will see people switch to the new $6.99 basic ad-supported plan or the $9.99 ad-free offer. All paths lead to a reduction in the average revenue per user.

Ad revenue will be welcome, and Netflix’s audience will be attractive to marketers. It won’t make up the difference between what they will pay and what they used to pay before trading down. The market applauded a questionable strategic move by the benchmark for streaming media stocks on Thursday. It’s hard to root for a new level of Netflix that wants to be successful, but also hopes it isn’t. also successful.

Rick Munarriz has positions at Netflix and Walt Disney. The Motley Fool has positions and recommends Netflix and Walt Disney. The Motley Fool recommends the following options: $145 long calls in January 2024 at Walt Disney and $155 short calls in January 2024 at Walt Disney. The Motley Fool has a disclosure policy.

Leave a Comment