Netflix's road to recovery might start with ads in late 2022

Ads are coming to Netflix, and it’s possible they’ll be here sooner than first thought. Per a report from The New York Times, Netflix executives reportedly have told employees that an ad-supported tier of the streaming service is being planned for a rollout sometime in the last three months of 2022. That’s a lot quicker than what investors were told in the company’s earnings call on April 19.

Netflix co-founder and co-CEO Reed Hastings told investors that the company would take the “next year or two” to figure out the possibility of ads on Netflix. The other Netflix executives during the company’s recent earnings calls also didn’t rule out the possibility of an ad-supported tier, but there was no hint that the dramatic business shift could happen as early as this year.

“I’m a bigger fan of consumer choice,” Hastings said on the call. “And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense. So that’s something we’re looking at now. We’re trying to figure out over the next year or two. But think of us as quite open to offering even lower prices with advertising as a consumer choice.”

Unlike rivals like Hulu and HBO, both of which offer a cheaper ad-supported tier, Netflix has historically been averse to the idea of ads. But 2022 changed a lot of things. Netflix lost 200,000 subscribers in the second quarter of 2022 — the first time it’s shed any in a decade — and is projected to lose a massive 2 million subscribers in Q3. The negative forecast led to a sharp decline in share price and wiped out billions from its market cap.

But that’s just half of the concern. Netflix often has gloated about the quality and diversity of its content library. But its heavy investment in regional content, especially in markets like India, hasn’t really proved to be the kind of critical and commercial success story that could revive its dwindling fortunes in the face of fierce competition.

Plus, with Apple bringing home the Academy honors with CODA, Netflix is under more pressure than ever to surpass its relatively young, deep-pocketed rival platform. The likes of Disney and HBO also continue to produce marquee shows that can drive subscriber growth in a massive fashion if done right.

Ads may not be a terrible idea

Netflix knows all too well that the road to streaming glory is lined with blockbuster content starring marquee talent, but walking that path requires some handsome paychecks. Going on a mad production spree with investors’ money to one-up the likes of Apple, HBO, and Disney is a huge risk. But if a share of that production money comes from ad partners, Netflix has a chance to keep investors happy and also work on its ambitious content plans.

And that’s where the ad-supported tier comes to the rescue. But more than just being a desperate money-making tactic for Netflix, it just might win some new subscribers. Nobody likes ads, but if Netflix could reduce the price of its subscription service by a meaningful margin, say about a 30% reduction for showing ads, it could attract new paying customers.

Netflix has continued to raise its subscription prices over the past few years to keep its production machinery running. But in doing so, it has also driven away customers due to the high asking price for its subscription. A cheaper ad-supported tier might win some of them back as well. At the end of the day, options are always a good business strategy.

Letting the customer decide if they can sit through a few ads while watching their favorite TV show in exchange for a meaningfully lower subscription price sounds like a reasonable move at this juncture. Hulu and HBO are shining examples that an ad-supported tier is a viable business strategy. For Netflix, it can prove to be more than just a desperate move. It just might strengthen its bond to subscribers while also lining its pockets for producing more content.