The Case for Netflix to Add an Ad-Based Tier

Ben Thompson, last week on Stratechery:

Meanwhile, subscriber growth has stalled, even as the advertising market has proven to be much larger than even Google or Facebook can cover. Moreover, the post-ATT world is freeing up more money for the sort of top-of-funnel advertising that would probably be the norm on a Netflix advertising service. In short, the opportunity is there, the product is right, and the business need is pressing in a way it wasn’t previously.

Thompson and I talked about this on Dithering last week, and I think this is a fascinating question. The first thing to note is that the “Netflix should sell ads” take that Thompson espouses is about adding new lower-priced tiers that are subsidized through commercials — no one is arguing that Netflix should add ads to existing subscription tiers. Basically, what’s being suggested is the Hulu model: pay something to get access but with ads, or pay more to get access without any ads at all.

When you keep that point in mind, as a business case, it makes a lot of sense for Netflix to expand this way. My argument against Netflix doing this is about brand, though. Netflix has built an incredibly valuable brand, and part of that brand’s foundation is that Netflix is a premium service that doesn’t do rinky-dink shit like force you to watch unskippable ads. When you’re a Netflix customer, Netflix is always on your side. Unskippable ads are not on your side. Ergo Netflix should never create a lower-priced-with-ads subscription tier. Yes, they’d add more subscribers that way, and goose revenue growth for a few more years, but I think the revenue they’d gain would be outweighed, significantly, by the brand equity they’d lose in doing so. Netflix isn’t just like Hulu or Peacock or any of the also-ran services with ads. Netflix is fucking Netflix, the leading streaming service.

There’s no way to account for brand value on a balance sheet, but great CEOs know what it’s worth in their guts, and savvy investors should too.

Sunday, 10 April 2022