Netflix Inc is considering pricing its new ad-supported tier at $7 to $9 per month, half the current most popular plan, which costs $15.49 per month with no commercials.
The goal is to attract subscribers who are willing to watch some ads in exchange for a lower monthly rate. As the streaming TV pioneer prepares to introduce advertising for the first time, he tries to strike a careful balance between reaching a more price-conscious consumer and providing a pleasant experience.
Netflix plans to sell about four minutes of advertising per hour for the ad-supported service, far less than most of its peers, according to people familiar with the company’s plans. The company will run ads before and during some programs, but not after.
It also tells advertisers it wants to cut smaller deals up front so it doesn’t over-promise viewers and overwhelm viewers with the spots, the people said, who declined to be identified because the discussions are private.
Netflix plans to roll out its new, lower-cost option in at least half a dozen markets in the last three months of the year. The company has said the full rollout may have to wait until early next year.
Details of the service trickle out as Netflix plans and meets with business partners. A lot can change as the company grows the business.
Netflix has long sold itself as a consumer-friendly alternative to cable TV. People could watch TV programs and movies on demand and without advertising. They can cancel (or sign up) at any time without much hassle and have access to an extensive catalog of programs. But the loss of subscribers in the first half of this year forced management to finally embrace advertising.
They believe the cheaper tier will both attract new budget-conscious customers and offer those willing to cancel a cheaper alternative.
According to media consultancy Ampere Analytics, the new tier could generate $8.5 billion a year for Netflix worldwide by 2027, including subscription fees and ad sales.
Many cable networks have between 10 and 20 minutes of advertising per hour. Most streaming services offer less than cable. Some, like Hulu, frustrate viewers by showing the same commercial over and over.
Netflix hopes to avoid these frequency complaints by starting up slowly. Don’t over-target to tailor ads to the viewer. Most people will see the same ads. And Netflix wants to make sure the same spots aren’t repeated over and over again.
Much of that work will be performed by Microsoft Corp, which won the right to be Netflix’s exclusive advertising technology and sales partner. The tech giant has little experience streaming TV, but has built a $10 billion advertising business in recent years.
Netflix is in talks with movie and TV producers, while Microsoft is in talks with many ad agencies and technology providers. The companies also met with a number of advertising agencies.
Netflix has declined to comment on details about its plans, and many advertisers, partners and investors still have questions. Netflix has not made any predictions about how many people it thinks will sign up for the ad tier, nor has it said when it will allow third parties to measure its viewership.
Netflix has been monitoring its audience stats, which it claims to own and give it a competitive advantage. The company could always say those numbers weren’t relevant because it didn’t sell ads.
But advertisers will require Netflix to partner with a third-party company, such as Nielsen, to measure how many people are actually watching.
Netflix will start advertising around the same time as Disney+, its biggest rival. While Disney is increasing the price of its main plan and keeping the current price for its ad-supported version, Netflix is actually lowering the price of its service.
Leadership at Netflix has begun to make decisions about which programs will and will not have ads. The company will not run ads in children’s programs, at least not in the beginning. Nor will it feature ads during its original movies.
The company is keen to include ads on many of its own TV shows. It also pursues rights to place advertisements in partner licenses.
Studios like Sony, Universal, Warner Bros. and Paramount like to charge Netflix for placing ads in old movies or old TV shows that originally aired with ads. They are less eager to allow ads in newer programs.
Advertisers, meanwhile, are celebrating Netflix’s decision. The growth of ad-free services such as Netflix, Amazon Prime Video and Disney+ led to an existential crisis among marketers.
They feared that TV, once the largest advertising industry in the world, would be taken over by non-advertising services. An agency predicted that the amount of time people spend watching ad-supported video would decrease by 6% by 2025.
Now that Netflix and Disney+ are entering the field, they say it will increase by even 1%.
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