A couple of years ago Netflix (NFLX) made an announcement.
Greg Peters, the streaming giant's chief operating officer and chief product officer, unveiled the "Basic with Ads" plan on Oct. 12, 2022, which was scheduled to kick off the next month.
"'Basic with Ads' is everything people love about Netflix, at a lower price, with a few ads in between," Peters said in a post on the streaming company's website.
The plan, Peters said, also gave advertisers an opportunity "to reach a diverse audience, including younger viewers who increasingly don’t watch linear TV, in a premium environment with a seamless, high-resolution ads experience."
A short time later Co-Founder Reed Hastings said he wished the streamer had introduced an ad-supported plan years ago.
Responding to interviewer Andrew Ross Sorkin of The New York Times, Hastings said, “You’re right to say I didn’t believe in the ad-supported tactic for us. And I was wrong about that,” Variety reported.
“Hulu really proved that you could do that at scale and offer consumers lower prices, and that that was a better model," he said, referring to the subscription streaming media company owned by Disney (DIS) .
A year later: Netflix tier had 15 million users
One year into the plan, Netflix said on Nov. 1, 2023, that the cheaper, ad-supported tier has amassed 15 million global monthly active users.
"We want to shape the future of advertising on Netflix and help marketers tap into the amazing fandom generated by our must-watch shows and movies," Amy Reinhard, the company’s advertising president, said.
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In January, Netflix said that its fourth-quarter sales totaled $8.83 billion, up 12.5% from one year earlier and marking the fastest growth since 2021.
The ad plan accounted for 40% of all Netflix signups in markets where it was offered last quarter.
The company also warned that it was kicking users in Canada and in the U.K. off its retired Basic plan by the second quarter of this year, and it hinted that the change would soon expand to other countries.
Netflix has been getting the thumbs up from Wall Street analysts this week, with Oppenheimer boosting its price target on Monday to $725 from $615.
Jefferies stepped up to the plate on Tuesday, raising its price target to $700 from $580.
Evercore ISI analyst Mark Mahaney followed on Wednesday, raising the firm's price target on Netflix to $640 from $600 per share, while keeping an outperform rating on the shares.
The firm's quarterly U.S. survey and annual Japan survey suggest largely neutral core Netflix trends in the U.S. and modestly positive trends in Japan, the analyst tells investors in a research note.
Mahaney added that subscription- and advertising-based video on demand continues to drive gross subscriber adds incrementally for Netflix. It is also increasingly becoming an anti-churn lever in the U.S. (Churn is the measure of people switching to other providers.)
Analyst sees 'a lot of wins' for Netflix
Mobile-only Netflix subscribers could also provide an additional and not insignificant subscriber-adds tailwind over the next few quarters, the investment firm said.
"I think the the bigger picture here is that this ad-supported plan has been rolling out now for a year or two, and I think what it's done is creating a lot more incrementality than maybe the market realized," Mahaney said in an interview with CNBC.
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The analyst said that the ad-supported plan "broadens the price points lower" so that Netflix can bring in more subscribers and "it's also given the company something of an anti-churn kind of safety net."
The plan, Mahaney said, enables the company to raise prices at the high end because it has a lower-price option. "There's just a lot of wins behind this ad-supported offering that I think have been underappreciated," he said.
The analyst said the intensity in streaming competition, which had been on the upswing, peaked when former Disney CEO Bob Chapek was fired amid the entertainment giant's streaming losses.
"That was your peak moment and ever since then you've had a decline in competitive intensity," Mahaney said, "which is also showing up in the fact that some of these studios are now willing to license their content to Netflix when they weren't willing to do that before."
That's why "Suits," "Band of Brothers" and other programs showed up on Netflix last year, he said. That wouldn't have happened in prior years, he added.
"There's less money spent on content and customer position and that benefits the leader in the space, and right now that's Netflix," Mahaney said,
"And shock of all shocks, they're generating more free cash flow than any of the traditional media companies, so good for them."
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