In a significant development, streaming giant Netflix has reported a second consecutive quarter of robust growth in its ad-supported tier, signaling a shift in its business model. Despite being in its early stages, the ad-supported tier has become substantial enough for the company to announce the retirement of its most economical ad-free option later this year.
According to Netflix’s earnings report for the fourth quarter of 2023, subscribers opting for the ad-supported tier now constitute 40 percent of new signups in countries where ads are available. This marks a noticeable increase from the third quarter, where the ad tier accounted for 30 percent of new signups. The growth in ad-tier membership stands at an impressive 70 percent compared to the previous quarter, reinforcing the trend observed in the company’s last financial report.
Co-CEO Greg Peters, speaking during the earnings call, highlighted that the ad-supported tier currently boasts 23 million monthly active users across the 12 countries where the plans are offered. Peters expressed optimism about the trajectory of the ad-supported business, acknowledging that while it will take time to become a significant contributor to Netflix’s overall revenue, the current growth is promising.
Retiring Basic Membership and Exploring Strategic Partnerships
Given the success of the ad-supported tier, Netflix has disclosed its plans to phase out its Basic membership tier in the coming months. The Basic tier, presently the most affordable ad-free option, will be discontinued for all subscribers in Canada and the U.K. in the spring, with potential further adjustments based on market dynamics.
Peters also highlighted the effectiveness of promotional bundles in driving subscriber growth, citing examples like T-Mobile’s “Netflix on Us” deal. Such partnerships allow free promotions that convert to the ad-supported tier after a specified period. Peters emphasized that the lower price of the ad-supported tier benefits both Netflix and its partners, creating a win-win scenario for all involved.
Netflix’s Advertising Strategy Expands
Netflix’s advertising team, under the leadership of Amy Reinhard, is gearing up for increased inventory in 2025. The streaming platform’s commitment to becoming the exclusive home of WWE’s flagship program, Monday Night Raw, represents its most significant venture into live programming to date. The deal promises 52 weeks of live shows each year, expanding Netflix’s content offering and potentially attracting a broader audience.
In its letter to shareholders, Netflix also hinted at possible price hikes in the future. The letter stated that as the company invests in enhancing its platform, occasional adjustments in subscription fees may be necessary. This approach aims to fuel a positive cycle of increased investment, further improvements, and sustained growth in the streaming service.
