Why Netflix may need to cut prices and run ads

Netflix executives have repeatedly said the company will not run ads to generate more revenue. But with competition getting more intense, one Wall Street ana...

Posted: Dec 10, 2019 1:46 PM
Updated: Dec 10, 2019 3:15 PM

Netflix executives have repeatedly said the company will not run ads to generate more revenue. But with competition getting more intense, one Wall Street analyst thinks Netflix should offer a cheaper ad-supported service.

Shares of Netflix fell more than 2% Tuesday after Needham analyst Laura Martin downgraded the stock to an 'underperform' — essentially a 'sell' rating.

Martin said that if Netflix keeps its prices where they are currently — in a range of $9 to $16 a month — the company will lose 4 million subscribers in the United States next year.

Her solution: Offer an option that costs only about $5 to $7 a month and features an advertising block of about six to eight minutes an hour.

Martin argues such a service could help fend off existing competition from Disney+, Amazon Prime TV, Apple+, Hulu and CBS All Access and new threats from AT&T's HBO Max and Comcast's Peacock, which will launch in 2020. (AT&T also owns CNN.)

Those competitors are already charging much lower prices for their streaming plans, between $5 and $7. Granted, most of them don't have content libraries as vast as Netflix's, but the challengers have some buzzy shows of their own.

Disney, for example, has the Star Wars show 'The Mandalorian,' which has become a pop cultural phenomenon thanks to its 'Baby Yoda' character. Disney charges just $6.99 a month for Disney+ and also has a free one-year offer for many Verizon customers.

Apple just received three Golden Globe nominations for its original program 'The Morning Show.' (CNN's Brian Stelter is a consultant on the show, which is based on his book.) Apple TV+ costs only $4.99 a month.

Increased competition

Netflix was not immediately available for comment when asked whether it would consider Martin's idea of creating a cheaper tier with ads.

But its executives have taken great pains in the past to point out that because Netflix has no ads, its service has fewer privacy concerns than Facebook, Google's YouTube and other ad-supported online media firms contend with.

Netflix CEO Reed Hastings, content chief Ted Sarandos and other top executives continue to argue that the service is worth the premium price given popular original shows like 'Stranger Things,' 'The Crown' and 'Dark' as well as movies such as 'The Irishman' and 'Marriage Story.'

Still, Martin said in her report Tuesday she's worried Netflix could lose international subscribers once Disney and other media companies launch global versions of their streaming services.

'We believe Netflix must add a second, lowe- priced service,' she said in the report. 'Netflix's premium price tier of $9 to $16 a month is unsustainable.'

Martin also noted that Netflix stands to lose a lot of popular content to its rivals. 'Friends' moves to HBO Max next year, and Peacock will be home to 'The Office' starting in 2021. Much of Disney's own branded movies and shows —- as well as content from Marvel, Pixar and Star Wars — are in the process of moving to Disney+.

Investors are starting to worry, too. Although Netflix's stock is still up 11% this year, shares are more than 20% below their 52-week high.

Netflix is also the worst performer of the so-called FAANG stocks — Facebook, Apple, Amazon, Netflix and Google owner Alphabet — this year. Disney's stock has trounced Netflix too. The House of Mouse has surged 33% in 2019.

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