August 25, 2022
Netflix is expected to generate $1.7 billion by 2027 from its pending ad-supported subscription tier in the U.S. market, according to new projections from Ampere Analysis. The domestic market will be the largest single contributor to global advertising revenue of $5.5 billion, boosted to $8.5 billion a year by ad tier subscription fees. Specifically, the ad tier is expected to increase the group’s revenue by 4.9% in 2023 and 7.1% by 2027 compared to the current ad-free business model.
London-based Ampere contends the ad tier will see Netflix generate $2.2 billion more in revenue by 2027 than it would by continuing with a subscription-only model, driven by an average revenue per user (ARPU) uplift combined with a modest increase in the overall subscriber base.
Assuming that the ad tier launches at $5.99 in the U.S., with pricing adjusted on a relative basis globally, and based on price elasticity analysis, Ampere calculates that the ad tier will see a 3.2% uplift in new subs, with the remainder of the ad tier customer base migrating from the existing subs.
The price elasticity analysis in the U.S. shows that if the ad tier launched at $2.99, the uplift would increase to 4.8% but at the expense of subscription revenue. If the ad tier cost $7.99, the uplift would drop to 2.2% and provide a smaller increase in revenue.
Using ad tolerance and price sensitivity data from Ampere’s consumer survey, the firm estimates that 20% of Netflix users will be on the ad tier by 2027. In addition, most of the ad tier customers will come from the existing customer base. Therefore, the report concludes that the ad tier will serve to stabilize the more saturated markets of North America and Western Europe.
“The ad tier is primarily a customer retention tool in the U.S., with sign-ups coming largely from Netflix’s existing subscriber base,” analyst Ben French said in a statement. “The U.S. ad tier will be an effective measure against a shrinking and less engaged audience rather than a new customer acquisition tool. Increasing advertising rates will grow total ad income over time, offsetting the negative impact of a fall in viewing.”