Netflix Could Reportedly Make Billions With Ad-Supported Tier

Netflix continues to be the dominant force in streaming, but that doesn't mean it isn't leaving money on the table in some ways. While companies like Hulu and Amazon have integrated add supported plans, Netflix has yet to do so, and according to Instinet analyst Mark Kelley, that decision could be allowing Netflix to lose out on billions (via Yahoo). According to Kelley, conservative estimates of a Netflix plan with ads would generate more than $1 billion of additional revenue per year. Even better is the fact that most of that would target the companies bottom line, resulting in around $700 million in added income.

"An ad-supported tier could [also] provide a lift to free cash flow, reducing the need for Netflix to raise debt frequently, especially beyond 2021 into a potentially rising rate environment," Kelley wrote in a note to clients.

Currently, Hulu offers both an ad-free plan and an ad-supported plan, but over 70% of subscribers use the ad-supported plan. Hulu has also continued to grow over the past few years, and their subscriber base is now beyond 28 million. To put that into perspective, Netflix has around 150 million subscribers, so if you introduced a cheaper ad-supported plan and even 10% took advantage of it that would be a significant portion of income to ignore.

Amazon is also expanding its free tier through IMDb TV by adding a substantial new allotment of titles but also with its upcoming launch in Europe later in the year. That is occurring at the same time that streaming television advertising is spiking in a huge way, as The Trade Desk revealed that ads placed on connected TVs grew 300% year over year.

As for why Netflix has yet to add an ad-supported plan, CEO Reed Hastings has always put Netflix's value squarely on its content and does not want to fill the service with ads. During an interview last year he said "Our content is our crown jewel. It's up to us to take [subscribers'] money and turn it into great content for their viewing benefit."

He also made his premise pretty clear in 2015, saying "No advertising coming onto Netflix. Period."

Thing is since then Netflix had spent a lot of money on creating original content and bringing movies to the service. At some point, it might want to help offset that cost by pulling in more ad money, and that will,l definitely be hard to resist, especially when you're talking about this much money.

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