After resisting the temptation to include an ad-supported tier on its platform for so long, why would Netflix ever make the change?
Well according to some analysts, the company could make an additional $US1 billion ($AU1.42bn) per year if it did.
Nomura Instinet analyst Mark Kelley wrote a note to clients about the idea over the weekend.
“An ad-supported tier could 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,” he said.
“Using what we believe are relatively conservative assumptions (launch of a free tier in the US in 2020, scaling to about a quarter of the paid subscriber base by 2021), we see a potential revenue opportunity of more than $1 billion per year, with nearly $700 million flowing through to net income, given the favorable margin dynamic of the advertising business,” he said.
And while Kelley indicated he believes the lure of ads might be “too difficult for Netflix to continue to resist,” he is unsure what it would look like.
Netflix could potentially make a free version of the service entirely supported by advertising or alternatively offer its ad-supported tier at a discounted rate, as its US rival Hulu does.
If Netflix was to add an ad-supported model, it would be doing so in an increasingly crowded streaming market.
Disney+ is not far off entering the mix, while the original content on Apple TV+ streaming service is due to arrive later this year.
In response, Netflix has doubled down on its original content, Netflix VP of original content Cindy Holland saying recently the company always knew “traditional players” like Disney would enter the fold.
“We believed this shift would all happen, it’s just taken many years longer than we thought,” Holland said, adding that the threat of such rivals potentially ending their licensing agreements with Netflix has prompted original content.