Netflix’s ad-based tier aims to reduce the high churn the company faced in 2022, attract new subscribers, and lure back those who canceled. However, by all measures, the rushed experiment is failing fast.
Currently, Netflix’s AVOD tier accounts for 12% of its subscriber base; however, during Q4 2022, 11% of its subscribers downgraded from SVOD to AVOD.
As expected, the savings of $3 a month was not enough incentive to win new subscribers, only in capturing those downgrading from higher tiers.
Netflix’s Subscriber Base Continues to Decline
Netflix cancellations are almost entirely related to costs. From July to September 2022, the top two reasons for subscribers canceling were to save money (39%) and unwillingness to pay its higher subscription fees (17%), which have steadily risen in recent years.
Planned streaming cancellations over the next three months (January to March 2023) remain at 5% of subscriptions. Yet, AVOD subscribers have the highest rate of planned cancellations, indicative of the sub-sector’s higher propensity to rotate between multiple streaming services.
However, subscription streaming overall remains robust. From September to December 2022, the number of households with video streaming rose by 2.5 million, reaching 115.7 million households, or 89% penetration.
The Hasty Advertising Launch Fails to Hit Expectations
Netflix pushed the launch of its advertising tier to beat Disney+ to the market by a month. Likewise, Netflix priced its ad-supported service at $6.99, again undercutting Disney+, which is priced at $7.99.
Netflix and Disney+ couldn’t have picked a worse time to enter the advertising space as ad-spending contracts, which was evidenced by Netflix’s failure to sell enough ads out of the gate (more below).
One of the many challenges for Netflix is introducing advertising into programming that was not designed with specific ad breaks. Series content, and obviously films, that were produced for SVOD services do not have the natural breaks for advertising. Careful integration and ad load will be vital for not turning off viewers.
Netflix subscribers who downgraded to its AVOD tier are less satisfied with the service because several titles available to SVOD subscribers are blacked-out due to contractual limitations and because the lack of advertising options leads to repetitive ads.
US Percentage of New Streaming Subscribers
Netflix Fails to Deliver Contracted Ads
Reports from the advertising world confirmed that Netflix’s new advertising tier failed to hit contractual viewership targets. According to insiders, Netflix delivered less than 80% of the expected viewership numbers to advertisers. As a result, Netflix permitted advertisers to reclaim funds for ads that had not run.
Netflix’s advertising tier launched in early November in the U.S. for $6.99 per month, compared to $9.99 for its basic tier without ads. The company also offers a standard tier for $15.49 and a premium tier for $19.99, both of which allow more than one device and offer enhanced picture quality. Currently, Netflix plans to deliver between four and five minutes of ads per hour. However, due to licensing agreement restrictions, over 10% of its catalog, which includes its most prestigious titles, will not be available to its advertising subscribers.
Netflix structured its initial ad deals on a “pay on delivery” basis, in which advertisers would only pay for the viewers they reached, and Netflix would release unspent ad dollars at the end of the quarter.
The company had initially sought advertisers to pay $65 per thousand impressions, which exceeds the $50 CPM that Disney+ sought, which makes Netflix the priciest of the major ad-supported streaming services. Netflix has since lowered its price, but it is still asking advertisers to pay a $55 CPM, though ad buyers will likely use the slow start to haggle for price reductions.
Worldwide Film & Television Distribution Intelligence
Get unparalleled access to market intelligence reports that draw on financial data and insights from dozens of content distribution deals worldwide between key industry participants, including — Distributors, Producers, Broadcasters, MPVDs, Pay Television Providers, and Streaming Exhibitors.
Film and Series distribution rates and terms deriving from dozens of agreements for rights to transmit films and episodic television via PayTV and SVOD.
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Licensing Terms & Included Programs:
Pay-1 & SVOD Rate Cards for Motion Pictures and Series Exhibited Worldwide in Multiple Availability Windows
- Motion Pictures: Pay-1, First Run, Second Window Features, Recent Library Features (Tiers AAA,A,B,C), Library Features (Tiers AAA,A,B,C), Current and Premium Made-For-TV Films and Direct-To-Video Films, covering many license periods over the last decade
- Episodic TV: Current, Premium, Premium Catalog (1HR & 1/2HR), Catalog Series (1HR & 1/2HR), and Catalog Miniseries + Case Studies on Current Mega Hit, Catalog Mega Hit, and Premium Catalog, covering many licensing terms from 2012-2024
- Because most-favored-nation rates operate in practice, the rates and terms apply to a diverse range of content and distributors worldwide in multiple availability windows.
FilmTake Away: Will Netflix Reverse Course?
While many industry observers and insiders tout the decision by Netflix to embrace advertising, the move will likely be a disaster for the company by cannibalizing its core SVOD service. If current trends continue, Netflix will likely discontinue its AVOD tier within the year.
A year ago, it would have been unthinkable that Netflix and Disney+ would reverse their position against advertising, but here we are.
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Continue Reading Splitting the Difference: Why Warner Bros. and Comcast Are Carving Up Their Empires
SVOD Trends in 2025: International Variability, Advertising, and Pricing Adjustments
Content and pricing strategies are shifting as platforms focus on retaining subscribers with live sports and bundled services. Sports rights, such as those for the Champions League and NFL, have driven substantial growth for Paramount+ and Peacock—Prime Video benefits from integrating most major streaming services into one platform.
Retention Over Acquisition: How UK and US Streamers Adapt to Market Saturation
As global streaming markets mature, platforms are shifting focus from acquisition to retention amid near-saturation in regions like the U.S. Strategies include ad-supported tiers and content diversification. While platforms strive to meet changing demands, competition is intensifying, particularly in the ad-supported landscape, emphasizing the need for innovation and strategic partnerships for sustained growth.
Continue Reading Retention Over Acquisition: How UK and US Streamers Adapt to Market Saturation
Super-Bundles and Churn Reduction: Disney’s Vision for Streaming Dominance
Disney’s super-bundling of Disney+, Hulu, and ESPN+ forms a key part of its streaming strategy amidst rising subscription costs that echo traditional cable models. The $30 mega-bundle with Max aims to reduce churn and simplify streaming but raises concerns over overwhelming choices and competitive pricing, challenging Disney to attract new subscribers effectively.
Continue Reading Super-Bundles and Churn Reduction: Disney’s Vision for Streaming Dominance