The Ad-Supported Gamble: How Netflix’s Missing Titles Affect Its Value Perception

Netflix’s recent introduction of an ad-supported tier marks a significant shift in its business model, which has historically championed ad-free streaming. However, the transition hasn’t been seamless.

At the launch of the ad-supported tier, 326 titles—about 5% of Netflix’s U.S. library—were missing due to unresolved licensing agreements. This gap includes around 60 Netflix Originals and 266 licensed titles, accounting for 11% of the total U.S. demand for Netflix’s catalog.

These absences raise concerns about how missing titles might impact consumer perceptions of value, particularly when viewers find popular shows and movies unavailable.

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The Resurgence of Ad-Supported Streaming: A Return to Cable-Era Tactics

The transition from ad-supported television to subscription-based streaming has been fraught with financial challenges. High licensing costs combined with lower revenue per subscriber have quickly impacted studios’ bottom lines. Initial shareholder satisfaction with rapid subscriber growth has waned as profitability remains elusive. Consequently, media companies are trimming content budgets while maintaining a steadfast focus on streaming to keep pace with the shift from traditional television.

As the streaming market matures, ad-supported streaming has become the focus for cash-strapped studios. In the first quarter of 2024, 61% of new SVOD sign-ups were for ad-supported plans, reflecting a growing acceptance among consumers to watch ads in exchange for lower subscription fees. This shift presents a lucrative opportunity for advertisers, who now have more avenues to reach their target audiences across multiple platforms.

Moreover, Free Ad-supported Streaming Television (FAST) services are gaining traction, with 33% of U.S. streamers using these platforms. This trend underscores the increasing importance of advertising in the streaming ecosystem as viewers become more price-sensitive and open to alternative viewing models that offer cost savings.

Furthermore, to offset streaming losses, media companies are revisiting strategies that once underpinned the success of traditional television. Practices like windowing content across various platforms and increasing the number of cable channels for higher bundle fees are proving their worth once again. These time-tested methods continue to generate profits, even as the industry evolves.

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Distribution of Missing Content: Film vs. Series Content

The missing titles are unevenly distributed across films and series content, with approximately 20% being shows (representing an 8% demand share) and 80% being films (accounting for a 14.2% demand share). This distribution is critical because Netflix has invested heavily in both original and licensed films, leading the domestic industry in SVOD film supply but still trailing behind Max in U.S. film demand.

The absence of popular titles such as “House of Cards,” “Peaky Blinders,” “The Last Kingdom,” and “Arrested Development” from the ad-supported tier could diminish Netflix’s perceived value, especially among fans of these series. Moreover, the lack of more than a dozen titles aimed at younger viewers, a key demographic for many streamers, could further impact Netflix’s family appeal.

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Comparing Netflix’s Ad-Supported Strategy to Competitors

Netflix’s strategy with its ad-supported tier is designed to provide comprehensive access to its library at a lower price point of $6.99 per month. In contrast, competitors like Peacock and Max have taken different approaches. Peacock, for example, offers fewer titles on its ad-supported tier compared to its premium ad-free tier, incentivizing users to upgrade for full access. Similarly, Max excluded day-and-date theatrical releases from its ad-supported plan, adding value to its more expensive tiers.

Netflix’s decision to offer almost its entire library on the ad-supported tier suggests a focus on maximizing revenue and reigniting subscriber growth rather than creating clear value tiers to upsell consumers. This strategy implies that Netflix aims to broaden its market reach and attract price-sensitive viewers, especially ahead of a possible recession.

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The Business of Licensing and Partnerships

The missing titles affect consumer experience and reflect the complex relationships between Netflix and content producers. Major distributors like NBCUniversal, Sony Pictures, Lionsgate, MGM, and 20th Century Studios are currently withholding titles from Netflix’s advertising tier, which could strain future licensing negotiations.

For instance, Netflix’s existing Pay-1 film licensing deal with Sony Pictures and its animated film licensing deal with Universal is significant. These partnerships are vital for Netflix’s content library, and unresolved ad-tier licensing issues could influence the broader business dynamics.

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Audience Demand and Perceived Value

Though not catastrophic, the demand for Netflix’s missing titles is notable. To maintain its reputation as a one-stop shop for diverse entertainment, the company must ensure that the content available on its ad-supported tier meets viewer expectations. Titles that attract high audience demand and cater to specific taste clusters (such as crime dramas and sitcoms) are crucial for consumer retention.

Moreover, Netflix’s extensive library of originals and licensed content has historically driven its success. Ensuring these titles are available across all tiers, including the ad-supported one, is essential for maintaining subscriber satisfaction and preventing churn.

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Strategic Comparisons: AVOD Approaches

Netflix’s competitors have adopted varied strategies to balance ad-supported and ad-free offerings. Peacock’s strategy of limiting titles on its ad-supported tier and Max’s exclusion of day-and-date releases from its ad-supported plan are designed to create value differentiation and upsell opportunities. Paramount+ similarly restricts access to local live CBS stations on its ad-supported plan.

By including nearly its entire library in the ad tier, Netflix focuses on providing comprehensive access to attract and retain subscribers. This approach contrasts with its competitors, who use content exclusivity to drive subscriptions to higher-tier plans.

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FilmTake Away: Navigating the AVOD Landscape

Netflix’s shift to an ad-supported model represents a significant strategic pivot to enhance revenue and subscriber growth. However, the missing titles pose challenges in terms of consumer perception and licensing negotiations. As Netflix continues to navigate this new terrain, its ability to provide a robust and comprehensive library on the ad-supported tier will be crucial in maintaining its market-leading position.

While the introduction of ads is a significant step in Netflix’s evolution, it highlights the company’s willingness to adapt and innovate in response to market demands. The success of this strategy will depend on Netflix’s ability to balance content availability, consumer satisfaction, and competitive dynamics. As the streaming landscape continues to evolve, Netflix’s advertising and content licensing approach will be closely watched by industry observers and competitors alike.

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