Netflix Will Offer a Cheaper, Ad-Supported Plan. Wall Street Is Split on the Idea.

Netflix is joining several rivals that already have ad-supported subscription plans.


Dreamstime



Netflix

is working on a ad-supported subscription to keep cost-conscious viewers and attract new ones. But Wall Street is divided on whether this new strategy will help or hurt the streaming platform.

Shares of



Netflix

(ticker: NFLX) have tumbled 63% this year. The stock was up 2.5% on Wednesday.

The company decided to offer a cheaper option after losing 200,000 viewers in the March quarter. The June-quarter loss fell just shy of one million viewers. The new tier should launch early next year. Today, all three monthly plans—basic for $9.99, standard for $15.49, and premium for $19.99—are ad-free.

Netflix is following the lead of several competitors, including Hulu, HBOMax, and



Paramount

+, which have ad-supported subscriptions.

Macquarie Research analyst Tim Nollen sees potential benefits for the ad-free approach. In a research note on Wednesday, he estimated Netflix could generate up to $3.6 billion in ad sales in the U.S. and Canada by 2025.

“The trick for Netflix will be to incentivize enough viewers to opt for the ad supported platform through the new tier price to generate the large audiences that advertisers want, while ensuring that the ad revenue it generates more than offsets the foregone ad-free subscriber revenue,” Nollen wrote. “We think if Netflix gets this balance right, the company can enjoy higher [average revenue per user] on ad-tier subs, driving higher revenue overall.”

Nollen upgraded his rating to Neutral from Underperform and raised his 12-month share price target to $230 from $170.

But Bank of America analyst Nat Schindler isn’t as enthusiastic. He has an Underperform rating with a $196 price target.

In a research note, Schindler wrote that “any potential realized benefits from the company’s advertising initiatives remain several quarters off, at a minimum.”

“[Netflix] is a premium service that will be offering a lower priced ad-supported tier that means it needs to make up lost subscription revenue before getting incremental revenue from advertising,” he wrote. “If the company starts with a relatively low ad load, it will incentivize people to trade down, decreasing sub revenue even more.”

Write to Angela Palumbo at angela.palumbo@dowjones.com

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