Netflix Wants Ads, But Must First Renegotiate Streaming Deals

Rachel Curry - Author
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Jul. 13 2022, Published 2:32 p.m. ET

Streaming service Netflix Inc. (NFLX) confirmed at the end of last month it plans to bring advertisements to certain paying customers. Users will reportedly be able to select a “cheaper” tier, according to co-CEO Ted Serandos, with premium customers retaining their ad-free landscape.

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Before Netflix can do this, it must first renegotiate streaming deals with popular movies and TV shows that are not Netflix originals.

Netflix's ads situation could get messy.

netflix
Source: Getty

Netflix co-CEOs Reed Hastings and Ted Sarandos

Netflix plans to add a cheaper, ad-enabled subscription tier for customers to increase and diversify its revenue. This model is similar to those from HBO Max, Hulu, and Amazon Prime, among others.

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The streaming service experienced a major windfall during the early days of the pandemic when the masses were staying at home. Now, as COVID-19 becomes a more casual element of modern life (at least on the surface) and inflation thins the pockets of consumers, the company must work harder to achieve shareholder-approved growth levels.

Netflix must renegotiate deals with Warner Bros., Universal, Sony Pictures Television, Paramount Global, and more. Deals for new and old entertainment will need to be addressed. In short, bringing ads to Netflix could complicate things for the company more than it may have bargained for.

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The streaming service will likely have to pay 15–30 percent more for contracts moving forward, given the fact that others will want a piece of the pie.

How does Netflix make money?

Right now, there are two ways Netflix makes money: Subscriptions and DVD rentals (that’s right, Netflix still has DVD rentals). Users pay between $9.99 and $19.99 per month for a subscription. With about 221.64 million users, this is the company's primary source of revenue. Netflix is losing subscribers and working tirelessly to recoup them (it’s worth noting that adding ads doesn’t seem like a fruitful way to achieve this).

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Netflix DVD plans cost between $11.99 and $14.99 per month, with users able to rent out one and two DVDs at a time, respectively. Last year, Netflix generated about $200 million in revenue from its DVD services. This is nowhere near the monetary volume it generates from streaming, but the capital remains valuable for the company.

NFLX stock reacts to the news.

NFLX stock fell marginally on Wednesday, July 13, though the stock remains in the green for 2022—albeit modestly. It’s up 1.8 percent YTD, enduring three separate return price swings. Still, the stock remains nearly 70 percent below its value this time last year, meaning NFLX has a lot of ground to make up.

For companies like Netflix, the recession-worried economy has not been nearly as kind as the pandemic-fearing economy seemed. This year, NFLX stock reached its lowest point since 2017, and the targeted bearishness has been swift. In moments like this, restructuring the platform to show ads whiffs of a hint of desperation, though Netflix executives would never have you believe as much.

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