Netflix to Move to a Tiered Subscription Model
This past week, the New York Times published an article about Netflix’s intention of changing its subscription structure. In streaming online entertainment, Netflix and Disney plus all have subscription models. However, their subscription model does not include advertisements, unlike some other subscription providers like Amazon and HBO Max. Amazon and HBO Max have tiered subscription packages. The premium level tiers have no advertisements, and subsequent tears have a sliding scale of ads. Previous leadership at Netflix staunchly said that there would never be any advertisements on their platform. However, Spencer Newman, Netflix's CFO, hinted at the possibility of ads on their platform. This announcement seems to be in response to Disney's introduction of a lower-priced subscription that includes advertisements in March 2022.
“No advertising coming onto Netflix — period”
The business model shift is what is interesting in this article. Companies are adjusting strategies to have a tiered subscription base where lower tiers include more advertising, and higher levels include less advertising. The language in the article presents this as a win-win for both the consumer and the company. Consumers will gain the option of a less expensive subscription where the business will increase revenue due to increased advertisements. However, one must look at this as a return to traditional advertisements broadcast only on a different platform. This advertisement model is similar to what cable companies have used for decades: pay for premium channels with no commercials (HBO) and the general subscription for other programming with commercials.
“In many ways, we are seeing a reincarnation of the last half a century of television for the streaming age ”
Defining Business Change
This is known as disruptive innovation. The idea that products and services completely replace existing services for producers and consumers is going on in this example. Netflix is getting rid of a general subscription to a more tiered subscription, changing the way consumers interact with Netflix. Granted, the idea of a tiered subscription is not new. Its implementation in one of the leading streaming companies is a game-changer. The articles suggest that this change will drive revenue in the coming years. HBO Go went through a similar product change. When dealing with the actual production, however, a small technology change will need to happen on the Netflix side. In this case, the actual production of the product and how subscribers interact with the Netflix servers will need to change.
However, I think what this article is not stating is that the tiered subscription service also has inherent password control. Sharing Netflix passwords among family members is deep-rooted in a subscriber's culture. As it will save the individual subscriber some money, this technology change will force family members to buy separate subscriptions. I could see a family account being part of the tiered service on the premium end, bringing the company more revenue. I think the question would be if consumers would be willing to pay additional money to keep their streaming experience status quo.
Dr. Mike Testa
