TVREV Co-Founder and Lead Analyst Alan Wolk sat down with Cheddar News anchor Baker Machado to discuss the launch of ad-supported Netflix and ad-supported streaming in general. Topics include where the subscribers will come from, what content will be available and what effect will Netflix’s coming password crackdown have on subscriber growth.

BAKER MACHADO: Netflix officially launching their cheaper ad supported tier that will cost you $6.99 a month in the U. S. And this is all starting today. The new subscription service will launch in 12 countries and will be officially called Basic With Ads. Shares of Netflix are trading fractional so far today. So let's bring in Alan Wolk, Co -Founder and Lead Analyst over at TVREV. Alan good to have you here as always. Some are saying this is really sort of a make or break moment for the media industry. What do you sort of think about this?

ALAN WOLK: I mean it is sort of a big deal. I mean Netflix launching an ad supported service and with Disney to follow in the next month is really going to change the shape of streaming. It's going to introduce a lot more ad supported to streaming. And we're just gonna see how much elasticity there is to the market as well, how many people were holding out for lower prices, how many people will shift to ad supported?

BAKER MACHADO: So what do you sort of think customers need to know about this ad supported tier? Besides the fact that it's cheaper and having to sit through commercials, will they still have access to the same content here at the end of the day? Are they still gonna also be seeing the stuff that they get that is outsourced from other platforms? Like maybe NBUniversal Sony, all that other stuff here?

ALAN WOLK: Well it's unclear so Netflix has been very you know very assiduously trying to negotiate deals with a lot of these outside sources, but you know, they haven't cinched all of them yet. And it's unclear whether they have rights to show ads against a lot of these properties. A lot of the the shows were not filmed with ad breaks in them. So if you think about the way, you know, prime time network TV is shot, there's always an ad break. You know, the sort of the storyline goes and they cut away. Whereas in movies or shows that were shot originally for streaming with no ads, there isn't that natural ad break. And so there's some hesitation on the part of the companies that own the rights to that to let ads be shown against it obviously to that they know they have Netflix up against the wall, so to speak. So there, you know, the money part is getting tricky.

BAKER MACHADO: Alan, Netflix is saying that the service is going to have about 4 to 5 minutes of ads an hour. We're seeing competitors. Disney+ also following suit with a new ad supported plan later this year. I mean look forever, we've sort of analyzed this company based on subscriber numbers. We know that that number sort of topped out when everybody and their mom had a netflix subscription. Now they're sort of being judged on revenue per subscriber Now, do you think that this is going to be the trend we're gonna see from other strippers in the market in terms of how we gauge success now in the streaming market.

ALAN WOLK: Oh, very, very much. I mean, I think you're one of the things you also have to look at too, is the time spent on platforms. So when we're only judging them by the number of subscribers and just to sort of frame that Netflix has about 66, penetration in the us. And for comparison, mobile phones, cell phones have about 80% penetration. So there's really not a whole lot of wiggle room left, but time spent on plan platform is really important because when you were judging it by the number of subscribers, they were fine if somebody just tuned in once a month, once a week to watch something so long as they kept paying that, you know that $15 a month. But when you've got ads against it, you don't see the ads unless you're watching, it's different than linear TV, the ad is only served up when someone is watching it. So in that case you really do need somebody to be tuning in on a much more regular basis. So that's a metric, that, in addition to revenue that I think we're gonna be seeing a lot more people looking at.

BAKER MACHADO: This is also a great day to play for Netflix, they're going to get even more data on their subscribers than they already have. And there's already reports from Madison Avenue that they've sold basically out on so much of the ad space is already across the board. I mean, if anything could, this almost happened to be an accidental, great thing to happen for Netflix in terms of all of this happening, given the fact that they were so resistant to having an ad supported tier for so long.

ALAN WOLK: Oh, 100%. I mean, first off, like it always seemed strange to me that they never acknowledge that they're going to need ads because as I've discussed on here before, they are in every country in the world except for China, North Korea and Syria. Now in most of those countries, there really isn't a user base for a paid subscription service. If you look at a country like Burkina Faso, El Salvador, Laos, where they have a presence and they want to be the number one streaming service, you know, there's really not a whole lot of people who can afford to pay, you know, for a stream for a ad free streaming service, so they're always going to have to introduce and ad supported service, possibly even quite likely, I would say actually a free ad supported service fast in a lot of these countries. So I think, you know, by experimenting in the US and learning here, you know, to your point, they've got a lot of data now, what's interesting though is they are starting from zero, right? They have no ad supported subscribers right now, so they're gonna need to grow that base is very interesting to see where that base comes from, you, are they going to cannibalize their ad free subscriber bases, they're gonna draw new subscribers. Probably my guess would be a combination of both. If you're an advertiser, there's a prestige to being on Netflix, that's why they're selling it out. They also hired some of the top people in the business to be on their ad sales team. You know, that's something that people on Madison Avenue talk about a lot, the quality of their staff there and so it will be really interesting to see what they do.

BAKER MACHADO: The other question at the end of the day is, does this sort of mitigate subscribe return of all those people canceling their Netflix subscriptions win a show like Stranger Things is no longer on because they're paying less than at the end of the day. The other sort of big question here, Alan is the password sharing crackdown that's going to come next year. I mean for the longest time you and I remember this, Reed Hastings didn't care about this. They were just happy you were watching Netflix, Is this a smart move for the company? Because a lot of users are upset because that is something they've been accustomed to having for so long, multiple people using the same platform.

ALAN WOLK: Well they've done it in a really smart way. So what they've said basically is, you know, if you have your adult children on the plan, you can keep them in the same account, you just have to pay more for them. They can keep all their preferences. But we're just gonna start charging you a few more dollars each month if they're you know if it's sort of clear to us that they're not living with you and they can do that by checking the I. P. Address where it's coming from. This makes a lot of sense that we've been talking about this this notion that you know you can keep adult children on your cell phone plans, on your health insurance once they're out of the house. So people are just used to it. I don't think anyone is trying to cheat specifically thinking oh I'm cheating Netflix by doing this But remember that a lot of people are 25 or 26 now got on their parents’ plan when they were 14 and just never bothered to get off of it. There was no real reason. So I think the way they're handling it is really smart. There's going to be situations where a bunch of friends were sharing an account but I think people who were doing that realized that wasn't cool, that it was sort of a hack to the system, and so then the big question with that though Baker is what happens with the parents? So do the parents continue with that $15 a month account or do the parents downgrade to an ad supported or even what they call the basic plan, which I think about $9 a month because it it only allows you one stream and if the kids have their own accounts anyway, why do we need five? Why do we need the ability to do two or three streams at once?

BAKER MACHADO: Listen, I'm now at the stage of my life, it's reverse. My parents are now using my accounts now, which is the even more bananas par.t of all of this. Alan, well, good to have you here as always, Co-Founder and Lead Analyst over at TVREV.

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