Netflix’s Average Revenue Per User (ARPU) is finally stabilizing in Western Europe, after two consecutive years on the decline. The transition to much cheaper advertising-supported plans, initiated in 2022, significantly eroded subscription revenues, as part of a larger bet on volume and advertising opportunities. However, the recent price hikes to these same ad-tiers in 4 of the 5 countries in which they are available indicate a new phase to this strategy; one that tackles long-term sustainability. Offering a rebate of 50% or more to access its service with advertising, Netflix effectively eased take-up in the Top 5 markets it launched ad-tiers in. Even including the additional advertising gains, the platform waives almost half the revenues it is making with ad-free customers. This aggressive pricing brings the service closer to Disney+ and MAX (although MAX only launched in 2 of the 5 countries where Netlix’s ad tiers are available). These two competitors, stemming from traditional TV, and having gone through the back and forth of the SVOD craze, came out more cautious in their ad-supported offers. Each ad-supported subscribers only represent a fraction of net loss compared to ad-free tiers. MAX’s plans have the smallest price discount while Disney+, starting from a cheaper price, gains more leverage from advertising. Amazon Prime Video is disregarded here as it draws on a distinct model, from its subscriber base (mostly captive from ecommerce) to its tier splitting (with advertising by default). Three years after its European roll-out, the strategy has arguably already broken even, but not for the reason we would expect. Matching the declining trend in new subscribers adds before 2021, and with 2021’s ARPU, Netflix would have organically grown €1.4B by 2024. Offering ad-tiers meant cutting upwards of €1B in subscription revenues last year. However, the growth in subscriber volume beat the previously described stagnation trend, and brought €0.5B in new subscriptions. Additionally, ad-tiers generated a modest €0.2B in advertising.By themselves, these two factors would not quite outpace the cost from customers downgrading to ad-tiers, when they would have paid for more expensive plans. In fact, the steep hikes in premium tiers, launched together with the ad-tiers, were the one closing the gap. These premium price increases allowed 2024 revenues to exceed the organic estimate by a small margin (€0.2B). Now, from what could be expected for the years to come. One main hypothesis is that Netflix might want to raise its ARPU again, as the service will soon approach user saturation in the top 5 markets. As highlighted previously, each new ad-tier customer weighs down the total ARPU. And since they will make up an increasing share of the subscriber base (poised to near 50% by 2027 across Western Europe), most of...
