Netflix’s new advertising-supported tier is falling short of expectations, according to a new report.

The streaming giant, which launched the cheaper $6.99 a month offering on Nov. 3, has allowed advertisers to take back money for ads that had not yet run, Digiday reported Thursday.

According to the publication, which cited five agency executives, Netflix permitted the refunds after missing viewership targets. The company reportedly only delivered around 80% of the expected audience.

Netflix did not immediately respond for comment.

Macquarie analyst Tim Nollen wrote in a new note published Thursday that Netflix’s missed targets is a sign that the product is still in early developmental stages.

“We believe the service will succeed by drawing users from higher ad-free tiers to this lower-price tier rather than adding new subscribers, but it could take a couple of years to build a large-enough user base to become a meaningful destination for advertisers,” Nollen wrote.

Netflix recently introduced an ad-supported offering for $6.99 a month.
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Although the ad tier is less expensive than Netflix’s most popular $15.49 a month plan without ads, critics have pointed to some shortcomings in the cheaper service.

For example, currently, the ad-supported experience can’t offer all Netflix titles due to licensing restrictions, which leaves out about 5% to 10% of titles, the company said in October. 

At the time, Netflix, which is known for hits like “Stranger Things,” “Emily in Paris” and “Squid Games,” said it had “hundreds” of advertisers, and were nearly sold out.

Netflix launched the ad-supported service in order to juice subscriber growth, which had dipped by nearly 1 million earlier this year. The streamer, which has over 223 million paying customers, was able to reverse losses and return to growth in the third quarter, thanks to binge-worthy new shows like serial-killer series “Dahmer – Monster: The Jeffrey Dahmer Story,”

The Los Gatos, Calif.-based company said it expects the ad tier to pump up demand over time, but some warned that Netflix would lose share to rivals with streaming bundles that have a more vast content portfolio.

 Co-CEOs of Netflix Reed Hastings and Ted Sarandos
Co-CEOs of Netflix Reed Hastings (left) and Ted Sarandos (right) said the company’s ad-supported tier is expected to ramp up subscriber growth.
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Needham analyst Laura Martin cited  Disney’s bundle, which includes Disney+, Hulu and ESPN+, along with Amazon’s bundle with Prime shipping and Prime Video, and YouTube TV’s bundle as the true winners that “can not be displaced.”

Speaking to Yahoo Finance Live on Wednesday, Martin said, “70 to 80% of the total economics [in streaming] will end up in those three companies, which is what we’ve seen in digital markets.”

“All those bundles are going to take share from Netflix, which can’t bundle because it doesn’t own anything else,” Martin added.



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Tyler Cowan