Apple and Disney's distribution plans could force Netflix to introduce a cheaper tier, with ads, one Wall Street analyst says.
The streaming-video giant has repeatedly said it does not want to be in the business of selling ads. But Apple and Disney are changing the economic reality of the streaming-video industry in the US, Laura Martin, senior internet and media analyst at Needham, told Business Insider.
The two companies, which are launching subscription-video platforms in November, recently announced bundles and other offerings that effectively make their services free or very cheap for users who buy or subscribe to their other products.
"The wealthiest people are going to get their SVOD services for free," Martin said. "Netflix cannot sustain just a $13 or $10 price point. They must have a cheaper option, or people will disconnect."
Netflix will have to introduce a $6-per-month service supported by advertising to compete, Martin previously told CNBC's "Squawk Alley" on Wednesday.
Apple, Disney, and Amazon are making it very cheap for some people to access their services.
Today, Netflix's cheapest plan costs $9 per month in the US. Its standard and most popular plan costs $13 per month, and its most expensive costs $16.
Apple, meanwhile, is giving its $5-per-month Apple TV Plus service away free for one year to anyone who buys an iPhone, iPad, Apple TV, iPod touch, or Mac. The service will launch with nine original series, making its library magnitudes smaller than Netflix.
Disney is bundling its forthcoming $6-per-month Disney Plus service with its other streaming services, ESPN Plus and the ad-supported version of Hulu, for $13 per month. Martin said she wouldn't be surprised to also see Disney offer a few months of the service for free to theme park goers.
Amazon Prime Video also comes "free" with a $119-per-year Prime shipping membership.
People who can't afford to buy new Apple devices, Prime shipping subscriptions, or larger streaming bundles will have to balance the costs of a Netflix subscription with the other options that are hitting the marketing. That may mean cutting Netflix in favor of one of these other services, which also have lower starting points than Netflix.
"Netflix too must have lower-cost option," Martin said.
Martin said CBS All Access, which charges $6 per month with ads — fewer ads than air on its TV channel — and $10 per month without, is a good model for Netflix. Two-thirds of the service's roughly 4 million subscribers pay for the version with ads. While Netflix has a larger library, CBS has live sports, which makes them comparable, Martin said.
Netflix will need advertising to offset the cost of the cheaper plan and continuing to invest heavily in content, because it doesn't have another meaningful revenue stream besides subscriber fees, Martin said.
"Reed [Hastings] has said repeatedly he will not do ad supported," Martin said, referring to the Netflix CEO. "Our contention is he must have an ad-supported option in order to lower that price point."
Analysts at Nomura's Instinet have also said advertising revenue could help improve Netflix's bottom line, cut down on its debt load, and improve free cash flow.
Netflix has already started to experiment with lower-cost plans outside of the US. It introduced a mobile-only option in India that costs roughly half the price of its next cheapest tier.
"Netflix has used the tie ring philosophy to great success in India and other foreign countries," Martin said. "It must bring that tiering and marketing notion to America. It must have far cheaper service."