Netflix Might Need Some Freeloaders to Stick Around

Just how delicate was on display last week when Netflix made its first showing at the annual TV advertising confab loosely known as the Upfronts. The strike by the Writers Guild of America compelled Netflix to keep the event virtual, but the company still managed to make a splash. The ad-supported tier, which launched only late last year, now has nearly five million monthly active users, while more than one-quarter of new Netflix sign-ups are choosing the ad-supported plan, the company said.

That thrilled investors, who sent Netflix shares up more than 9% the day after the company’s presentation. Wall Street has been closely watching for signs of traction in the advertising tier, especially since Netflix disclosed in its first-quarter earnings call a month ago that ad-supported subscribers in the U.S. bring in a higher average revenue per user than even the company’s standard ad-free plan costing more than twice as much.

Netflix has been trying to tamp down expectations even before launching the ad-supported service. Company executives have frequently deployed the “crawl, walk, run" analogy to describe its approach to a business the streamer has studiously avoided for its first 15 years of existence. Netflix even chose a notably smaller venue for its New York presentation than those used by streaming rivals such as Disney, Warner Bros. Discovery and NBCUniversal.

Still, hopes are high. Analysts expect Netflix to generate nearly $1.3 billion in ad-supported revenue this year, which would be a little less than 4% of the company’s projected total revenue, according to consensus forecasts from Visible Alpha. That contribution is expected to rise to about 20% by 2027.

Getting there might require more than those actually paying for an ad-supported service. Netflix notably avoided any reference to paid subscribers in last week’s announcement. And the company’s disclosure last year that more than 100 million global households were sharing the accounts of its 222 million paid subscribers strongly suggests that a good portion of those five million monthly active users for the ad tier aren’t paying for the privilege either. But exactly how many requires guesswork. In a note to clients, analyst Mark Mahaney of Evercore ISI said five million MAUs likely equates to about two million to three million actual subscribers. Market-research firm Antenna estimates that a little over one million U.S. subscribers signed up for Netflix’s ad-supported plan by the end of April.

Keeping as many ad-supported viewers as it can will be crucial as Netflix tries to crack down on password sharing. The company expects to roll out new account-sharing plans widely before the end of June. Those would allow subscribers to share their accounts with others outside their households for an additional charge.

The pricing of those plans actually could have the effect of driving more into the ad-supported option. In Canada—one of the early test markets for the account-sharing option—adding another user boosts the monthly cost of the Netflix standard plan by 52%. The Canadian ad-supported tier has no account-sharing option but allows for two devices to be viewing simultaneously at less than half the monthly cost of the standard plan. Netflix might be tired of entertaining 100 million homes free, but, in the advertising world, all eyeballs have value.

Write to Dan Gallagher at dan.gallagher@wsj.com