The growing competition in streaming is leading subscribers to switch or outright cancel their streaming services more often. Industry churn increased by about 25% last year so the churn rate averaged about 35% in 2019, according to data from Parks Associates.
Netflix (NASDAQ:NFLX) warned investors ahead of the launch of Disney (NYSE:DIS) and Apple's (NASDAQ:AAPL) streaming services in November that the new competitors will create some noise in its net addition results. And with new services coming from AT&T (NYSE:T) and Comcast (NASDAQ:CMCSA), incumbents such as Netflix must consider what really causes consumers to cancel their subscriptions.
Here are the top three reasons people say they cancel their subscription video-on-demand service, according to a survey from Parks Associates.
1. Needed to cut household expenses
The overwhelming top reason for canceling a streaming service is to make room in the budget for something else.
It's not clear whether this disproportionately affects higher-priced services such as Netflix or HBO Now (soon to become HBO Max), or if it's the smaller, more niche services that charge a lower price, but might not provide as much value.
That said, there are lots of other areas where consumers might cut spending if a streaming service provides good value for the money. One challenge for Netflix and other streaming services is to convince consumers that it's not competing for time from exact replacements, but for attention from categories such as video games, concerts, or other general entertainment expenses. Last year, Netflix told investors its biggest competitor is the video game Fortnite; now it needs to convince consumers.
2. Couldn't find good programs to watch
Consumers might sign up for a service because they hear about a series from a friend, but after watching that series, they can't find anything else they want to watch. The endless scroll through the Netflix home screen may be America's most popular thing to watch on the service.
Keeping subscribers paying month after month requires a fresh flow of content to the service. To that end, Netflix releases dozens of new series, films, and specials every month. Smaller competitors such as Disney+ aren't releasing new content nearly as often, relying on the re-watchability of many of their titles. Services such as Apple TV+, which relies exclusively on originals, carry a lot more risk. Most of Apple TV+'s subscribers are on year-long free trials, so it has some time to round out its library.
3. Price increase or promotional pricing ended
Consumers don't like it when the price for something goes up. That's proven particularly true in streaming. When Netflix raised its prices in early 2018, it produced disappointing net additions. In 2019, the company actually lost some subscribers in the U.S. during the second quarter.
Netflix will likely continue to raise prices as it brings more value to its subscribers. Despite last year's small hiccup, Netflix has a good track record of figuring out how much it can raise prices with the smallest impact on continued subscriber growth.
That'll be a challenge for companies such as Disney, which has priced Disney+ at a considerable value of just $7 per month. Or AT&T, which has kept the price of HBO Max the same as HBO Now despite planning to invest billions in content and marketing. Both will likely need to raise prices at some point in the future, and if they don't calibrate it correctly, it could cause a lot of cancellations.
What's not on the list
One thing notably missing from the top three reasons consumers cancel their streaming services is the exodus of popular programming. It did make Parks Associates' list, but it's all the way down at No. 8.
As more media companies move to the direct-to-consumer model, they're holding back their content instead of licensing it to services like Netflix. Friends left at the start of the year for HBO Max. The Office will leave for Peacock next year. But these video-equivalents of comfort food have been replaced by other titles in the Netflix catalog, increasingly original titles. And consumers don't seem to mind that it's not their old favorites, as long as its something "good" to watch (see reason No. 2).
Given these reasons for canceling streaming services, Netflix still looks strong compared to the rest of the competition. It provides one of the best values in entertainment, and its content library is more robust than that of any other service. The competition will be fighting amongst each other for second place.