It may seem like an inconsequential story at first. Netflix (NFLX -1.96%) is shutting down dormant accounts, even as they continue to pay their monthly subscriptions. The world's leading premium streaming platform is now reaching out to folks with current accounts who haven't been consuming content for a year since joining the service and shutting them down if they don't respond. Netflix will also be checking in on customers who have stopped watching for more than two years.
Companies often seek out the biggest drags on their business models and weed them out. Some internet providers and wireless carriers will slow you down if you consume too much bandwidth in any given billing period. Credit card companies will gun for churners who gobble up lucrative signup offers and move on to the next card by rejecting applicants who have had too many recent credit inquiries. Insurers will jack up the rates of folks who file too many claims or take too many chances. Netflix is going in an entirely different direction here. It's booting its most profitable customers. This is a ridiculous move, but it's also a brilliant one.
The method behind the madness
Netflix isn't kicking out deadbeat customers. These folks continue to faithfully pay every month. However, if they haven't consumed fresh content over the past year -- no Tiger King, no Love Is Blind, no Ozark -- it might just be that they aren't watching their monthly credit card bills closely. Maybe these dormant viewers just don't have a firm grasp on how easy it is to cancel Netflix.
In terms of overhead, Netflix is kicking out its highest-margin customers with this move. Netflix pays for the bandwidth on the content it serves, so the more you stream, the more Netflix pays. This is the polar opposite of the Roku (ROKU -5.71%) model. Roku's hub is free for consumers. All of the streaming costs beyond its namesake channels are on the dime of the third-party services on the platform. Roku actually makes more money the longer someone is on the platform, because that expands its ability to place online ads.
Netflix showing the door to folks who fail to heed the call to binge is certainly odd. When Netflix -- and now Roku -- asks you if you're still streaming a series after a long period of inactivity, it's financially beneficial to Netflix. Checking the dormant viewers with inactive accounts is more about customer service and human decency, which you don't often see on subscription-based platforms.
There aren't a lot of people in this dormant-subscriber group. We're talking about hundreds of thousands of impacted subscribers, or 0.5% of the 183 million members worldwide it was serving at the end of March. These were really profitable customers, but at the end of they day it's not as if they were moving the needle. If anything, this is a testament to how engaging Netflix is to the other 99.5% of subscribers. Netflix will continue to be a market darling among media stocks. It's just being a class act in the process.