Netflix (NFLX 1.98%) added over 36 million new subscribers in 2020, about 8 million more than in each of the prior two years. The surge in signups is attributed to the coronavirus pandemic keeping more entertainment-hungry consumers at home. But when restaurants and entertainment venues (hopefully) reopen this year, Netflix could see all those new subscribers cancel. The introduction of several new streaming options over the last year and a half could put added pressure on the video-streaming leader.
But there are a couple of reasons for Netflix investors to remain optimistic the streamer's churn rate will remain stable in 2021.
New subscribers look just like old subscribers
Lockdowns may have been a catalyst for consumers to sign up for Netflix last year, but once signed up, new users look just the same as old users. "They're behaving very much like the cohort of users that we added just before COVID," COO Greg Peters said at an investors conference this week.
That's great news for management and investors because it means Netflix has "to do the same work to delight those members and retain them as subscribers," Peters said.
Engagement levels have increased across the board, Peters noted. That suggests new members are highly engaged with the service, meaning they get value out of their monthly subscription. That increases the likelihood they'll stay subscribed month after month.
It's reasonable to expect engagement levels to decline among subscribers as other outside-the-home entertainment options increase in availability and accessibility. But it's unlikely the users that signed up in 2020 will cancel their subscriptions as a result. Keep in mind engagement among previous cohorts wasn't nearly as high before lockdowns, and Netflix still kept churn rates low.
Recent price hikes indicate confidence
Netflix raised prices in Canada, the U.S., and the U.K. late last year. Management wouldn't have made that move if it wasn't confident it would see strong retention among the subscribers it just brought on board.
Successful price hikes in those regions typically foretell increases in Europe and Latin America as well. If management follows through with increases in one or both of those regions in 2021, it's another vote of confidence that subscriber churn isn't an issue for the subscription service.
That said, there are some additional considerations for Netflix this year. It may be waiting on Walt Disney (DIS 3.51%) to implement its price hikes for Disney+ in Europe and Latin America first to see how consumers respond. AT&T (T -0.14%) is planning to launch HBO Max in Latin America in June. A tepid response to those products may tell Netflix to hold off on a price increase in order to manage subscriber retention.
Netflix subscriber growth could surprise
If Netflix retention rates remain strong, as all indications suggest, it could produce upside to Netflix's subscriber growth outlook. Management expects to add just 6 million net new subscribers in the first quarter, significantly less than the 9.6 million it added in 2019 and 8.3 million it added in 2018. That's despite fourth-quarter net additions coming in close to the same number as the year prior.
But as long as Netflix doesn't see an influx of cancellations, the media company should be able to continue attracting subscribers at a rate comparable to previous years without anomalous global pandemics. With a growing slate of originals, improving marketing efficiency, and broader adoption of streaming across the globe, Netflix can keep up its momentum from 2020.