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The Next Battle in the Streaming Wars: Churn

By Adam Levy – Jun 16, 2021 at 8:15AM

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Subscribers are hopping from one streaming service to another.

There are now well more than a handful of premium direct-to-consumer streaming options for American consumers. And while additional options led total subscription video on demand (SVOD) subscribers to increase by 14% in the latter half of 2020, according to research from Interpret, those subscribers are canceling and moving to the next service more quickly. 

Consumers canceled 20% of their subscriptions in the last six months of the year, up from 15% in 2019 (when there wasn't a raging pandemic). If media companies are going to succeed in the next phase of the streaming wars, they'll need to get a handle on churn.

A person lounging on a couch streaming video on a tablet.

Image source: Getty Images.

The biggest reasons customers cancel

There's really only one big reason consumers sign up for or cancel a subscription: content.

Twenty percent of subscribers switched to a new service in order to watch an exclusive series or film, according to Interpret. Thirteen percent of people said they canceled a service after watching a series.

As content becomes more and more siloed, this behavior is likely to become increasingly prevalent. "The question for the future is less about how to stop churn, and more about how to make churn work in your favor," Brett Sappington, vice president of research at Interpret, said.

Making churn work in your favor means that in periods of increased churn, a service sees a substantial increase in gross additions to offset the churned subscribers. And since 20% of subscribers are signing up to watch exclusive content, that means it's an arms race to develop and market new content.

Here, scale can be a significant advantage. If you're releasing a new film and series every week like Netflix (NFLX 8.74%), it's more likely one of those will have strong enough appeal to win subscribers' money for a month. If you're only releasing one new series a month, it's much less likely. What's more, a company like Netflix can afford to put more marketing spend behind titles that show potential for becoming a hit.

Indeed, Netflix's churn rate remained roughly flat in 2020 while the rest of the industry saw churn rise, according to data from Antenna. So, it's no surprise that while new competitors were coming to market (increasing the viability of cord-cutting for some) and the pandemic kept people at home, Netflix saw its total subscribers explode as gross additions ballooned.

For any investors worried about Netflix's position in streaming as more competitors enter the market, its churn rate over the last year should put those worries to rest.

Some strategies the non-Netflixes are taking

There are a few ways Netflix competitors are trying to combat churn.

The first is that they're releasing series one episode at a time. At its basic level, if someone signs up for the service just to watch a single series, they'll likely have to subscribe for multiple months in order to watch every episode. That said, there's nothing stopping someone from waiting for a series to end before signing up and binging the episodes.

Moreover, the weekly episode strategy can give a hit series like Disney's (DIS 3.36%) The Mandalorian more time to build an audience and gain buzz and press. That can benefit the marketing push necessary to actually attract new subscribers to a service.

Another strategy is that of Comcast's (CMCSA 3.27%) Peacock. Peacock offers a free tier in addition to its ad-supported and ad-free subscription tiers. Such a strategy can keep consumers from abandoning the service entirely, even if they cancel their subscription. Interpret says ad-supported streaming services have seen increased engagement among consumers subscribing to multiple streaming services. If Comcast can ensure Peacock sticks around in heavy SVOD users' arsenal of streaming services with its free tier, it could have an easier time getting users to resubscribe.

While total SVOD subscriptions continue to climb, the next phase of the streaming wars will see more services trading subscribers back and forth. While a rising tide lifted all boats in 2020, that's less likely to be the case moving forward.

Adam Levy owns shares of Netflix and Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

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