Netflix (NFLX +1.69%) shocked investors when it not only reported its first subscriber loss in over a decade in the first quarter but also said losses would worsen in the second quarter. Management expects to lose two million subscribers between April and June this year.
But it just had one of its biggest releases of all time: the fourth season of Stranger Things. The latest season became the biggest English-language series debut ever for Netflix, besting last quarter's Bridgerton season two. And fans will have to keep their subscription through July to see the finale of the two-part release.
Netflix LA offices. Image source: Netflix.
Getting a handle on subscriber churn
Netflix is facing a slowdown in subscriber additions alongside an increase in subscriber churn.
The slowdown in additions is understandable. Netflix has relatively high penetration rates in the U.S. and Canada, already meeting the mid-range of its long-term outlook for the region. Indeed, management said subscriber acquisition was in line with its expectations in the first quarter. But there are still pockets of subscriber growth opportunities for Netflix around the world, despite its 220 million global subscribers.
Churn is a greater concern. Management admitted to an uptick of 0.2 to 0.3 percentage points in monthly subscriber cancellations in the first quarter. That's an increase of around half a million subscriber losses every month.
Churn is not just a concern for Netflix. The entire streaming industry is facing the challenge of holding onto subscribers as more competitors enter the market, and consumers shift their entertainment spending to going out and traveling. Still, Netflix's churn rate remains one of the best in the industry.
NASDAQ: NFLX
Key Data Points
Is Stranger Things enough to hold onto more subscribers?
The latest season of Stranger Things generated 286.79 million hours of viewing on its opening weekend. That's better than Bridgerton's 251.74 million hours for the premiere of its second season. But when adjusting for the runtime of both series -- Stranger Things is about 8% longer than Bridgerton -- the gap in episodes watched is minimal.
Even with the record viewership, it might not indicate an improvement in churn rates. The series has historically produced strong interest. Global search interest for previous seasons was much higher for Stranger Things than Bridgerton. The series was expected to produce more viewership.
One area the series might improve, however, is subscriber acquisition. Specifically, it might reengage people who previously canceled. After all, it's been nearly three years since we saw new episodes of Stranger Things, and many fans may have left in the meantime.
It's worth noting, however, that Netflix had a massive hit that spanned the end of the third quarter to the start of the fourth quarter: Squid Game. For reference, global viewership for the series at its peak popularity was nearly twice as high as the debut of Stranger Things season four. Fourth-quarter results were solid but still came in below management's expectations. Furthermore, the fourth-quarter strength didn't carry over into the first quarter.
The popularity of Stranger Things is a good sign for Netflix, but it's by no means a guarantee it can produce better-than-expected subscriber results this quarter. Similar results from Bridgerton weren't enough to save its first quarter from declining subscribers, and the expectations are much worse for the second quarter. While I expect the return of the tentpole series will help boost subscriber acquisition, it might not mitigate the higher subscriber churn Netflix saw in the first quarter, as it's a symptom impacting the entire streaming industry.
