Consumers have been hit with a deluge of options for streaming video to their televisions and mobile devices. While Netflix (NFLX +0.96%) was an early pioneer of the subscription video on demand market, it's now facing competition from big media companies offering their own series and films directly to consumers.
That increased competition is partially to blame for Netflix's subscriber loss in the first quarter and the expectation for even further losses in the second quarter. Understanding why subscribers cancel a streaming service may help investors get a better understanding of where Netflix and its stock price goes from here.
Here are the top two reasons subscribers cancel a streaming service, according to a recent survey from NPD Group.
Content is still the main appeal of a streaming service
The No. 1 response from customers who canceled their SVOD subscriptions was, "I'm not watching as much as before." That was also the top response six months ago.
There may be several reasons consumers are watching less. Notably, they have a lot more options for entertainment today than they did at the height of the pandemic. But it could be that subscribers are hopping to new services that have the content they really want to watch.
Indeed, the top reason for signing up for a new streaming service, according to the survey, was to watch a specific show or film. That response increased in popularity from 30% of respondents to 33%.
With the increasing fragmentation of the media landscape, consumers may find themselves hopping from one streaming service to another more and more often. Industry churn is expected to tick up this year due purely to the plethora of streaming services now available.
For Netflix, this means it needs to release a steady schedule of series and films that become must-see TV. A one-off season premiere of Stranger Things isn't going to move the needle by itself.
While Netflix has received negative attention for the glut of mediocre to downright bad series and films it releases, it still offers consumers some of the best content available. And after working through production bottlenecks caused by COVID-19, it ought to be able to produce a steady stream (no pun intended) of shows worth watching month after month. The challenge for Netflix is to make sure its best content gets in front of the most people. It's historically been very good at doing that (see Squid Game).
Subscribers are becoming more price-sensitive
The second-most popular response for why consumers canceled a streaming service was price. That's up significantly from just six months ago when it ranked fourth on the list of reasons.
There's no doubt consumers have become more price-conscious as inflation wreaks havoc on personal budgets. While price has always been a top factor in why consumers cut the cord and cancel their pay-TV bundle, it's been less of a concern for streaming services.
That's starting to change as many competitors launched offerings that cost less than $10 per month. Walt Disney (DIS 0.68%), for example, saw tremendous success with its $7.99 launch price for Disney+ (it has since increased to $8.99 per month).
Many competitors offer an ad-supported tier, which helps defray the cost of the service for consumers. And a growing number of consumers are willing to watch ads if it means paying less for content.
NASDAQ: NFLX
Key Data Points
Netflix is late to the game when it comes to offering an ad-supported tier for consumers. It announced its plans during the company's first-quarter earnings call, and it's moving quickly to catch up with the competition. Disney had already announced its plans for an ad-supported Disney+ tier, and operates the most popular ad-supported SVOD in Hulu. Netflix's announcement came shortly after yet another price hike for the service, pushing the price for its most popular plan to the highest in the industry.
The interesting thing about pricing in the streaming industry is that each service has full control over what it charges consumers. Importantly, each company has control over its content costs as well, since they control how much to license and produce. As such, there's some math to be done in order to maximize the gap between subscription revenue and content costs while still building a content library for the future.
While subscription prices don't usually go down, there is some precedent. If the ad-supported tier doesn't produce the results Netflix needs, it still has room to adjust pricing.
While Netflix is seeing slightly higher subscriber cancellations, investors don't need to be concerned at this point. Its content pipeline remains strong, and it has the budget to support producing new hit shows and films. Furthermore, it's working to give consumers new options, and if need be, it can still find the pricing that maximizes subscription revenue for its preferred content budget.
