It's been a troubling year for Netflix (NFLX -0.04%), as the streaming video pioneer shed a total of 1.2 million subscribers during the first six months of 2022. On its second-quarter earnings call, management suggested that the worst was over, with churn returning to "pre-price-change levels." A survey of viewers in the U.S. paints a very different picture, however, suggesting that the streaming pioneer could lose a large number of its paid subscribers by year-end.
Let's look at the reasons viewers gave for considering the change, how intentions might differ from reality, and what it all means for investors.
A tidal wave of defections?
A recent report suggests the pain is just beginning for the streaming pioneer, which could have serious ramifications for Netflix shareholders. A survey of 1,000 Americans found that roughly 25% of respondents said they plan to quit Netflix this year, according to a report by Review.org. That suggests the streaming giant could be at risk of losing as many as 18 million subscribers by year-end.
When asked why they planned to leave, more than 40% cited the rising cost of a Netflix subscription. Another 20% pointed to the rising costs of everyday items caused by inflation, with some considering Netflix as a place to cut back.
It's possible Netflix has become a victim of its own success. Until recently, the company was lauded for its pricing power, seemingly able to raise its subscription cost at will. Earlier this year, Netflix instituted its sixth rate hike in eight years, so at $15.49 for its most-popular tier, it's certainly possible subscribers could be feeling a little price fatigue.
Then there's the matter of choice. The survey found that the average viewer is subscribed to four streaming services. Once upon a time, the streaming giant was the only game in town, with a library packed with "must-see" popular programs, as well as a number of compelling Netflix originals. Now, however, consumers have a wealth of other options, with Warner Bros. Discovery's HBO Max near the top of the list, followed closely by Walt Disney's Disney+, according to the survey. It isn't inconceivable that with budgets tightening, consumers could cut back on the number of streaming services they subscribe to, with Netflix as a potential choice.
There is, however, some conflicting data in the report. When asked which streaming service they used most, a full 70% cited Netflix -- leading all other services by a wide margin. HBO Max came in a distant second with 10%, while Disney landed in third place with 6%. Every other streaming service came in under 5%. This seems to contradict the idea that subscribers would cancel Netflix, the service they use most.
A tale of two outlooks
When Netflix reported its second-quarter financial results, investors breathed a sigh of relief, because the results weren't nearly as bad as Netflix expected. The company lost 970,000 subscribers to churn -- the industry term for cancellations -- during the quarter, far less than the loss of 2 million it had forecast. This led many investors to believe the worst was over. Furthermore, Netflix is guiding for 1 million net new subscribers in the third quarter.
So is the company about to lose 25% of its U.S. subscriber base? A frustrated consumer, hit by a recent price hike, 40-year high inflation, and crumbling buying power might well say they're going to quit -- and fully mean it at the time. However, with 70% of respondents saying they use Netflix more than any other service, it's highly doubtful most will actually follow through with canceling their most-used service.
Furthermore, Netflix announced plans to debut an ad-supported plan, which will give viewers a lower-cost option. While the company has been mum about the proposed launch date for the new tier, rumors suggest Netflix is targeting Nov. 1, according to a report in The Wall Street Journal. Given the choice of bailing on the service they watch most or trading down to a less expensive, ad-supported plan, most viewers will likely choose the later.
Time will tell
So what does this mean for shareholders? It won't be long before Netflix unveils its cheaper plan and much will depend on how that plan is received. The streaming giant will need to balance the need for advertising revenue with the risk of alienating viewers, so how many ads the company shows and how much money it makes will be key.
Estimates vary wildly, but Atlantic Equities analyst Hamilton Faber calculates that Netflix could generate average revenue per user (ARPU) of $26 per month from advertising, nearly triple the rate earned by Disney's Hulu. Even factoring in downgrades from current subscribers, Faber estimates that Netflix could generate $6.7 billion in incremental revenue over the coming three years.
Netflix shareholders will want to keep a close eye on the rollout of the ad-supported tier and watch closely to see if churn heats up. If the company fumbles on the advertising front or viewers start to defect en masse, it might be time for investors to change the channel on Netflix.