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Netflix Churn Trends

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June 06, 2011 – Comments (0) | RELATED TICKERS: NFLX

http://seekingalpha.com/article/252310-the-netflix-churn-challenge

The article above does an outstanding job of detailing what I think is a huge issue for NFLX in their near 50% annual churn rate. NFLX reports their churn on a monthly basis which provides a number that seems deceptively low and I suspect this is one reason why churn gets almost no attention. In any case from 2002 to Q1 11 NFLX has signed up almost 60M subs out of ~75M broadband households in the U.S. and ~8M in Canada for a total addressable market of ~83M.

The article points out that some of the subs are surely repeats and I've had debates with NFLX supporters on S.A. that argue based on anecdotal evidence that subs are regularly joining and walking so the number of households that have tried the service at least once is a lot lower than the 60M total subs signed since 2002. I've been meaning to look at recent quarterly trends in sub additions and losses to see what they might tell us about churn and how much of their addressable market have they gone through in recent years. I started with 2008 NFLX second year offering subscription streaming and tallied up additions, losses and net adds which I post below:

            Q1-08            Q2-08            Q3-08            Q4-08            TOTAL 08

ADD        1,862              1,384                1,528              2,685               6,859

LOST      1,098               1,216               1,267              1,367               4,948

NET            764                 168                  261                 718               1,911

 

            Q1-09            Q2-09            Q3-09            Q4-09            TOTAL 09

ADD        2,413              1,936                2,180              2,803               9,332

LOST      1,793               2,025               2,169              2,572               6,454

NET            920                 289                  510                1,159               2,878

            Q1-10            Q2-10           Q3-10            Q4-10            TOTAL 10

ADD        3,492              3,059                4,101              5,649               16,301

LOST      1,793               2,025               2,169              2,572               8,559

NET         1,699               1,034               1,932              3,077               7,742

 

            Q1-11            Q2-11 (EST.)

ADD        6,299              4,300-5,250

LOST      2,709               3,000 

NET          3,590               1,300-2,250 

 

The stats show that there is indeed a seasonality to their sub additions where Q4 is their strongest quarter and Q2 their weakest with Q1 and Q3 about average. this makes some sense with people watching more tv in the dead of winter and around the holidays and not watching a lot over the summer. There is no particular pattern to losing subs except that Q2 is a little worse than the rest of the year. For the most part sub losses have continually climbed with a little bit of lumpiness as new sub additions have accelerated. To me this is confirmation of what I suspect that subs get bored with the service over varying time frames starting from the first months to a few years which translates to a bit of a lag between sub addition growth and sub loss growth and a less seasonal sub loss pattern.

In regard to how much of the market NFLX has signed up since 2008 they have signed up 39M new subs, lost 23M subs and have 24M current subs as of Q1-11. In other words over the last three years they have lost almost exactly the same number of subs they currently have. Based on loss trends they will lose ~10M-11M subs over the remainder of 2011. In order to hit 28M net subs for 2011 which is what I recall analyst were projecting they will need to sign up ~14M-15M additional new subs over the rest of the year or ~5M/ quarter. If they do this they will have signed up ~53M-54M new subs since 2008 out of ~83M potential broadband households in the U.S. and Canada. Extrapolate their loss rate out to 2012 and they will have to sign up ~14M subs in 2012 just to break even for the year on net subs which will put them at ~66M-67M subs since 2008 out of a potential 83M households.

I'm sure critics will point out that some of the subs since 2008 are repeats however I also did not count any pre 2008 subs in additions and loss numbers above. How ever you slice it they have to be near saturating the U.S./Canada markets and when they do subs continuing to walk in droves is going to quickly drive their total down. Unless they have the ability to ratchet their content costs down with sub losses they will be in trouble. If they have to sacrifice content to get content costs down as they lose subs they will only accelerate sub losses. I know they want you to believe that other international markets are going to make up for saturation in the U.S. but there are a whole host of reasons why international is not going to pick up for a saturated U.S. market anytime soon if ever. Small markets, lower income levels, competing with piracy, existing competition and lack of brand recognition, more restrictive bandwidth usage levels, need to add local content and local licensing etc...

IMO when you look at the combination of scripted conference calls allowing Hastings to duck tough questions, no longer providing churn metrics after 2011, the sudden emphasis on international expansion and talk of multi sub households, Hastings knows they have a serious problem with churn and is scrambling around to find some way to deal with it on one hand and trying to distract attention away from it on the other. Sure analyst seem oblivious to this problem but they were oblivious to the issues that AOL faced a decade ago. IMHO this is the new AOL easy to sign up tons of subs as the price is cheap enough to give it a shot but not enough substance to keep subs coming back for the long haul. I've seen some cynical NFLX critics surmise that analyst are pumping NFLX so that their Investment banks can get a peice of a looming secondary. IMO Hastings is hoping to entice someone to take them over before the model implodes and the pumping is pimping a buy out and getting a peice of the action.

One last point if you look at the supposed competition that should be lining up against NFLX; GOOG, AAPL and AMZN. They all sport cash piles of in the multi billions to NFLX paltry $0.35B cash. To some extent content deals they would potentially sign will be priced according to their sub count and so starting a subscription streaming service from scratch their content expense would be minimal and they could afford to blow NFLX out of the water on content per sub costs and could easily afford to just take subscription streaming from NFLX if they wanted to. The fact that they are not going the subscription streaming route and opting for ala carte instead should be telling you something. IMO subscription streaming is not a sustainable business.

 

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