Even Netflix isn’t immune to growing problems in the streaming business

It’s no surprise to learn about a streaming service like this Netflix (NFL 3.74%) and HBO Max are struggling to add subscribers. The COVID-19 pandemic has created a surge in demand that will never last, and a plethora of streaming options have emerged over the past few years. That’s why global streaming subscription growth is now slowing.

However, the problem of acquiring and retaining streaming customers may be more serious than it appears.

That’s the conclusion of new data reported by streaming market research firm Antenna. The industry saw its second-highest churn rate in years in September, trailing only the time-related surge in September 2021 associated with the pandemic itself. Even the venerable Netflix, historically known for some of the best subscriber attraction and retention rates in the industry, has not been immune.

Shareholders of any streaming company are likely to want to significantly temper their expectations. Things are about to get tough.

The revolving door of Streaming

All in all, a major streaming platform like Netflix, walt disneyof (this 0.74%) Disney+ and Hulu, and Warner Bros.Findof (World Bank Day 2.02%) HBO Max and Discovery+ added (only) 24.2 million global customers last quarter. That’s up from 21.2 million in the second quarter, but only a slight increase, and well below the industry’s average growth rate since the start of the pandemic in early 2020.

The slowdown is at least partly indicative of full market saturation.

Global registrations for streaming services have fallen sharply following a pandemic-induced surge.

Data source: Paramount, Warner Bros. Discovery, Comcast, Walt Disney, CuriosityStream, AMC Networks, and Tubi. Author Chart.

However, this slowdown is also far more subtle than pure saturation. Churn rates are rising across the board, so much so that the entire streaming industry should be concerned.

In layman’s terms, churn is the total number of customers who signed up for a service compared to the total number of consumers who canceled it within a certain time frame.

Antenna estimates Disney+, Hulu and paramountof (PAR 0.45%) Paramount+ added 5.2 million U.S. customers to its total headcount last quarter.

What the net revenue numbers don’t tell you about churn, though, is that a record 32 million U.S. consumers canceled their streaming services in Q3. The churn was simply offset by an increase of 37.2 million subscribers. These numbers translated into a 5.8% churn rate in September, extending the month-over-month churn rate increases seen in July and August.

US premium SVOD rates are growing, even including the well-respected Netflix.

Data source: Antenna. Registration and cancellation data are in millions.

The same trend is evident outside the US as well.

so what? By itself, it doesn’t necessarily matter how net subscriber growth is achieved, as long as it is achieved. The rising churn rate does raise a red flag, however, because it suggests that it’s getting harder to convince consumers to test-drive a streaming service and then keep paying for it.

As mentioned above, not even Netflix is ​​immune. The churn rate for the first nine months of the year was 3.5%, up from 2% last year and 1.9% in 2020. While it still has the lowest churn rate in the industry, like most of its peers, churn is a growing problem for the streaming giant.

Long-term liabilities finally surfaced

The effect of rising churn is exactly what it seems it should be: a sign that streaming companies are struggling to gain and keep subscriber interest.

But in the end, it means these companies may have to spend more on marketing or content, or both.

easy to say, hard to do. Take Walt Disney, for example. Disney’s streaming business posted a record loss of nearly $1.5 billion last quarter despite record revenue of $4.9 billion. The media giant has been forced to spend heavily on programming and promotions to attract the crowd it wants. The company said it will cut costs going forward, while raising prices for ad-free streaming and launching a low-cost, ad-supported version of Disney+. However, it remains to be seen when, or even if, the company will be able to strike the right balance between content spending, pricing, marketing, and ad disruption.

Netflix is ​​trying a similar strategy. In November, it launched a low-cost, ad-supported version of its popular streaming service to revive subscriber growth and, in turn, revenue growth without expanding its content budget. However, the extent to which this will help remains to be seen. Amid a plethora of similarly priced, ad-supported alternatives, it may still be easy for consumers to cancel their Netflix service and then sign up again months later with a refreshed content library.

Or, maybe those customers simply won’t sign up again. Netflix’s growing churn rate shows that it’s already happening now that there are so many other streaming options available.

control your expectations

Is this the death knell for the streaming business? No, the industry will survive.

It won’t flourish in its current form, though.

While greater scale (in terms of the number of customers and larger, pricier streaming services) will help, it may still not be enough to make all of these providers as profitable as investors hope. The streaming business is highly competitive, and even if the synergies from the integration are eventually discovered, marketing and promotional costs are likely to continue to soar as the companies vie for customers.

Disney may find that it can’t simply cut spending in search of streaming profits, but it’s not just Disney. Netflix, too, has seen a slowdown in its customer growth coincide with less aggressive marketing spend. Other players, such as Warner Bros. Now that streaming services have become commoditized, Discovery and Paramount may face the same headwinds.

The bottom line is: control your expectations. The streaming business doesn’t work the way it used to, when there was little competition and profit wasn’t the focus. None of these stocks are must-haves, and just a few quarters ago, consumers now have more options than they can effectively utilize. However, Netflix is ​​particularly concerned because of the limited ways it can monetize its content.

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