How It Affects Churn – The Hollywood Reporter

How It Affects Churn – The Hollywood Reporter

As Hollywood executives ponder the next phase of their streaming strategy, the major services will see how loyal their customers are as subscription prices creep up during an economic downturn.

Services like Disney+, Netflix, Apple TV+ and Amazon’s Prime Video have all raised their monthly prices by $2 to $3, signaling the end of a honeymoon period when entertainment companies, fully aware of the competitive streaming landscape ahead of them, were willing to underprice their streamers for to attract subscribers. HBO Max, now run by David Zaslav’s Warner Bros. Discovery, will also see a price increase of some kind in 2023 as the company prepares to merge the prestige streamer with Discovery+.

Raising prices when consumers may be more conscious of their spending may seem counterintuitive, especially as streaming companies — especially Netflix — have seen lower subscriber growth over the past year. And when churn is the monster always lurking under the bed, higher prices don’t exactly help persuade a subscriber to stay.

Still, it’s a risk companies are willing to take as costs remain high, especially for prestige, tentpole productions that streamers use to attract and retain customers. (Netflix’s fourth season of Stranger Things costs more than $30 million per episode, while Amazon’s The Lord of the Rings: The Rings of Power costing around $58 million per episode, making it the most expensive show, per episode, in history).

Ian Greenblatt, managing director of technology, media and telecom intelligence at JD Power, says the streamers who will be “most resistant to churn are the ones who have already done it.”

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In other words, services like Netflix and Hulu, which launched in the early 2000s, have an edge over others. “Time in the game, and in the minds of consumers, is impactful; the longer a submarine has been a submarine, the more likely they will remain one, says Greenblatt. “Therefore, Netflix and Amazon have the least risk in the face of increased fees.”

Newer services like Apple TV+, which launched in late 2019 and doesn’t have a back catalog of content to rely on, may have the hardest time keeping and attracting subscribers with its latest price hike, which raised the monthly subscription price from $4.99 to $6. 99.

“Apple TV+ is the smallest and [least] seen with a smaller program library, and thus the most prone to churn, says analyst François Godard in Enders Analysis. By contrast, the launch of Netflix’s new ad-supported subscription tier is poised to be a “convenient option for consumers looking to cut costs,” he says, especially for users who might otherwise have canceled their Netflix subscription due to its higher price point (the standard subscription jumped from $13 .99 to $15.49 a month in January).

Disney’s streaming offerings — which include Disney+, Hulu and ESPN+ — are also well-positioned to resist subscriber churn due to quality programming and growing subscriber reach, Greenblatt asserts: “The content library is diverse enough to entertain or at least justify the monthly cost of almost any demographic groups, and the dreaded outcry at home when canceling the subscription is enough to justify the monthly cost.”

Disney’s franchise power helps the company maintain its grip on subscribers, despite price increases, adds Peter Csathy, chairman of advisory firm Creative Media. The entertainment giant also benefits from having a strong subscription package that has “notably lower churn” and accounted for more than 40 percent of Disney+’s domestic subscriber count at year-end, Disney CFO Christine McCarthy said during the company’s Nov. 8 earnings call.

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“Our history shows that when we’ve taken price increases across our streaming businesses, we don’t meaningfully increase departures or cancellations,” Disney CEO Bob Chapek also said during the earnings call. “We think we still have some headroom there.”

In terms of pure economics, however, Reed Hastings and Ted Sarandos-run Netflix is ​​conversely most likely to feel the effects of subscriber churn because the company’s business is primarily driven by subscriptions, unlike Amazon and Apple, which both have robust commerce and hardware businesses, respectively. drives most of its revenue.

“Netflix and Apple TV+ are most vulnerable, because both lack significant ‘must have’ content franchises,” says Csathy. “Disney+, on the other hand, is safest with its Magic Kingdom franchise. But Netflix faces the biggest threat, because it makes money only with its content, while Apple uses content primarily as marketing to drive more sales of core products such as the iPhone and Mac. For the same reason, Netflix faces a greater risk by continuously increasing subscription prices. Apple can afford to do that because Apple TV+ plays the role of just one cog in the overall machine, not the sole cog in itself as it is for Netflix.”

Disney’s finances, similarly, aren’t dictated solely by streaming; Although the company sees streaming as its future, it can lean on its parks and linear TV businesses to bring in big revenues. Godard says that “the context of a stressed economy is difficult to gauge,” although it’s clear that economic trends — from high inflation to potential recessions in many countries — will affect departures as consumers reconsider entertainment options.

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Source: JD Power TMT Intelligence Report, October 2022

A version of this story first appeared in the Nov. 9 issue of The Hollywood Reporter magazine. Click here to subscribe.

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