How It Impacts Churn – The Hollywood Reporter

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

Such services as Disney+, Netflix, Apple TV+ and Amazon’s Prime Video have all brought up their monthly prices by $2 to $3, signaling the end of a honeymoon period when entertainment companies, fully aware of the competitive streaming landscape in front of them, were willing to price their streamers low to attract subscribers. HBO Max, now run by David Zaslav’s Warner Bros. Discovery, will also see a price hike 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 — most notably, Netflix — have seen slower subscriber growth 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 cost more than $30 million per episode, while Amazon’s Lord of The Rings: The Rings of Power cost about $58 million per episode, making it the most expensive show, per episode, in history).

Ian Greenblatt, the managing director of technology, media and telecom intelligence at J.D. Power, says the streamers that will be “most resistant to churn are those that have already done so.”

In other words, services like Netflix and Hulu, which launched in the early 2000s, have a head start over others. “Time in game, and in consumers’ minds, is impactful; the longer a sub has been a sub, the more likely they will remain one,” Greenblatt says. “Thus, Netflix and Amazon face 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, could have the hardest time retaining and attracting subscribers with its recent price hike, which saw the monthly subscription price increase from $4.99 to $6.99.

“Apple TV+ is the smallest and [least] watched with a smaller program library, thus the most exposed to churn,” Enders Analysis analyst François Godard notes. In contrast, the launch of Netflix’s new ad-supported subscription tier is poised to be a “handy option for consumers seeking cuts in spending,” he says, especially for users who otherwise might have canceled their Netflix subscription because of its higher price point (the standard subscription jumped from $13.99 to $15.49 a month in January).

Disney’s streaming offering — which includes Disney+, Hulu and ESPN+ — also is well-positioned to withstand subscriber churn due to quality programming and growing subscriber reach, argues Greenblatt: “Its content library is diverse enough to entertain or at least justify its monthly cost to nearly every demographic, and the feared in-home outcry at its subscription cancellation is enough to justify the monthly cost.”

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

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

In terms of pure financials, however, the Reed Hastings- and Ted Sarandos-run Netflix is conversely the 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 of have robust commerce and hardware businesses, respectively, that drive most of their revenue.

“Netflix and Apple TV+ are most vulnerable, because both lack significant ‘must have’ content franchises,” Csathy says. “Disney+, on the other hand, is most secure with its franchise Magic Kingdom. But Netflix faces the biggest threat, because it makes money only with its content, whereas Apple uses content primarily as marketing to drive more sales of core products like iPhone and Macs. For that same reason, Netflix faces more risk at continuously hiking its subscription pricing. Apple can afford to do it because Apple TV+ plays the part of only one cog in its overall machine, not the sole cog itself as it is for Netflix.”

Disney’s economics, similarly, aren’t solely dictated by streaming; though the company looks to streaming as its future, it can lean on its parks and linear TV businesses to bring in major revenue. Godard says that “the context of stressed economy is difficult to gauge,” even though it’s clear that economic trends — from high inflation to potential recessions in many countries — will affect churn as consumers reevaluate entertainment options.

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Source: J.D. 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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