Ad-Supported Plan Could Help Curb High Netflix Churn Rate: Wedbush
Netflix has an opportunity to limit churn in coming months by offering its ad-supported tier, which launches Nov. 3 in the U.S. (see 2210130058), to subscribers looking to quit the service, Wedbush analyst Michael Pachter wrote investors Friday. Netflix reports Q3 earnings Tuesday.
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Pachter is “very positive" on ad-supported subscriptions, "particularly as a disincentive to churn,” saying once the $6.99 monthly service rolls out, Netflix will be able to “down sell” customers who notify Netflix of their intent to quit the service “and will retain a significant portion of churned customers as a result.” Netflix has a high churn rate, said the analyst, estimating a third of Netflix subscribers regularly opt out of the service and return later. “Ad support could trigger the migration of a much higher percentage of customers to the lower priced model,” he said, noting the Basic with Ads plan is $1 lower than Wedbush expected.
The ad-supported model also has “great potential to cannibalize existing customers,” Pachter said, citing a Wedbush survey saying 15%-25% of current U.S. users are “highly likely” to switch to the new $6.99 tier. Wedbush estimates Netflix will go from 73 million domestic customers paying an average $16 monthly to 55 million-62 million; it projects 16 million-23 million will adopt the ad-supported plan, generating at least $10 per month per subscriber in ad revenue, based on comparable rates generated by fuboTV, The Roku Channel and Hulu.
On password-sharing, Pachter noted Netflix intends to “crack down” on password sharing, believing 30 million households in the U.S. and Canada, and 100 million globally, are using shared passwords that breach the company’s terms of service. The Wedbush survey of 1,200 respondents showed 59% of current Netflix users, across income brackets, have a personal subscription, 32% log in through a family or group subscription and 8% use someone else’s account.
Wedbush estimates 65% of current domestic subscribers share their account and “are doing so in breach of the company’s terms of service.” Of those who identified as having a personal subscription, 54% “admitted to sharing with at least one other person,” Pachter said, saying Netflix could be overestimating the number of password-sharers "and may alienate some of its users that share passwords legitimately" with attempts to curb sharing.
Commenting on Netflix’s tests in three Latin American countries to cut down on password-sharing, Pachter said plans offering additional locations per account at $3 each is a “reasonable way to approach the password crackdown,” but there will likely be pushback from users who could access their accounts while traveling only via a mobile device and not from hotel rooms, second homes, dorm rooms or vacation rentals. “As password sharing is, in many cases, a legitimate use according to the company’s terms of service, we believe that any crackdown on password sharing carries the risk of alienating customers who practice legitimate and permissible sharing,” said the analyst: “Netflix is unlikely to win more than a few million new customers by changing its practice," he said.