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Is churn for OTT SVOD services really relevant?

road ahead

The revelation that half of Hulu’s subscriber base has cancelled their subscription in the last year sounds like a disaster of epic proportions, but is it?

Parks Associates released data last week revealing that 7% of U.S. broadband consumers had cancelled their subscription to Hulu in the last month. This, the company says, equates to half of Hulu’s subscribers.* Parks also said that 9% of Netflix subscribers had cancelled in the last 12 months and around 30% of Amazon Prime Instant Video users had cancelled.

To put these numbers in perspective DirecTV experienced average monthly churn in 2014 of 1.52%, which equates to about 20% of the subscriber base cancelling service in 2014. That means Netflix churn is extremely low by pay TV standards, and Hulu’s is extremely high.

The first thing to point out is that churn in pay TV and OTT are two very different things. DirecTV’s subscriber acquisition cost (SAC, the amount spent in marketing, equipment and installation services to sign a customer up) is a horrifying $883. If 20% of subscribers churn every year that’s a potential cost burden of over $3B a year! The last time Netflix reported SAC in 2010 it was just $18 and falling fast. Assuming Hulu sees a similar figure, churn is costing the company less than $100M a year.

The problem churn poses to OTT SVOD is more of a revenue issue than a cost issue. Speaking at this year’s INTX Tim Connolly, Hulu’s SVP of Distribution, said: “Churn is tough. It’s the double-edge of that sword easy-in-easy-out.”  Roger Lynch, CEO of Sling TV, expanded on the thought saying that he didn’t necessarily think of people leaving and then coming back again as churn.

“When they come back it’s not like they cost us money to start them up again. They’re just paying us money again. It’s not something we discourage at all. Live sports will drive more of that activity. They might come in during the season and leave after that. The challenge to us is can we make it interesting for them year-round to try to make more revenue out of them. But for those people that just want to come and do that, that’s totally fine with us.”

Taken to its extreme, a service with 100% or higher churn could still be very profitable online. Sports subscription services likely see extremely high annual churn, but I doubt anyone cares as long as people come back again for the next season.

This suggests churn may not be the best metric by which to judge the performance of monthly OTT subscription services. Perhaps a better measure is subscriber retention time. Both Mr. Lynch and Mr. Connolly agree they are keenly focused on getting people past the first 3 months of service. The likelihood they will quit the service drops dramatically after that.

Why it matters

Churn is a metric that is tracked closely for pay television services as the cost of acquiring a subscriber is extremely high.

OTT SVOD churn may not even be a relevant measure of a service’s performance because subscriber acquisition costs are so low.

A better metric of the health of on OTT SVOD service is subscriber retention time, which is more directly related to revenue generation.

*There are 90 million US broadband subscribers. 7% is around 6 million households. Hulu said it had 9 million subscribers at the end of April 2015. If Parks 7% number is right, around two thirds of subscribers cancelled service in the last 12 months, not half.

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One Comment

  1. Very good article indeed. Churn does not mean the same thing for all services or for all Operators.
    Example, you are customer a Netflix and you want to go out? Netflix shows you a nice link and kiss you bye-bye. (BTW this is a smart way of showing confidence in future customers).
    But for old-style Operators churn is evil.
    Since PSTN days it means CEOs discomfort, redundant numbers (“who issued this churn number, Customer Care or Network?”), struggle between Marketing and Finance (“we must allow new retention schemes”), etc. They have done this for fixed, mobile, broadband, and now for video.
    In the end, Operators can´t believe why an OTT is cool when showing a 9% churn.
    Well done,
    Daniel

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