Features

Churn Notice

Operators struggle to retain customers in a streaming era that’s made adding and dropping TV services fast and easy.

Daniel Frankel
  • Illustration by Lou Brooks

In this era of rampant competition and seemingly unlimited consumer choice in the TV distribution business, getting customers to stick is almost as hard as signing them up in the first place.

Whether they be traditional "linear" pay-TV companies like Comcast, Charter Spectrum and DirecTV, or over-the-top (OTT) suppliers like Netflix, Hulu, Amazon or Sling TV, operators of subscription video services refer to the percentage of customers who drop out for a given period as churn. Of course, lower churn is better.

Right now, in what we'll call tv's "holocene epoch," churn is a big problem, particularly for streaming services. "One third of households that currently subscribe to an OTT video platform have canceled one or more services in the past year, which shows that there is quite a bit of experimentation occurring," says Michael Greeson, co-founder, president and director of research for The Diffusion Group.

Parks Associates, another research company, says that beyond leaders Netflix and Amazon, OTT service providers are experiencing churn rates exceeding 50 percent of their customer bases each year.

To understand how we got here, let's go back a few decades to TV's late Mesozoic Era, if you will — a time when quitting your TV service provider wasn't nearly as easy as it is now.

Three decades ago, you probably received TV via a cable operator. And if you wanted to cut the cord too early in your two-year contract, you probably owed at least a couple of hundred bucks. There was leased equipment to return, and big holes in your walls to fill. Oh, and there was an even bigger problem: since the cable company was probably the only TV service provider in your town; without it you were stuck watching whatever you could pick up with an over-the-air antenna.

Things got a little better in the '90s, when satellite TV companies DirecTV and Dish emerged, giving most folks at least a second choice. You could probably save a few dollars by switching to a satellite TV provider, and the competition made cable operators lower their prices and improve their service, at least a little. But just like the cable companies, DirecTV and Dish required you to wait up to two or three weeks for an installation appointment that made you stay home and wait around all day.

Finally, some guy would park his van in front of your house, then climb up on your roof to mount a giant dish. He'd drill more holes into your wall and saddle you with even more expensive leased equipment.

Meanwhile, cable and satellite subscribers wishing to cut back on premium channels — as well as basic cable channels they weren't watching — were discouraged from doing so by a kind of promotional shell game. Want to save $15 a month by cutting HBO? Fine, the cable company would say, but you're really only saving $5 a month, since that $10-a-month HD DVR in your living room is only "free" because you subscribe to HBO.

Faced with a big and confusing hassle, many customers chose to keep overpaying for the bundle they had, to the satisfaction of the large telecommunications giants.

Churn was pretty manageable for pay-TV operators back in the day, when consumers had limited choice. But then, Netflix and its free seven-day trial emerged, leading to an explosion of over-the-top TV service options that could be signed up for — and quit — almost instantaneously, no installation appointment required.

When Netflix started streaming movies in 2007, it revolutionized not only how TV shows and movies reach homes, but also how the video business was transacted. To sign up for Netflix, you didn't have to call anyone. You just punched in your name, address and credit card number, and boom! — you were hooked up. If you didn't like the service, you had seven days to cancel before the $7.99 bill hit your Visa or Amex.

Canceling required even less time than signing up. There was no expensive leased equipment to return. There was no runaround on the phone, no guy in a van, no holes in your walls and no dish on your roof.

"It's very easy to go online and get rid of the service after a few months," says Alan Wolk, lead analyst at TV[R]EV, a TV industry publication. "Especially versus having to call Comcast and spend two hours on a phone, only to find out that you don't actually save any money by getting rid of HBO because you no longer qualify for the Titanium Super Plus Extra package."

As Sling TV, DirecTV Now, Hulu Live, YouTube TV and other virtual multichannel video program distributors (vMVPDs) have emerged, more and more viewers are now getting their live channels and their on-demand programming from quick-signup OTT services. Last year, about 3 million consumers cut the cord to traditional cable, satellite and telco pay-TV services, and nearly as many signed up for a vMVPD.

So, people aren't so much cutting the cord on their favorite channels as they are replacing traditional pay TV with live channels they stream over the internet. In short, they're migrating to OTT services that are much more susceptible to churn. For example, a Comcast cable-TV subscriber probably also gets broadband, landline telephone and even home-automation/security and wireless from Comcast. With a video service rolled into that package, and everything discounted accordingly, that customer is less likely to service-hop.

But stand-alone subscription video on demand (SVOD) and vMVPD services are much more exposed. According to a recent study conducted by The Diffusion Group, 5 percent of U.S. adult consumers have signed up for vMVPDs, but more — 8 percent — have tried one out and decided to cancel. "In other words, more subscribers tried and canceled a vMVPD service than currently use one — undoubtedly due in large part to the absence of a contract and the ease of cancellation," Greeson says.

The Diffusion Group also found that among current vMVPD users, 23 percent indicated, to varying degrees of likelihood, that they will be canceling in the next six months. Also to varying degrees of certainty, nearly 60 percent of these virtual cord-cutters said they'd re-up once their favorite show or sports team was back in season.

"In other words," Greeson adds, "The 'big event syndrome,' be it a series like Game of Thrones or a season of NFL games, is real, and the absence of a contract undoubtedly makes it easier to cancel or switch between both direct-to-consumer channels [like HBO Go] and vMVPD services."

According to Wolk, in the early days of World Wrestling Entertainment's highly successful streaming channel, nearly two thirds of the platform's user base churned out, "Because everyone had seen the main matches and there was nothing waiting in the wings."

Wolk says that OTT subscribers platform-hop for a range of other reasons — not just because their favorite show isn't in season. "They may not like that Sling doesn't have CBS and The CW," he explains. "They may not like that YouTube TV won't play on Roku. They may decide that they want their local broadcast stations live and not VOD."

With the major SVOD platforms like Netflix, Amazon and Hulu — as well as the big vMVPD players — all growing right now, you might think churn is a problem these companies could live with, as long as they add more customers than they lose. But the cost of adding subscribers is daunting. According to figures provided by Business Insider, Netflix is currently spending around $90 to acquire each new subscriber.

With the service's U.S. base price at $10.99 a month, it takes eight months just to recoup a customer's acquisition cost. With these economics in mind, OTT operators have taken aggressive measures to combat churn. Some vMVPDs have offered free devices — like Roku and Apple TV boxes — for those willing to commit to several months of service.

DirecTV, for example, will ship an Apple TV 4K (MSRP $179) at no charge to customers who prepay for three months of vMVPD service. The idea is to get into the living room and give the service a chance to become integral to the customer's viewing habits.

Wolk wonders how effective this strategy is. "I'm guessing people sign up thanks to promotions initially and then, after using the service and getting used to the idea of vMVPDs, they'll realize their service has some shortcomings and start looking at what else is out there," he says. For its part, Netflix has eschewed promotional items, embarking instead on an ambitious quest to be integrated into subscription services that are stickier and less subject to churn.

While there has been much discussion about cord-cutting in recent years, cable companies remain the number-one source for delivering broadband into American homes. We're not cutting that cord anytime soon. Last year, Netflix entered into a somewhat groundbreaking partnership with longtime rival Comcast, embedding the Netflix service natively into the cable operator's X1 video platform.

Again, integrating and stacking services helps. As Netflix CFO David Wells said at the company's fourth-quarter earnings presentation in January, "There is a churn benefit, especially if you're thinking about Netflix being bundled in with a consistently lower-churn product that has a positive benefit to the lifetime value of that subscriber."

While churn is a problem for linear and OTT service operators alike, it's really just a byproduct of a highly competitive market for video services. And that kind of market is never bad for consumers. In fact, much of this so-called Golden Age of Television is likely caused by the competition between service providers and programmers for customers who won't churn away.

Take, for example, the arms race in original programming, where Netflix leads the way with a content budget set to exceed $6 billion in 2018. This is as much about keeping customers as it is about luring them in. Competitors ranging from Hulu to HBO have had to beef up their own original content investments in response.

"That's why it's so important to have library content," Wolk says. "It keeps people around, and they're not there just for specific shows."

Meanwhile, as OTT services have proliferated, traditional pay-TV operators have improved. Back when it was one of the few TV service options in many markets, the biggest U.S. cable company, Comcast, used to shrug when subscribers complained about poor customer service and costly, bloated channel bundles.

These days, Comcast offers perhaps the most advanced video technology platform on the planet. Its X1 platform delivers a rich entertainment experience that integrates popular OTT services with advanced voice control and artificial intelligence–aided search and navigation capabilities. The telecom conglomerate credits X1 with markedly reducing churn.

"Comcast's versatile platform has driven higher engagement and a better user experience, while the integration of Netflix and YouTube should only further help [reduce] churn," Jefferies analyst Mike McCormack told investors last year.

Comcast, which had lost pay-TV subscribers every year since 2008, actually increased its video base in 2016. Besides improving its video technology and investing $300 million in customer service, Comcast recently added a wireless service to the bundle it offers customers.

"Our strategy is to get most of our customers in a bundle," Comcast CEO Brian Roberts told investors last year. "Every time people take one more product, they churn less."


This article originally appeared in emmy magazine, Issue No. 3, 2018