By Jonathan Guthrie, CEO, Paywizard
A company not meeting its quarterly earnings expectations is not a major story. Yet, when the worldâ€™s largest SVOD provider missed its subscriber sign up numbers by 270,000 for the U.S., causing an 8% dip in share price, the reason behind it required closer inspection.
According to Netflix, it suffered from â€œinvoluntary churnâ€ due to an â€œinability to collectâ€, which it attributed to an industry wide switch to EMV (Europay Mastercard Visa) – a method of making credit and debit card transactions more secure. Although common in Europe, the technology, also called â€˜Chip and Pinâ€™, has been introduced this year across the 1.1 billion US issued electronic payment cards to combat $7bn a year lost due to fraud. Netflix says that with 42 million customers using its service, entirely billed through electronic payment, the impact of the change was a â€œminor tactical issueâ€. However, some experts from the financial services sector point out that the switch to Chip and Pin has been years in the planning and that there are methods of delivering continuity of payments when cards are reissued – like when a card expires, or is lost.
However, for such a highly visible and scrutinised TV industry player, it is clear that the EMV change has, at least in the minds of executives, contributed to the blip. Whatever the validity of the claim, it exposes a more fundamental issue around the challenges of subscriber management.
A little more understanding
Netflix is a juggernaut. The service plans to spend $5 billion on content in 2016 and currently operates in 40 countries serving around 70 million subscribers. Its rise is an exemplar for the ongoing change in TV from a broadcast media to a subscriber centric experience.
Yet the lower than expected subscriber numbers highlights two fundamental concerns that other subscriber based industries have long understood. The first is around the subsection of subscribers that pay for but donâ€™t actually use services they are entitled to. For example, health and fitness clubs in the US is an industry worth $27 billion each year, but research suggests that only 18% of memberships are regularly used. In fact, for a small gym to be profitable, it needs to over subscribe by a massive ratio. In the SVOD world, this equates to subscribers signing up for a series like â€œHouse of Cardsâ€ or Premier League Football and then simply not cancelling when the series or season ends. It is events like EMV that break the â€œforgottenâ€ subscription and causes customers to revaluate their commitments.
The second factor is that subscribers, especially within SVOD, are loyal to content – not brands. Football supporters, whether American or English, follow teams and not the service that provides access. And this makes understanding consumer behaviour critical. In the Netflix example, would a grace period and on-screen pop-up notification that allowed subscribers to watch two items before stopping service have been a better option? It is unclear whether Netflix did proactively email subscribers ahead of the change to engage and promote subscription renewal at a time when there could be a natural break.
Innovation delivers retention
With the rapid rise in broadband adoption, electronic banking capability and a growing global middle class; SVOD providers need to take away a lesson from Netflixâ€™s â€œinvoluntary churnâ€ statement and consider how well they actually understand customer behaviour, and whether that knowledge translates to a coherent strategy.
A great example of such understandings are â€œseason passesâ€ that sign up pay-TV subscribers around sporting seasons that may last only eight months. These passes recognise that itâ€™s better to find a deal that suits the viewer’s habits than miss out on potential revenue from subscribers unwilling to commit to longer 12 and 24 month contracts.
Proactive vs reactive
Pay-TV providers are in a great position to start capitalising on their relationship with subscribers. In a defensive posture this could entail proactive campaigns based on viewing habits to counter the factors that lead to churn. Going proactive and analysing the wealth of data from within subscriber systems and across related data sources can allow for more compelling content acquisition, bundles and cross-selling potential.
Netflix believes the EMV issue will naturally sort itself out in the next few months as everybody gets the new cards. Its international growth is still outpacing its home US subscriber additions and new regions are on the horizon. However, other operators should take heed that ignoring subscriber behaviour can be a costly mistake and the EMV incident is part of a wider technical and cultural shift that will have lasting repercussions.