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Cartesian: why it matters that churn is higher for OTT SVOD providers than for traditional Pay TV operators

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Providers of OTT SVOD services generally design their business models such that: (a) the monthly subscription cost is significantly less than a traditional Pay TV provider’s; and (b) the contract does not involve a long-term commitment.

Therefore one might expect that their churn-rates would be much higher than their traditional Pay TV rivals’: since it is not only easier to opt in to an SVOD offer, but also easier to opt out.

A recent White Paper from consulting company Cartesian confirms this assumption, calculating the churn-rates for a number of different types of video service-provider (see Figure 1), and quoting Parks Associates’ conclusion that “a typical over-the-top provider experiences churn of 60% annually, which is three to five times more than a traditional Pay TV provider.”

Figure 1: Cross Communications Service Provider Annual Churn Rates (2015-16)

Company Type Company Annual Churn Rate*
OTT Provider Netflix 9%
Amazon 19%
Hulu 50%
WWE Network 138%
Other 60%
Pay-TV Dish 21%
Sky 11%
Tier 2 MSO 18%
Postpaid wireless Sprint 20%
T-Mobile 18%
Verizon 12%
AT&T 13%
Prepaid wireless Sprint 60%
T-Mobile 55%

* Rates are approximated by dividing the gross estimate of customers lost during the year by subscriber numbers at the beginning of the base period

** The WWE network is heavily influenced by event-based signups, who tend to churn immediately afterwards

Sources: Parks Associates, SNL Kagan, Company Filings, Cartesian

Should SVOD providers worry about this? A recent research paper by IBM Cloud Video into the causes of SVOD churn argued that they had less cause to worry about churn than traditional Pay TV operators did – because their subscriber acquisition costs were so much lower.

Citing the fact that US satellite Pay TV operator DISH Network had reported annual churn of 22% in 2015, the paper described this as “a huge problem for a Pay TV operator like DISH, as the costs involved in signing up a new customer (so-called subscriber acquisition costs, or SAC) are enormous, around $730 in 2015.” This issue was “not nearly so troublesome for SVOD, as SAC is just a few dollars,” the paper said.

However, in its white paper, Cartesian warns against complacency, pointing to research that shows that in the U.S. alone there are now more than 100 OTT providers, and that subscriber growth is slowing (See Figure 2 below). “As the market matures and competition increases, customer acquisition costs, which are often below $100 today, will likely rise,” Cartesian argues. “As it becomes harder to win new customers, it becomes ever more important to hold onto those you already have.”

Figure 2: North America OTT Subscriber Forecast (2013-18)

2013 2014 2015 2016 2017 2018
North America OTT SVOD Paid Subscribers (m) 57m 75m 81m 87m 91m 94m
North America OTT SVOD Paid Subscribers Growth (%) 30% 9% 6% 5% 4%

Source: SNL Kagan OTT Subscriber Forecast 2013-2018

However, OTT providers are well-placed to address this challenge, Cartesian points out, since they have access to “a far greater range and volume of data” than traditional Pay TV operators do about the sources of churn. This should allow them to pre-empt and all but eliminate what it calls “preventable” churn.

Cartesian accordingly recommends that SVOD service-providers should begin by segmenting their subscriber base into two categories – “loyal” and “vulnerable” churners (loyal churners are those who leave the service temporarily only to return at a later date; vulnerable churners those who are less likely to return).

Since loyal churners are generally tracking the specific availability of shows or events (e.g. they churn out after each series of Games of Thrones, for instance, and then re-enlist when the next series begins), the key is “to keep these proactive users constantly engaged with content” with a view to maximising the number of months per year this group uses the service.

For the (larger) vulnerable group, first experiences, including navigation, are vital, counsels Cartesian, for instance “following the three-click rule from landing page to watching content.”

Meanwhile, as the IBM Cloud Video research already cited discovered, technical issues such as buffering and delayed starts remain one of the most significant sources of churn. For the vulnerable segment, Cartesian suggests that monitoring network performance and pro-actively addressing it when it deteriorates should also help minimise churn.

Photo: Recent home page for Netflix UK. Netflix has a low churn rate.

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