Is Netflix Signaling the Demise of Subscriptions?

Netflix stunned the investment world when it announced its first-quarter 2022 earnings on 4/19/22 and reported that it lost about 200,000 subscribers.  This sent Netflix’s stock plunging 35% on the following day, according to a Forbes article.[1] The Netflix news came about six weeks after an article in “The Atlantic” predicted that subscriptions had peaked.[2] Have we reached peak subscriptions?  Is the Netflix news signaling the demise of the subscription economy?

 

We believe the answer is no.

 

Companies Doing a Good Job Retaining Subscribers

Churn is the rate at which customers stop doing business with a company.  It is calculated by comparing the number of lost customers to the total number of customers at the start of the period.

 

During 2021, the churn rate for the Subscription Economy Index declined to 5.4% from 6.3% during 2020.  The churn rate is actually lower than the 6.1% and 6.5% rates registered in the pre-pandemic years of 2018 and 2019.[3]  This implies that, on the whole, companies that offer subscription services are retaining their customers, not losing them.

 

Post-Pandemic Normalization

While the pandemic was raging and lockdowns were widespread, subscriptions, particularly for services such as video streaming, digital news and media, and e-learning, surged.  So, it should not be a surprise that as infections have waned in number and intensity, and the economy has opened up, there would be some slowdown in growth in these areas.

 

Netflix Had Company-Specific Issues

Netflix’s earnings should not be used to interpolate overall subscription trends as it was affected by some company-specific issues. 

  • The company lost 700,000 members from its exit from Russia[4]
  • Lack of content – Netflix lacks big hits, and its franchise-building power is weak compared to how much content it produces[5]
  • Competition – Netflix never viewed other entertainment companies as their competition.  Rather, they considered other activities, like sleep, gaming, and TikTok, as competitors. However, Netflix has faced serious competition from peer streaming companies such as Disney, Discover, Amazon, Apple, etc., which are also well-stocked with original content 
  • Binge model – Netflix basically created the binge model.  However, this creates a shorter shelf life for its content. Netflix may be too slow to adjust to new viewer habits. [5]

 

Netflix Argues for Portfolio Approach

The decline in Netflix stock highlights the potential wisdom in holding a portfolio of stocks that are part of the subscription economy.  Company-specific issues may affect stocks from time to time, but overall, we believe that subscription economy stocks represent an attractive investment opportunity.

 

The Fount Subscription Economy ETF (SUBS)

The Fount Subscription Economy ETF (SUBS) seeks to provide investment results that, before fees and expenses, generally correspond to the total return performance of the Fount Subscription Economy Index.  The Index was designed to measure the performance of companies engaged in the business of providing subscription services, i.e., companies that sell products or services for recurring subscription revenue.

 

SUBS may invest in companies that offer subscription-based pricing models, including those in the technology hardware industry.

 

 

For a list of fund holdings, please click here.

 

 

 

 


 


[1] Team, Trefis, Is Netflix Stock’s Post Earnings Sell Off An Opportunity to Buy?, Forbes, 4/22/22

[2] Mull Amanda, This is Peak Subscription, The Atlantic, 3/3/22

[3] The Subscription Economy Index, Zuora, February 2022; The Subscription Economy Index is designed to measure the growth in the volume of business for subscription-based products and services.

[4] Forbes, 4/22/22

[5] Adalian, Josef, Netflix’s Bad Habits Have Caught Up With It, Vulture, 4/21/22

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Bong-Geun Choi Chief Economist

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