Why OTT Providers Aren’t Concerned with
Churn – and Why They Should Be
By Micah Sachs and Michael Tomasini
Over-the-top video providers today downplay the fact that their customers churn at far higher rates
than traditional service providers. While OTT video has some important differences from traditional
Pay-TV, increasing competition and slowing growth will make customer acquisition a more challenging,
and expensive, proposition for OTT providers. Understanding the true causes of churn and
implementing some best practices can help OTT providers maximize profitability.
July 2016
Cartesian: Why OTT Providers Aren’t Concerned with Churn – and Why They Should Be
During a quarterly earnings call in 2013, Netflix CEO Reed Hastings was asked why his firm
doesn’t report churn. His reply was telling: “I don't even look at the churn numbers . . . really,
what we care about is total growth”.i This attitude pervades the over-the-top video industry,
as providers downplay the fact that their customers churn at rates far higher than traditional
service providers. According to Parks Associates, a typical over-the-top video provider
experiences churn of 60% annually, which is three to five times more than a traditional PayTV provider (see figure 1). Customer acquisition and retention are two sides of same coin,
driving service provider profitability from opposite ends of the customer lifecycle – why, then,
do Netflix and its peers appear cavalier about something so vital?
Figure 1. Cross Communications Service Provider Annual Churn Rates (2015-16) ii iii
How OTT Providers View Churn Today
Over-the-top video providers claim that the churn metric is not relevant because they have a
different business model than traditional Pay-TV providers. To onboard a new customer, OTT
providers need not make a service call, install equipment or activate a device. Customers only
have to create a user ID and fill out credit card information. Over-the-top video subscriptions
are much less sticky than traditional communications service subscriptions – providers don’t
sign customers to long-term contracts or bundle in other services like home internet and
phone, and there is nothing stopping an unsatisfied subscriber from cancelling her service and
subscribing to a competitor. This consumer flexibility creates a liquid market, and inevitably
leads to subscribers churning at far higher rates than experienced by traditional service
providers.
As a result of the differing business models, over-the-top video providers have acknowledged
what they see as flaws in the churn metric as it applies to their business. Speaking on a panel
during INTX 2015, Sling TV CEO Robert Lynch mentioned a phenomenon where customers
would cancel their service only to return a short while later, claiming that “we don’t think of
it as churn”iv. It isn’t uncommon for a churning customer to return based on the availability
Copyright © 2016 Cartesian, Inc. All rights reserved.
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Cartesian: Why OTT Providers Aren’t Concerned with Churn – and Why They Should Be
of desired content or a change in their economic situation. In that sense, the churn metric
does not paint an entirely accurate picture of the business’ success. Conversely, the quarterly
earnings quote from Netflix CEO Reed Hastings continues, “management looks at [net
additions] which we do check every week, every day” – in that vein, churn is not flawed, but
rather a less appealing descriptor of their customers than overall subscriber growth. While
looking solely at overall growth paints an attractive picture to investors, it hides the danger in
constant customer attrition.
How OTT Providers Should View Churn
The over-the-top video market is becoming more crowded – in the last several months,
DirecTV and Hulu have announced virtual service provider services, offering a bundle of linear
channels streamed over the Internet. ESPN recently announced the development of a directto-consumer app focused on niche sports. There are now more than 100 providers of OTT
services in the U.S.v, and subscriber growth is slowing (see figure 2). As the market matures
and competition increases, customer acquisition costs, which are often below $100 today,
will likely rise. As it becomes harder to win new customers, it becomes ever more important
to hold onto those you already have.
Despite its claims not to be concerned with churn, market leader Netflix has clearly invested
in customer retention. Their user interface and recommendation engine are designed to
encourage continued usage, especially when subscribers finish watching seasons of popular
shows, a prime churn flashpoint. Their content recommendation algorithm auto-queues a
recommended show after a subscriber finishes the season of whatever they’re watching.
Additionally, a subscriber’s “watch history” (and therefore recommendations) disappear after
10 months of cancellation, providing a disincentive from re-subscribing once per year to
watch a particular show.
Figure 2. North America OTT Subscriber Forecast (2013-2018) vi
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Cartesian: Why OTT Providers Aren’t Concerned with Churn – and Why They Should Be
How Prioritizing Churn Can Help
In the OTT world, content availability is unquestionably the biggest driver of churn. But it is
not the only driver, and OTT providers have access to a far greater range and volume of data
than traditional Pay-TV providers to understand other reasons for churn. Sales funnel, profile
set-up, usage, devices used, geography, preferences, network experience—this wealth of
data sources can allow OTT providers to nearly eliminate preventable churn.
One of the simplest ways to temper churn is to notify subscribers of imminent credit card
expiration in order to reduce the incidence of involuntary churn. Conversely, ensuring the
transition from free trial to auto-pay status is smooth and unobtrusive avoids premature
voluntary churn.
The wealth of data available can make determining the true reasons for churn challenging.
While geographic and socioeconomic analysis of the subscriber base may lead a provider to
view one demographic group as more prone to churn, analysis of ISP performance data may
highlight that this demographic group disproportionately uses an ISP with inconsistent speeds.
A key step, then, in understanding and proactively responding to churn is segmenting the user
base. Cartesian sees two key categories of subscribers that over-the-top video providers must
differentiate: “loyal” churners and
“vulnerable” churners. Loyal
churners are defined by their
tendency to return to the service
of their own volition in time; as
SlingTV CEO Robert Lynch stated,
many subscribers cycle through
signing up and cancelling multiple
times. For loyal churners the
name of the game is specific
content availability, whether it be
a marquee sporting event or a
recently finished season of a
show.
As
Netflix’s
tactics
demonstrate, keeping these
proactive
users
constantly
engaged with content is necessary
to maximize the number of
months per year these subscribers
use the service.
Vulnerable churners comprise the larger group of subscribers who are less likely to resubscribe following cancellation. Their first experiences--signup, initial profile and
preferences setup, and first navigation of the user interface--need to be clean, simple and
intuitive. Following the three-click rule from landing page to watching content is a good
barometer for a UI’s ease of use. Monitoring network performance from elements in the OTT
Copyright © 2016 Cartesian, Inc. All rights reserved.
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Cartesian: Why OTT Providers Aren’t Concerned with Churn – and Why They Should Be
provider’s control (internal network, transport network, third-party CDN, peering partners)
and proactively addressing network performance will minimize consumer frustration.
Loyal churners can be identified retroactively if a provider has a long enough usage history.
But accurately predicting which new subscribers will be loyal churners vs. vulnerable churners
(or for that matter, free riders or dabblers) requires teasing out the right signals from the
marketing funnel, profile set-up and demographic data.
The OTT market is still growing. Market leaders with large capital reserves and high visibility,
backed by investors with an extended timeline for profitability, are still going to prioritize
growth. However, for leaders, virtual service providers, and niche players serving targeted
consumer segments, the story is one and the same: customer retention is vital to continued
success, and is only going to grow more important as the market reaches maturity. Keeping
loyal churners engaged and preventing vulnerable churners from eschewing the service
altogether will allow a firm to see a significant increase in profitability; further, incorporating
sophisticated data analytics into their churn strategies allows firms with compelling content
to reach and maintain their market potential.
i
Netflix Earnings Call Q2 2013
Rates are approximated by dividing the gross estimate of customers lost during the year by subscriber numbers at the
beginning of the base period, Sources: Parks Associates, SNL Kagan, Company Filings, Cartesian
iii
The WWE network is heavily influenced by event-based signups, who tend to churn immediately afterward
iv
http://www.fiercecable.com/story/sling-tvs-lynch-we-dont-think-people-leaving-service-churn/2015-05-07
v
https://www.parksassociates.com/blog/article/pr-03292016
vi
SNL Kagan OTT Subscriber Forecast 2013-2018
ii
Copyright © 2016 Cartesian, Inc. All rights reserved.
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Cartesian is a global consulting firm that specializes in telecommunications, media and
information technology. We leverage strategic analytics to drive new customer acquisition and
optimize customer retention for OTT video services.
For over 20 years, Cartesian has advised clients worldwide in strategy development and assisted
them in execution against their goals. Our unique portfolio of consulting services and managed
solutions are tailored to the specific challenges faced by executives in these fast-moving
industries. Combining strategic thinking, robust analytics, and practical experience, Cartesian
delivers superior results.
www.cartesian.com
For further information, please contact us at [email protected]
Copyright © 2016 Cartesian, Inc. All rights reserved.