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Netflix: Q2 ’07 Update

Q2 2007: Netflix’s Not So Excellent Adventure

Netflix Magnet
In August of ’05, I first wrote about the challenge Netflix faces to retain subscribers. With its 2Q 2005 average monthly churn at 4.7 percent, Netflix needed to replace more than HALF of its subscribers every year. Now two years later, average monthly churn for Q2 2007 is 4.6 percent — not significantly changed — while new sub acquisition costs have increased.

When I first wrote about this, I didn’t believe that many Netflix-watchers understood the full implications of the churn stat. Clearly, that’s changed as the company’s stock price has ebbed.

To review, Netflix defines churn as “customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, divided by three.” The formula for Q2 2007 looks like this:

( 1,083,000 / ( 6,797,000 + 1,028,000 ) ) / 3 = 4.6

Because it’s a monthly average that Netflix reports quarterly, I believe it’s easily misunderstood or overlooked. 4.6 sounds low, but multiplied by 12 months, you get annual churn of 55.2 percent. Netflix has to land more than 3 million new subscribers this year just to stay even.

At the same time, new sub acquisition costs for Q2 2007 were $44.02 per gross sub addition. Compare this to Q1 2006 when the cost was $38.47 per sub.

As of July 2007, Netflix has again cut its sub prices — the second major cut in two years. At the same time, it’s preparing for a transition to video-on-demand by providing access to a limited library of content at no added cost to subscribers.

With higher acquisition costs, fewer subscribers, and lower revenue-per-sub, Netflix must immediately reduce churn (increase brand attraction) and at the same time consider dramatic steps to reimagine its business model.

David M. Kalman is the president of Terrella Media, Inc. and editor of BrandMagnet.

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