Netflix stock has been in free fall ever since the company surprised investors by revising subscriber numbers downward last Thursday. It’s down about 30% since then.Surprises are never good for investors, but Netflix may be setting itself up to deliver even more surprises.
Next year, the company plans to stop reporting metrics like subscriber churn and acquisition costs.
In June, the SEC sent Netflix a letter urging it to reconsider:
We continue to believe that disclosure of rates of churn would be useful to investors since disclosure of the total number of subscribers who discontinued the service can high light important operating trends and therefore request reconsideration of discontinuing this metric. Please advise.
In July, Netflix responded by saying that churn doesn’t really matter — especially now that it’s moving more toward a streaming business:
…Management believes that in a largely fixed-cost streaming world with ease of cancellation and subsequent rejoin, net additions provides the most meaningful insight into our business performance and consumer acceptance of our service. The churn metric is a less relevant and reliable measure of business performance, and does not accurately reflect consumer acceptance of our service.
Our service is offered on a month-to-month basis. We do not require long term commitments from our subscribers. We have made it very easy to exit and rejoin our service and believe that this type of consumer-friendly approach to providing our service has benefited our overall consumer appeal. The ease of cancellation and rejoins is evidenced by the fact that approximately one-third of gross subscriber additions are former subscribers who have rejoined the service, many within the same year. This ability to freely cancel and rejoin may result in a higher level of churn than we would otherwise experience, and could be viewed as a negative business development; however, we believe that this has actually been beneficial to our operating results in the form of a lower cost of subscriber acquisition.
As the Netflix subscriber base and revenues have grown and as we have shifted our service offering toward streaming content, churn has become less relevant and management has come to rely more and more on net subscriber additions versus churn to monitor and describe the business….
We wonder if Netflix investors would agree.
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