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Netflix's new discovery features may not stem post-COVID churn – analysts

With competition rising and content production delayed by the coronavirus pandemic, Netflix Inc. is hoping new technology can help it retain its position as the No. 1 subscription video-on-demand platform.

While the pandemic has led to a spike in subscribers and usage for the streaming media giant, consumers glued to their couches by shelter-at-home orders may be burning through Netflix's content faster than the company can make new shows. To help prevent user fatigue, Netflix recently began experimenting with a Shuffle Play button, where viewers can watch a randomized stream of programming based on their prior preferences. But analysts warn that these efforts may not be enough to retain subscribers amid mounting competition.

Seth Shafer, an analyst with Kagan, a media research group within S&P Global Market Intelligence, noted that Netflix is not the only streaming service investing in microfeatures to keep users interested. He pointed to The Walt Disney Co.'s generous download permissions for Disney+ and Hulu's watch party support as other examples.

The impact of features like Shuffle Play on user retention has yet to be seen. What does seem apparent is that the shelter-at-home period has driven consumers to Netflix in droves. During the first half, the company added 25.9 million members, more than double the additions for the first half of 2019.

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The question for analysts is whether Netflix can retain those subscribers going forward.

Shafer is not so sure, saying the platform could begin seeing erosion in its third-quarter numbers due to high unemployment and rising competition. However, these are difficult times to predict, and Shafer admitted that he expected to see more of a negative impact already.

When consumers are not able to go to restaurants, bars or theaters, perhaps the extra cost of streaming TV is easily justifiable, even in a recession. "Just getting your Starbucks every day, that pays for a lot of SVOD. We're still figuring out this new normal," Shafer said.

There is some evidence that Netflix is not only keeping ahead of any apparent streaming fatigue, but also ahead of the competition. Consumers are more likely to maintain their Netflix subscription than any other SVOD platform, according to a recent survey by Piper Sandler's equity research team. Netflix well outpaced Disney+, with 41% of respondents saying they were likely to maintain a Netflix subscription after the COVID-19 shelter-in-place orders relaxed and only 17% saying the same of Disney+. Only 7% of respondents said they were likely to maintain HBO Max. The survey also indicated that the respondents would absorb a Netflix subscription price increase.

"We believe Netflix has furthered its position as the go-to streaming option and while we recognize some of the record setting sub adds were pulled forward, we also believe the trend was an acceleration of an ongoing shift from broadcast TV to streaming," Piper Sandler analyst Yung Kim said in an Aug. 25 note on the survey.

Regardless of a broad shift to streaming, Netflix still depends in part on a stable economy and free time among its users. For his part, Wedbush Securities analyst Michael Pachter believes Netflix should see members begin to churn out before year end.

The problem, according to Pachter, is not so much content, as Netflix has a significant library that is not easily burned through. But Pachter said competition — especially from Disney+, AT&T Inc.'s HBO Max and Comcast Corp.'s Peacock, each featuring their own originals as well as vast proprietary catalogs of library content — will likely weigh heavily on Netflix.

"Everyone has a problem creating new content, but the others have deeper libraries of proven content. Eighty years of Disney and Fox content is tough to compete with. I think people who 'finish' Netflix will check out the other services, and those libraries are new to them," Pachter said.

Shafer agreed, noting, "We have five new services in the market. At some point Netflix has to start showing cracks."

Netflix for the third quarter offered net member growth guidance of 2.5 million, saying that "growth is slowing as consumers get through the initial shock of COVID and social restrictions." Pachter in a recent research note said he believes the weak guidance indicates the company is already realizing higher churn rates as the pandemic period wears on. If the hangover skews churn up by just 1%, that could result in the loss of 2 million subscribers per quarter, according to Pachter's note.

As for features like Shuffle Play, which are intended to help users discover new content on the platform, it does not change the fact that "for every great show, there are a dozen mediocre ones," Pachter said.

"I don't see discovery getting better, and they appear desperate to me to drive viewers to original content, regardless of appropriateness," he said.