Cord Cutters Love to Watch, Until the Free Trials Expire

(Bloomberg Businessweek) -- Walt Disney Co.’s new streaming service, Disney+, signed up 10 million customers last month, well ahead of expectations. And it’s got a buzzy show with the Star Wars spinoff The Mandalorian. Now the world’s largest entertainment company has to figure out how to keep people from canceling the service after that series’ season finale on Dec. 27 or when their free trials expire.

Everyone wants to be the next Netflix Inc., with its 158 million customers worldwide. In addition to Disney, Apple has introduced its own streaming service, and Comcast and AT&T are set to follow early next year. But such services have some of the highest cancellation rates among subscription-based businesses, according to Recurly, which provides billing assistance to the industry.

Only about a third of customers stick around after free trials run out, and roughly 10% of members quit video streaming services monthly—twice the rate for games, music, and other entertainment. “There’s a learning curve,” says Dan Burkhart, Recurly’s chief executive officer. “Some of these large organizations are going to have to learn how to deal with data, and [then] putting it into practice requires time.”

Free trials are a big part of the marketing push. Apple Inc. is giving away Apple TV+ for a year to anyone who buys a new device. Disney formed a partnership with Verizon Communications Inc. to offer a free year of Disney+ to 17 million of Verizon’s higher-end phone and internet customers. Businesses are also offering multiservice discounts. Disney charges $13 a month for Hulu, Disney+, and ESPN+ (Disney+ alone runs $7); CBS All Access and Showtime are bundled at a discount, too. This largesse has led some investors to wonder if free is the right strategy. “Are these offers eroding customers’ willingness to pay for content in the long term?” research firm MoffettNathanson asked in a note this month.

The experience of an early adopter of the direct-to-consumer subscription model, World Wrestling Entertainment Inc., provides an answer. It started its $10-a-month WWE Network five years ago. First-time customers can still sign up for a free month, including April, when its hugely popular WrestleMania event takes place. The company reported 2 million total subscribers right after that show this year. By September paid subscribers had fallen to about 1.5 million, an indication of how many had jumped on board for that offer.

George Barrios, WWE’s co-president, says it’s sticking with free trials because they’re a relatively cheap way to get new customers. The company is making changes to its service, though, including adding free content on its app to immerse customers in the WWE world. “We think it’s a huge opportunity,” he says. “Fans who may not be ready to subscribe, it gives them a home where they can experience a ton of short-form content, though not the premium content.”

John Skipper, the former head of ESPN and now executive chairman of DAZN Group, a sports streaming service, told guests at the Code Media conference in November that he’s rethought the service’s free-month promotion. DAZN had offered a trial in December 2018 that included its marquee attraction, a boxing match featuring Canelo Alvarez. People signed up but didn’t renew at the rates Skipper wanted. So he eliminated the trial, doubled the service’s monthly price to $20, and introduced a season of boxing matches, with the biggest ones scheduled a little more than 30 days after the last one to encourage fans to stick around. “We learned hope is not a good strategy,” Skipper says.

Recurly is also making sure that its streaming clients don’t cancel a customer if a payment is declined on the first try. Valid credit cards can be rejected by mistake. The company suggests billing debit card holders on the 15th or 30th, paydays when their accounts are less likely to be overdrawn.

Kevin Mayer, chairman of Disney’s direct-to-consumer business, says he’s already learned a lot from the company’s March acquisition of a majority stake in Hulu, including about the need to monitor customers’ viewing habits to see if they’ve stopped watching. The company can try to keep audiences engaged by highlighting upcoming programs that may interest them. Disney has gone so far as to suggest customers subscribe to Hulu’s $55-a-month live TV package during football season and then switch to a cheaper one without sports in the offseason.

Ultimately, the shift to a direct-to-consumer model will be won by the companies with the best content. In the past, a run of bombs could lead TV networks to bad ratings and a loss of advertisers, but revenue from cable subscriber fees would offset the pain, brokerage firm Cowen & Co. noted in a recent report. Now duds are likely to lead more quickly to cancellations, which explains why the 10 largest players are expected to spend a combined $116 billion next year on programming.

Richard Broughton, research director at Ampere Analysis, a media consulting firm, says the most popular services release as many as one new series a week. People would rather watch a mediocre new program than a critically acclaimed old one, he says. Disney’s boost from The Mandalorian won’t last forever. When the company’s deal with Verizon ends, Broughton says, “there will be a wave of cancellations unless Disney drops a number of new series.”
 
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To contact the editor responsible for this story: Bret Begun at bbegun@bloomberg.net

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