Disney CEO Bob Iger thinks that Netflix technology is a big reason for its low churn. Is he right? If integrating Hulu content in Disney+ fixes engagement, will it fix churn, too?
Speaking at the Morgan Stanley Technology, Media & Telecom Conference in San Francisco, Disney CEO Bob Iger said the company has come a long way on its journey with direct-to-consumer services and that he “feels great” about where the company is. However, he cited remaining challenges, including taming churn and scaling globally. He posited the problem as a technical challenge, one that Disney’s “gold standard” competitor, Netflix, has already conquered:
“We are now in the processes of developing all of that technology, and obviously the gold standard there is Netflix. We need to be at their level in terms of technology capability.”
To be sure, Netflix remains the gold standard, with monthly churn running at 2% at the end of 2023. With the second lowest churn among top SVOD services, Disney+ is no slouch either, but its rate is 2.5 times higher than Netflix’s and barely below the category average. However, is the key to conquering churn a technical one, or does it have more to do with content?
Netflix wins in the mid-tail
As Jonathan Hurd of Altman Solon pointed out at the VideoNuze CTV Ad Preview Summit, Netflix’s ace with subscribers is its “mid-tail” content. He said 3% of titles – usually the newest and most high-profile – generate about 37% of hours viewed, while “long tail” content (10,000 titles) accounts for 4%. That leaves approximately 60% of viewing hours accruing to 8,000 titles between new releases and the long tail. He contends that:
“The mid-tail is where consumers decide what to watch based on genre preferences rather than interest in specific titles.”
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Success in the mid-tail makes Netflix a service people use daily and Disney+ one they dip into weekly. According to Comscore data, Netflix households spend 35 hours a month with the service, while Disney+ homes spend 12 hours monthly.
Is Hulu the answer to Disney+’s mid-tail problem?
Mr. Iger believes he has the solution to Disney+’s mid-tail problem: Hulu. The company is beta-testing the integration of Hulu into the Disney+ experience. When the beta test is generally released later this month, Mr. Iger expects engagement to rise:
“We are not only increasing the volume of content on the platform, but with that comes significantly more [user] engagement.”
He could be right. The Comscore data shows that Hulu engagement is almost as good as Netflix, delivering 34 hours per month of viewing by Hulu households. Mr. Iger said as much in the Q1 2024 earnings call:
“We’ve already seen an incredible response to the beta launch of Hulu on Disney+, which has far exceeded every metric, and we are looking forward to the full launch next month.”
Does Hulu help Disney+ with its churn problem?
So, combining Hulu and Disney+ could fix Disney+’s mid-tail problem. Normally, we would expect churn to go down as engagement goes up. After all, if people use a service a lot, they should be much less likely to cancel it, right? Not necessarily!
Antenna data shows that despite Hulu’s equal engagement to Netflix, its churn is three times worse, at 6%. Hulu’s churn is even worse than Disney+’s, which has a third of its engagement.
In other words, there is no straight-line relationship between engagement and churn. Engaging content is certainly involved in the churn equation, but other factors make Netflix’s churn significantly lower than Disney+ and Hulu. And perhaps Mr. Iger is right. It could be that the advantage lies within Netflix’s technology.
Netflix has expended great energy developing personalized content discovery tools. These tools could significantly shorten the time between starting Netflix and finding something to watch compared to other services. Features like that could contribute to Netflix’s success at becoming the first service subscribers turn to when they are ready to watch. And becoming someone’s default service must make them much less likely to churn.
