Canceling Streaming Services: What Does it Say About the Economy?
Netflix’s latest quarterly report showed that consumers may be responding to price hikes by canceling services. Netflix expected to grow by 2.5 million subscribers this quarter but ended up losing 200,000. That was a net swing of 2.7 million from expected additions to realized customer losses.
Cable subscribers shifted to streaming in increasing numbers for the past decade or so. The idea seemed foreign because cable, network TV, and DVD rentals were the only way to consume content at the time. Streaming not only allowed for nearly 80% of US households to watch anything they wanted on-demand, but it allowed for the chance at saving money. Cable subscribers typically don’t want every single channel in their cable packages, therefore subsidizing the other channels that go unwatched. Streaming allows subscribers to pay for the programming they watch. Now the consumer is bombarded with so many streaming choices that to watch them all would end up costing more than a cable package.
But streaming subscriptions are getting another look as budgets are being squeezed by inflation. It is much easier to pause or cancel subscriptions because viewers can simply perform these actions through the app. Gone are the days when you would have to call in, wait on hold, and give several reasons to cancel your cable service. My car gets more expensive to fill up, bye Netflix. The impact of inflation may already be doing the Fed’s job to a certain extent. As a reminder, the Fed sees too much demand in the economy and needs to raise interest rates to lower that demand. At least to the level where it meets available supply.
Generally cutting back on non-essentials can be a good thing.
With the cost of living broadly moving up, maybe the final straw was a price hike from a streaming service that was created as an alternative to costly cable packages. This could be a blip in the overall spending of streaming subscribers as the number of options has increased exponentially. My family subscribes to Netflix through our cell phone plan, Apple TV+, Hulu, and Disney+. Tack on the cost of high-speed internet, and we’re right back where we started in terms of monthly subscription costs. The wide breadth of options would seem to make it easy to cancel any one of these services (or multiple).
Netflix is also competing with changing dynamics at home. With fewer restrictions on travel, we’re expecting lots of pent-up demand to go on a vacation. Getting away has gotten significantly more expensive too. Price of food is up 10%, gas up 26%, and hotels are up 13%. Just a few months ago, durable goods experienced high inflation and still are. When the pandemic hit, people spent money on home remodels and online shopping. Now there are places to go and we’re seeing a shift to services.
Hotels have increased prices due to a lack of labor. Almost all of them are at full capacity even though they have plenty of vacant rooms. They simply don’t have enough staff to cater to visitors. The price of vacationing will eventually be a strong consideration to future vacationers. Travel demand has already gone above pre-pandemic levels.
Nearly every component of traveling has gone up in price. This has to have an impact on our budgets. If not now, eventually. We’re starting to see that price increases in travel could eventually have their upper limits.
It feels like a herd is moving from one part of the economy to another. When the lockdowns started, there was a shortage of home gym equipment. Then there was a shortage of lumber and home building materials. Then a car shortage. I have never heard of a vacation destination shortage. I guess we’re about to find out…
In a similar crunch that we’ve experienced with the supply chain, airlines only have so many seats and so many pilots. In keeping with the theme of everything going through shortages, the ATP estimates we have a shortage of 208,000 pilots. Similar to the trucking industry, the airline industry experienced a rash of early retirements. Let’s not forget that airlines offered voluntary early retirements during the pandemic.
The bottom line is the Fed needs to raise rates to tame inflation by lowering demand. In time, we will see if other factors are in play that might help meet the Fed halfway. Supply chains continue to recover, and our spending is shifting to different parts of the economy. The Fed is targeting a benchmark interest rate of 2.5% by the end of the year.
Spending is fluid and shifts all the time. Geopolitical issues arise. Is that the appropriate level of interest rate to slow down inflation? The risk is the Fed overshoots and slows down the economy too much. Undershoot, we will have even more persistent high inflation.
The national savings rate peaked at 34% during the pandemic and most recently hit a low of 6.3%. Can the economy still run hot when savings are depleted? Consumers without savings can borrow, which the Fed is making more costly.
Ultimately, companies may be experiencing the upper limits of price increases, likely a good thing for consumers. They’ll need to be more mindful or may suffer a similar fate as Netflix.
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