Fool.com Story Disputes Netflix Churn Numbers

Hacking Netflix reader Aron posted a story on The Motley Fool with his analysis of the Netflix "churn" numbers. He makes an interesting argument:

Netflix's churn formula is unprecedented in my research. There is not a single churn calculation method used by all subscription-type companies, but there is no other company I could find that uses this particular one. Since a new trial subscriber that fails to convert to a paying subscriber is counted as a churned subscriber, Netflix seeks to include all new trial subscribers in the denominator of their formula. There should be no ideological problem with this goal. However, in implementing this goal and attempting to remain simple, they over-simplified. There is a flaw in the formula which leads to increasing inaccuracy as true underlying churn increases and/or growth rate increases. Netflix has both a high churn and high growth rate. The conclusions I have found are two-fold:

1) An accurate measurement of churn shows an increase from Q403 to Q104, not a decrease.

2) In absolute terms, the churn measurement is roughly 20% inaccurate to the low side for Q104.

I've seen several different views on how Netflix calculates churn. What do you think?

Comments

[Elvis Presley]

This post could have been in Aramaic for all i understood of it.

[Peter]

I do not think Aron's calculations are necessarily more accurate than Netflix's. I would dispute his claim that the denominator should be divided by 2, but the number of canceled subs should not be. This makes no sense. His logic being that the current subscribers had a full 3 months to cancel so the average number of subscribers during that period should be divided by 2. Fine, then why not divide the actual number of canceled subs by 2? They had 3 months to cancel also. It would only be right to compare the average number of cancellations to the average number of subscribers.
I would be more interested in knowing how many people cancel after some period of time. More of a retention rate figure than a churn figure. What percentage of new subscribers are still subscribed after 3 months, 6 months, 1 year, 2 years, etc.?
The costs of obtaining that subscriber in the first place are fixed (variable over time, but fixed in time for that particular subscriber). So after a given amount of time that subscriber is basically all profit. If people are signing up, and leaving after a short period of time, then Netflix isn't making any real profit off them, irregardless of how many new subscribers they are claiming to add.

[Fred]

Rather than some dumb percentage or ratio, wouldn't it better if you knew how many new people try Netflix, how many drop out and how many stay. How many stay for 3 monthes well you get the idea. Numbers not statistics.

[AceInMySleeve]

There was some good discussion and refinement on the Motley Fool board after I made that post and here was the general consensus:
1) The formula I suggested was more accurate then Netflix's but an even better one is: starting subs + ending subs) / 2 for the denominator. This better represents the "average # of subscribers" which is the goal for the denominator.
2) If Netflix were to go 1 step further, it would be even more useful if they just released the number of new trial cancellations as distinct from total cancellations.

In response to the points above:

Elvis: I apologize since Aramaic is my original language and I still think in it during difficult posts or confrontations with Romans. You see I'm not actually dead either.

Peter: You would never divide the numerator by 2. If you are interested in more detail you can email me.

Fred: All of those numbers you mention are given by Netflix in their SEC filings. The churn calculation is very useful though, and all subscriber based businesses provide it.

Following the stock price drop recently, there has been a class action lawsuit filed based on this churn problem.