Column-‘Peak subscription’ a red flag for U.S. economy and markets: McGeever

3 mins read

By Jamie McGeever

ORLANDO, Fla. – U.S. consumers appear to have online subscription and streaming fatigue, a lethargy that may be a reflection of where the wider economy is heading.

Soaring inflation and the resulting ‘real’ income squeeze is forcing consumers to rethink spending habits and one of the most explosive trends of the COVID lockdown era is in danger of reversing.

Netflix raised a red flag last week, announcing that subscriptions fell in the first quarter for the first time ever. It also warned that the slide could accelerate.

Then Warner Bros Discovery shut its CNN+ streaming service less than a month after it launched, after it reportedly attracted as few as 10,000 viewers a day.

Figures from Truebill, a personal finance app that helps some 2.5 million customers manage and cancel recurring charges, show that the average number of cancellations outpaced new subscriptions last July for the first time since the company was founded in 2015.

The trend is accelerating. In March new subscriptions were 4.4% of total subscriptions, down from 7% a year earlier, and 10.4% of subscriptions were canceled, almost double the 5.6% from a year earlier.

“People are tightening the purse strings and being more selective about where they spend their money,” Yahya Mokhtarzada, Truebill’s chief revenue officer, told Reuters. “We may have hit peak subscription.”

And Americans subscribed to a lot of online services during pandemic lockdowns – anything from work-related software to language learning or video streaming and entertainment apps.

With household savings for those able to work from home boosted by restrictions on travel, mass events and socializing, incremental small monthly subs for multiple online distractions were easily absorbed.

A survey of 1,030 adults of varying ages by Wethrift.com in January showed that 96% of people had at least one video-streaming service, 80% had a music-streaming subscription, followed by meal-kit delivery services at 57%; beauty, health, and wellness at 51%, and 56% that didn’t fit a category.

But with workplaces, entertainment and travel gradually returning to some semblance of normality, and household savings being burnt off by energy and food price spikes, many people are pruning back their bloated direct debit lists.

To be sure, U.S. consumption overall seems to have so far shrugged off threats posed by inflation, rising interest rates and the Russia-Ukraine war. And many economists argue that as long as labor markets remain firm – the unemployment rate is just 3.6% – consumers can shoulder these hits.

U.S. retail sales rose 0.5% in March and were revised sharply higher to 0.8% growth in February. But gasoline spending flattered the overall retail sales data for March, and online spending posted back-to-back declines for the first time in more than a year.

Crucially, average nominal wage growth is 5.8%, well below consumer price inflation of 8.5%, and consumer sentiment is fragile.

TECH WRECK

From the stock market’s perspective, the tech and tech-related sectors that outperformed since the outbreak of the pandemic are the ones falling the most in the current selloff.

Perhaps complacency and over-exuberance are succumbing to reality: there is only so much TV you can watch in one night, and it turns out there is a limit to people’s appetite for subscriptions after all; content is proving to be one of the most over-invested spaces in the saturated tech industry.

The Nasdaq’s underperformance this year partly reflects the realization that the flow of subscription-based income streams for years to come might not be as steady as previously thought.

The index is down 23% from its November peak, after soaring 145% from the March 2020 low. To compare, the S&P 500 index is down 13% from its January peak, having rallied 120% from March 2020.

The more high-octane parts of the tech world are in even deeper trouble. Cathie Wood’s ARK Innovation ETF has slumped 23% just this month, and is down 46% this year.

“Costs are going up and that is starting to impact consumer behavior. Where are the easy ways I can cut back spending? People are starting to look at subscriptions. Consumer psychology is changing,” said Julie Biel, portfolio manager at Kayne Anderson Rudnick.

According to Andreas Steno Larsen, an independent strategist, the investment upshot could not be more straightforward.”Be long stuff that people need and short stuff that people don’t need for now. It is as simple as that,” he advises, recommending investors buy consumer staples stocks like Walmart and Procter & Gamble versus consumer discretionary stocks like Amazon.com and Tesla.

Related columns:

– U.S. housing market alarm bells begin to ring (Reuters, April 18)

– Cold comfort in re-steepening U.S. yield curve (Reuters, April 8)

– Q1 investment verdict? ‘Not good, but not horrible’ (Reuters, March 30)

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Paul Simao)