Column: “Peak Subscription” a Red Flag for US Economy and Markets: McGeever

Google, Amazon, Facebook, Apple and Netflix mobile apps logos are displayed on a screen in this illustrative image taken on December 3, 2019. REUTERS/Regis Duvignau – RC2VND9O022Y

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ORLANDO, Fla., April 27 (Reuters) – US consumers appear to be fatigued with online subscriptions and streaming, a lethargy that could be a reflection of where the broader economy is headed.

Rising inflation and the resulting ‘real’ income squeeze are forcing consumers to rethink their spending habits and one of the most explosive trends of the COVID lockdown era is threatening to reverse.

Netflix (NFLX.O) hoisted a red flag last week, announcing that subscriptions fell in the first quarter for the first time ever. It was also warned that the slide could accelerate. Continue reading

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Then Warner Bros Discovery (WBD.O) shut down its CNN+ streaming service less than a month after it launched after reportedly attracting just 10,000 viewers a day. Continue reading

Figures from Truebill, a personal finance app that helps around 2.5 million customers manage and cancel recurring charges, show that the average number of cancellations last July rose for the first time since the company’s inception in 2015 of new subscriptions exceeded.

The trend is accelerating. In March, new subscriptions accounted for 4.4% of all subscriptions, up from 7% a year ago, and 10.4% of subscriptions were canceled, almost double the 5.6% a year ago.

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

And Americans have subscribed to many online services during the pandemic lockdowns – everything from work-related software to language learning to video streaming and entertainment apps.

With budget savings for those able to work from home boosted by travel restrictions, mass gatherings and socializing, small monthly subscriptions to multiple online distractions have gradually been easily absorbed.

A survey of 1,030 adults of various ages in January found that 96% of people had at least one video streaming service, 80% had a music streaming subscription, followed by meal delivery services at 57%; Beauty, health and wellness at 51% and 56% who didn’t fit into any category.


But as jobs, entertainment and travel begin to return to some semblance of normality, and household savings are eroded by spikes in energy and food prices, many people are trimming their bloated debit lists.

Certainly, US consumption as a whole seems to have shaken off the threats of inflation, rising interest rates and the war between Russia and Ukraine so far. And many economists argue that consumers can shoulder these losses as long as labor markets hold up – the unemployment rate is just 3.6%.

US retail sales rose 0.5% in March and were revised sharply higher to 0.8% in February. But gasoline spending flattered overall retail sales data for March, and online spending posted softer 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 weak.

From a stock markets perspective, the tech and tech-related sectors that have outperformed since the onset of the pandemic are those falling the most in the current sell-off.

Perhaps complacency and over-the-top exuberance succumb to reality: there’s only so much television one can watch in one night, and it turns out people’s appetites for subscriptions are limited after all; Content is proving to be one of the most overinvested areas in the saturated tech industry.

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

The index (.IXIC) is down 23% from its November peak after rising 145% since the March 2020 low. For comparison, the S&P 500 index (.SPX) is down 13% from its January peak after rising 120% since March 2020.

The higher octane parts of the tech world are in even bigger trouble. Cathie Wood’s ARK Innovation ETF is down 23% this month alone and down 46% this year.

“Costs are rising and that’s starting to affect consumer behavior. Where are there easy ways to reduce spending? People are starting to look into subscriptions. Consumer psychology is changing,” said Julie Biel, portfolio manager at Kayne Anderson Rudnick.

According to Andreas Steno Larsen, an independent strategist, the investment outcome couldn’t be simpler. “Be long stuff that people need and short stuff that people don’t need right now. It’s that simple,” he advises, recommending investors to buy consumer staples stocks like Walmart (WMT.N) and Procter & Gamble (PG). N) versus consumer discretionary stocks such as (AMZN.O) and Tesla (TSLA.O).


Related columns:

– Alarm bells are starting to ring in the US housing market (Reuters, April 18) Read more

– Cold comfort as US yield curve steepens again (Reuters, April 8) Read more

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

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

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By Jamie McGeever Edited by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias under the Trust Principles.

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