What Does Netflix’s One Million Drop In Subscribers Tell Us?

So it looks like the honeymoon period with Netflix (NSDQ: NFLX) may be over. Today’s news that it has lost one million customers after a price hike has sent the stock down by nearly 19 percent in trading, as investors get to grips with what they value most in business that straddles the worlds of streaming and legacy entertainment services.

In its note to investors today, Netflix tried of offset its news about a decline in customers by noting that it expects to maintain earnings guidance for the quarter (more details on the pricing changes and guidance here, PDF of original note to investors here).

Maintaining earnings guidance, of course, is not a bad thing — but subscriber numbers are potentially a much more metric a for a company like Netflix than hitting financial targets. If revenues are apples, then subscribers are the trees that can bear many more apples over time.

Some research out from PwC earlier today highlights some of the wider consumer trends that go some way to explaining why it is that Netflix — while delivering some impressive results by actually getting consumers to sign on for its streaming/rental services — is still finding it hard to convince everyone to go down this route.

Using data it picked up from an online survey and several focus groups earlier this year, PwC shows how there is still a very strong demand for legacy home entertainment services: that is, physical DVDs.

» It found that more than half of respondents rent movies fairly regularly — between once per week and once per month. Renting by mail — the service that Netflix considers too costly compared to online rentals, and is trying to cut down — is still very popular against online subscriptions (52 percent versus 56 percent), and with Netflix losing one million subscribers it shows that they are not migrating, but simply leaving.

» Free content is still keeping people happy. More than half of the surveyed respondents — 53 percent — stream movies for free, and 54 percent stream TV content for free. That means there isn’t yet a compelling enough reason to choose the paying service for the majority of people over a free offering. (PwC notes it made no distinction between legal and illegal services, which is probably similar to most people.)

» Going into the lower tier of entertainment consumers, the numbers on DVD rentals continue to remain robust. PwC found that more than 40 percent of respondents who said they watch a film or TV show on demand at least once every three months are getting these programs either through DVD rentals or via physical copies borrowed from others.

Given Netflix’s rollout into developing markets like Latin America, it’s not clear that those trends will be moving in a more digital direction — if anything, Netflix might face even more of a challenge.

Full table of results below: