Netflix Fails To Meet Lowered Expectations On Subscriber Losses

Although Netflix (NSDQ: NFLX) has recently tried to make up for the PR disaster it fell into when it announced a major price hike for its DVD and streaming video subscribers in August, it was too late to avoid massive subscriber losses in Q3. In a shareholder note to investors, the company said that users fell to 23.8 million from 24.6 million three months earlier, a 3.3 decrease, but a larger decline than the company had forecast. That news sent the stock down about 24 percent an hour before the company’s 3pm Pacific earnings call.

As the revenue and profit numbers show, Netflix still had the kind of growth that most companies would die for. But Netflix had been riding so high up until July, when it said it would separate streaming and DVD subscriptions, the significant growth in profits and revenues wasn’t enough to reassure investors about its ability to recover quickly.

While it had a 42 percent increase in total subscribers to its video rental services, which was higher than many analysts’ expectations, the slowdown in new additions has surely spooked investors. Observers had been looking closely at how many subscribers Netflix would lose after it predicted it would lose 600,000 users. In the end, it lost about 810,000 during Q2.

Using the note to shareholders to express his latest mea culpa (the first mass apology was in September on video), Netflix CEO Reed Hastings wrote:

“The last few months, however, have been difficult for shareholders, employees, and most unfortunately, many members of Netflix. While we dramatically improved our $7.99 unlimited streaming service by embracing new platforms, simplifying our user?interface, and more than doubling domestic spending on streaming content over 2010, we greatly upset many domestic Netflix members with our significant DVD?related pricing changes, and to a lesser degree, with the proposed?and?now?cancelled rebranding of our DVD service. In doing so, we’ve hurt our hard?earned reputation, and stalled our domestic growth. But our long?term streaming opportunity is as compelling as ever and we are moving forward as quickly as we can to repair our reputation and return to growth.”

In July, Netflix said that as of September, it would no longer will offer a plan that includes streaming and DVD and would charge subscribers a choice: pay for two plans or select either DVD or streaming only. Unlimited online streaming stayed at $7.99; the DVD-only monthly fees range from $7.99 (one at a time) to $11.99 (up to two DVDs at once). DVD and streaming services would cost $15.98, with no discount. In other words, both services would cost users 60 percent more.

While Netflix has been plugging away with noteworthy international expansion plans, it will be a while until it can make up the domestic subscriber losses. It could take even longer to win back the good feelings that investors and remaining subscribers had associated with it.

That will certainly be the case in Q4, as Hastings noted that profits and revenues will be lower than expected. (And represented another factor in this afternoon’s stock plunge).

While Hastings did not spell out the name “Quikster,” the proposed brand of the separate subscription DVD service that was quickly abandoned 23 days after it was announced, the company did attribute a “temporary cancellation surge” to that ill-conceived plan.

“Our primary issue is many of our long?term members felt shocked by the pricing changes, and more of them have expressed that by cancelling Netflix than we expected,” Hastings wrote.

In the interim, Hastings insisted that Netflix had indeed learned from its mistakes and has heard the criticisms loud and clear. He still maintains that the pricing for DVD and streaming video are each competitive and that growing its foreign business, such as plan to roll out out its services in the UK and Ireland early next year, will ultimately put it back on top. Right now anyway, the company’s image has been sorely dented and as Netflix embarks on new challenges, it does so from a weaker vantage point that it had just a few months ago.