Netflix Continues To Bleed Subscribers
October 25, 2011

Netflix Continues To Bleed Subscribers

Netflix continues to plunge as third quarter revelations shows the company continues to lose customers and share value after rough and rocky business decisions that left CEO Reed Hastings making apologies and trying to make a comeback.

Netflix shares plunged on Tuesday after the Internet movie streaming company announced it ended September with 23.8 million US subscribers, an 800,000 member drop from June and far worse than the 600,000 the company had initially forecast back in September.

Shares had fallen $42.65 (35.9 percent) to $76.19 in morning trading Tuesday, down from more than $300 per share just 3-and-a-half months ago.

Netflix Inc. did report better-than-expected financial results for the third quarter, but that was drowned out by the tumult of subscriber cancellations, expense controls and a one-time tax benefit, said Wedbush analyst Michael Pachter.

And the bad news hasn´t even started. Netflix said it expects more customer departures in the coming months, many enraged because of price increases of 60 percent in July, and probably more because of the company´s Qwikster calamity.

The Netflix website was flooded with angry customers, many of which canceled their service, especially on the DVD-by-mail side.

Now the company is forecasting losses in 2012 because of costs to offer content in the UK and Ireland, and will delay further expansion until profitability is restored. The company does expect total US subscribers to be “slightly up” in the coming quarters, while DVD subscriptions continue to wane. It also expects content spending will “nearly double” in 2012 overall.

“We expect the costs of our entry into the UK and Ireland will push us to be unprofitable on a global basis; that is, domestic profits will not be large enough to both cover international investments and pay for global G&A and technology and development,” Hastings said in a letter to shareholders accompanying its quarterly report.

Netflix is forecasting earnings per share of between 36 cents and 70 cents and revenue of $841 million to $875 million for the upcoming fourth quarter.

“The guidance is well below what people were expecting. I think they are hitting the reset button here ... to set a bar for themselves going forward that they can achieve,” Piper Jaffray analyst Michael Olson said.

Investors are trying to estimate how severe the subscription fallout will be due to the price increase and the aborted plan to turn its DVD-by-mail service into Qwikster.

“To show even modest US subscriber growth in the fourth quarter will require significant ramp-up in Netflix´s marketing spending,” said Paul T. Sweeney, director of research for Bloomberg Industries.

Hastings downplayed the likelihood of a big increase in marketing efforts.

“Our streaming marketing has been very effective in the past two years,” Hastings told Bloomberg. “We are going to work on improving the user interface, expanding to more platforms and delivering more content. There´s no grand gestures, there´s just a lot of steady and intense efforts.”

Hastings said that subscriber losses should slow in the coming months “as the price effect washes through.” The company said it would return to profitability by increasing its global streaming subscriber base faster than costs rise. It also plans to raise its streaming margin by 1 percent every quarter.

Domestic streaming subscriptions are forecast to decline this month, level off in November and rebound in December to end at 20 million to 21.5 million, Netflix said. DVD subscriptions will fall “sharply” to 10.3 million to 11.3 million customers.

Netflix´s woes are good news for rivals, such as Dish Network´s Blockbuster, and Wal-Mart´s Vudu, that are ramping up their online entertainment offerings to better compete with the online streaming service.

Netflix said in a letter to shareholders that it was “moving forward as quickly as we can to repair our reputation and return to growth.”

Hastings said he has no plans to step down as CEO and declined to comment on discussions with Netflix directors.


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