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NetFlix CEO Reed Hastings
NetFlix CEO Reed Hastings

Subscribers flee, Netflix shares hit Add to ...

Following a false start on reshaping its mailed-DVD and Internet movie rental businesses, and a price hike that triggered a subscriber backlash, Netflix Inc. is still taking its licks.

The company lost more subscribers than expected in the third quarter, it reported Monday. Investors hammered Netflix stock following the late-afternoon earnings release, pushing it down 27 per cent in after hours trading – and compounding a dramatic slide in the stock since July, from nearly $300 (U.S.) to $87 after hours on Monday.

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“As people become more aware of the price increase, they change the plan or cancel,” chief executive officer Reed Hastings said during a conference call on Monday. “The focus for us is in building back our reputation and brand strength.”

The subscriber losses are bigger even than the company expected when it adjusted its forecast in September, revising its guidance for the three months ended Sept. 30. Originally, Netflix had expected to reach 25 million U.S. subscribers, then said in September it would be more like 24 million. In reality, it ended the period with 23.79 million U.S. customers, down 810,000 from the previous quarter. And the company expects its performance to continue sagging, forecasting the number of customers to its Internet streaming service will be about the same or slightly down by the end of December, and that the DVD-by-mail business will bleed another 2.6 million to 3.6 million subscribers.

Netflix is struggling to achieve a fine balance between the two sides of its business: a declining DVD service and a rapidly expanding Internet TV presence – and it has been stumbling, trying the patience of both shareholders and subscribers.

When the company attempted to address this divide, hiving off its DVD business into a separate service called Qwikster in September, Netflix raised the ire of customers who had already faced a price hike, and would now have to manage two accounts instead of one. It abandoned the plan shortly after.

This mismanagement has “hurt our hard-earned reputation, and stalled [U.S.]growth,” Mr. Hastings wrote in a letter to shareholders on Monday.

“In hindsight, it’s hard to justify,” Mr. Hastings said. “In practice, post the price increase, Qwikster became a symbol of Netflix not listening. And we quickly changed course on that.”

But it is clear Netflix envisions a distant future without DVDs. On Monday Mr. Hastings compared the DVD rental business to AOL dial-up Internet from 2002 until now, an antiquated service that has seen steady declines.

“Going forward, we will be very aggressive on promoting streaming Netflix and the benefits, and anyone who wants to also subscribe to DVD will be very welcome, but we are going to be pushing and promoting streaming,” he said.

(The price increases did not affect Netflix customers in Canada and Latin America – the international markets where it has expanded so far – because those markets only receive rentals via streaming over the Internet.)

Netflix has begun expanding internationally, although its U.S. business still accounts for 97 per cent of its revenue – and gave some indication Monday of its further plans. The company will continue that expansion in early 2012 with new offerings in the U.K. and Ireland. But the cost of expansion will mean Netflix will not be profitable “for some number of quarters” starting in the new year. It will not be pushing into any more countries until it is back in the black, Mr. Hastings said.

“We think the future is brightest by focusing on streaming.”

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