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Customer Defections Wallop Netflix

Customer Defections Wallop Netflix

Netflix took a pounding on Wall Street Tuesday as the results of its summer price reshuffle came into focus. The company lost 800,000 customers in the third quarter -- 200,000 more than expected. It also projected a loss for its fourth quarter as it attempts to expand to England and Ireland. The company's stock value plunged 30 percent.

By Rachelle Dragani
10/25/11 9:15 AM PT

Unexpectedly high customer losses for Q3 sent Netflix stock into a tailspin in after-hours trading Monday, driving share prices down more than 30 percent overnight. The online video and DVD-by-mail provider also projected a net loss for the quarter ahead as it attempts to expand into new overseas markets.

After a price reshuffling in July, the company expected to lose around 600,000 customers. Instead, Nexflix's total customer count now stands at 23.79 million, down 800,000 from the 24.59 million it had three months ago.

Despite the heavy customer losses and highly publicized company missteps, such as a scuttled attempt to re-brand its DVD service, revenue was still higher than expected. The entertainment provider brought in $822 million, more than the estimated $812 million.

The company's fourth quarter outlook didn't sit well with investors, however. Even though Netflix predicts that domestic streaming subscriptions will rebound in December up to 21.5 million users, it projected a continued decline in DVD subscriptions, down to 10.3 million.

Netflix also announced that it plans to expand to England and Ireland. Domestic revenue won't cover the necessary investments for launching abroad, so it is anticipating a global consolidated net loss for the fourth quarter as well. In a letter to investors, CEO Reed Hastings said it would be Netflix last global expansion until the company restores profitability.

Investor confidence plunged on the outlook, and company shares tumbled in after-hours trading. They recovered only slightly Tuesday morning, at which time they hovered around $77.50. Last July, NFLX was trading at a high of just under $300 per share.

Netflix didn't provide further comment to the E-Commerce Times.

Nobody's Fault but Mine

Customers started their exodus after a July announcement from Netflix that the company would divide its streaming and DVD services, charging separately for each, whereas they had previously been available as a package for as low as $9.99. Customers who wanted both DVDs and streaming capabilities had to buy the two separately for $7.99 each.

Seeing a sharp decline in subscriptions after the switch, the company briefly announced its plan to rebrand the DVD service as a separate entity called "Qwikster." Customer reaction caused the company to backtrack on that idea within weeks.

The company took another hit whe media holding company Starz said that once its contract with Netflix ends in February, it will stop providing new movies and shows from content providers Sony Pictures and Walt Disney Pictures to Netflix's online service.

In the data released by the company, Hastings acknowledged the missteps and apologized to shareholders.

Competition Headed Netflix's Way

Netflix's original move to reshuffle prices was met with dismay from customers. Inside the industry, though, it was largely understood as a move to appease content providers concerned with getting their fair share of revenue, though the company apparently underestimated the resulting customer loss.

"This is a result of all the price changes, and consumers are essentially responding to the negative headlines and price increase for getting both a DVD and streaming subscription purchase," Andy Hargreaves, senior research analyst at Pacific Crest, told the E-Commerce Times.

The company anticipated losses after the price reshuffling, but not to the extent it saw.

"The stock being down is a combination of misguidance from the third quarter, and the guidance they gave us for the fourth quarter was weak," Brett Harriss, research analyst with Gabelli, told the E-Commerce Times.

Netflix indicated Monday it feels confident that it can regain its foothold as a lead entertainment provider. Since online video is in a relatively early stage, competition hasn't been a huge challenger to Netflix yet.

"Competition is always a factor, but right now the reaction is relative to the price changing and Qwikster that consumers are reacting negatively towards," said Hargreaves.

Though online video providers such as Hulu, HBOGo, and possible Apple TV and others haven't emerged to be rising stars yet, Netflix hasn't proven to consumers or investors that it can continue to be a dominant force if those competitors grow in prominence

"I would say the competition has not yet become an issue. That's not to say that it won't but the results that we are seeing today are driven mostly by Netflix's missteps," said Harriss.


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