Netflix saw it coming, but that doesn't make it any easier to swallow. The video streaming and DVD rental company has seen a mass exodus of subscribers since its controversial price increase, and the company doesn't expect to recover in 2012.
The news caused Netflix's stock to plummet 27 percent to $87 a share in overnight trading. That dip continued on Tuesday, with Netflix down 36 percent in morning trading. In a 17-page letter to shareholders, CEO Reed Hastings and CFO David Wells explained its difficulties and outlined a recovery plan.
"Although 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 customers with our significant DVD-related pricing changes, and to a lesser degree, with the proposed-and-now-canceled rebranding of our DVD service."
More Losses Expected
That's a fairly accurate assessment, though perhaps an understatement. Based on the fact that Netflix saw 810,000 customers bail out, Netflix may have done more than "hurt our hard-earned reputation" and "stalled our domestic growth" as it explained to shareholders.
Considering that Netflix was adding at least 1 million new subscribers each quarter for nearly the past two years, the reversal of fortune is giving employees and stakeholders plenty of reasons for concern.
Netflix met analyst expectations in its third quarter. The company posted $62 million, or $1.16 a share. Netflix even posted record revenue of $822 million in the quarter, which exceeded analyst expectations. Nevertheless, bleeding nearly a million customers, as well as the high cost of international expansion and the reality of an unprofitable business in the United Kingdom and Ireland "for a few quarters" next year caused analysts to downgrade the stock.
"The long-term potential for streaming-only in the U.S. and international markets remains intact," JP Morgan analyst Doug Anmuth wrote in a note to clients. "[But] start-up costs in Latin America and UK/Ireland are likely to come in much higher than we anticipated." Anmuth downgraded the stock from "overweight" to "neutral" on Tuesday.
Analyst: Take Action
Rob Enderle, principal analyst at Enderle Group, said Netflix can recover from this fiasco, but the company has to do something much different from what it has been doing in the past few months. If Netflix plans to maintain its price increase, for example, the company needs to offer customers evidence that the service is still a good deal even at higher prices. Right now, Enderle said, it just looks like a new tax.
"Netflix needs to match up what people are paying with what they think the service is worth. Netflix can do that in two ways. They can either reduce the price or make an effort to convince people that it's still a good deal," Enderle said. "Either one will work, and often companies will try to do both. But you can't just sit back and let the storm continue because as long as people think they are overpaying, people will move away from the service over time."
Posted: 2012-08-05 @ 12:14pm PT
I am not getting any sound from any of the movies that I try today, is something wrong? Please tell me if there is something I can do.
Posted: 2012-01-18 @ 6:02am PT
What's up with the long wait for new release movies? Is this the future of netflix dvd movies? If so I will reconsider what their value will be in my future use of this service.