by BRIAN STELTER
Sept 15, 2011
Some of Netflix's popularity lies in its simplicity — in its ability to serve up films and TV shows and renew subscriptions automatically, without any thinking on the part of the customer.
Until now, that is.
A new pricing scheme is forcing Netflix's 25 million customers to think about which service they want — access to online streams, access to DVDs by mail or both — and some have decided to rethink the monthly splurge entirely.
On Thursday, the company said that customers were canceling their subscriptions in greater numbers than it expected, about a million in total, causing a projected quarterly loss in customers for only the second time in its history. The company did not signal a shift in direction or a change its financial guidance for the quarter; still, its stock dropped almost 19 percent in heavy trading on Thursday, closing at $169.25 and worsening a season-long selling streak. In July, the stock peaked at $304.79.
The downward revision reflects the negative reaction to Netflix's decision, announced in July and adopted this month, to separate its DVD-by-mail service from its faster-growing Internet streaming service. Before, DVD-by-mail was a $2 add-on for some streaming subscribers; now, each service now costs $8.
Like many customers, Steve LoGiudice, a health care analyst from Wooster, Ohio, re-evaluated his Netflix spending this summer when the change was announced. His 6- and 9-year-old children watch TV episodes through Netflix, so he kept the streaming service, but he stopped paying for DVDs by mail.
"If they didn't radically change their cost structure," Mr. LoGiudice said of Netflix, "we probably would have just kept paying the old rate without much thought or review."
Netflix's subscriber base had been on a reliably upward trajectory since its founding more than a decade ago, with one slight exception in 2007. The company — widely praised for making it easy to stream films and some TV shows via the Internet — had 24.6 million customers at the end of the second quarter of the year, when it last reported figures to investors. Back then, it expected that it would end the third quarter with 25 million, three million of whom would opt only for the DVD service.
But early Thursday morning it lowered its subscriber estimates for the third quarter, which ends in two weeks, to an expected total of 24 million, a quarterly decline of 600,000.
The decline is due in large part to customers who were unhappy about the price changes. Netflix now expects that 2.2 million customers will opt for DVDs by mail only.
Investors and the Internet video-consuming public have been paying close attention to Netflix as a leader in the growing over-the-top video industry, a reference to the fact that Netflix piggybacks on other companies' Internet connections.
Netflix has proved that many people will pay for a premium selection of films and shows online, helping to create a new revenue stream for media companies and sparking competition from Hulu, Amazon and other competitors. But Netflix also has shown that customers can reject what they perceive as an unfair deal.
Netflix knew that some customers would drop out when the changes were instituted. It had previously cautioned investors that the change would benefit the company, but not until the fourth quarter. "Despite the guidance revision, we remain convinced that the splitting of our services was the right long-term strategic choice," the company wrote in a letter to shareholders on Thursday.
The splitting of the services, the company said in July and again Thursday, will give it more money to spend on content for its streaming service, which is widely recognized as the future of the company.
Some analysts backed Netflix. While noting the short-term uncertainty, Anthony DiClemente of Barclays Capital said in an analysts' note Thursday that Netflix "remains among the best user experiences for watching video online" and credited it for remaining "disciplined on costs" and pursuing international opportunities.
Earlier this month, Netflix started new streaming services in Brazil, Mexico and many other Latin America countries. Previously the service was available only in the United States and Canada.
Netflix faces the same hurdle in every country it opens up shop: a need for compelling content. That fact was reaffirmed in the United States earlier this month when the premium cable channel Starz, which supplies Sony and Disney films to Netflix, said it would stop doing so in February when its contract expires.
The films from Starz helped to jump-start Netflix's streaming service several years ago, but according to Starz, the two companies could not come to terms on a new contract. Netflix said it would acquire content from other sources, essentially spending its subscribers' money elsewhere.
