Netflix cuts subscriber targets: Customer rebellion or just a blip?

Netflix cuts subscriber targets: Customer rebellion or just a blip?

Summary: Netflix changes its pricing and comes up 1 million subscribers short of what it expected.

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Netflix cut its subscriber outlook for the third quarter and said it would come up 1 million short of its initial targets as uncertainty over its pricing changes hurt customer acquisition.

On July 25, Netflix said that it expected to have 37 million subscribers---streaming and DVD---in the third quarter. Now it expects 36 million.

Netflix said that its financial outlook hasn't changed. In other words, the financials add up for Netflix. Wall Street is expecting Netflix to report earnings of $1 a share on revenue of $819.3 million.

The issue is obvious: Netflix split its services into streaming and DVD offerings. To get 1 DVD and streaming it's $15.98 and a hefty price increase. Netflix has expected churn to increase and it's worth noting that its financial outlook hasn't changed.

For Netflix the big question is whether this subscriber dip is just a blip or start of something more worrisome. Netflix stuck to its guns on the pricing change and said that the move was strategically sound. The company said:

Despite the guidance revision, we remain convinced that the splitting of our services was the right long-term strategic choice...We know our decision to split our services has upset many of our subscribers, which we don’t take lightly, but we believe this split will help us make our services better for subscribers and shareholders for years to come.

Uncertainty abounds

Netflix's warning about its subscriber totals comes at a bad time. Just a few weeks ago, Netflix and Starz, which accounts for multiple titles in the streaming library, have broken off talks.

The end of the Starz negotiations means that Netflix may be staring at a content hole in its streaming service in 2012. In other words, Netflix may have to spend more on content and still lose subscribers to other streaming services and DVD rental kiosks from the likes of Redbox.

Given the uncertainty, investors in Netflix weren't sticking around.

Analysts were mixed on Netflix's new subscriber outlook. Morgan Stanley analyst Scott Devitt noted that the reality of the price increases bites. Devitt said:

Netflix blazed the streaming trail and its success now positions the company with 1) difficult U.S. comps, 2) more competition and 3) an investment cycle. We believe the price increase had the negative short-term effect of reducing one of the best consumer value propositions on the Internet while giving Netflix a stronger long-term capital base from which to grow (international development and more U.S. content). We think there may be an investment case for Netflix shares that builds in the next year or so based on a thesis that Netflix business model / access to capital positions it well to acquire premium TV content directly from studios … but this content does not seem accessible until 2014/2015 at the earliest.

Devitt added that Amazon's tablet launch will also be a threat to Netflix.

Stifel Nicolaus analyst George Askew downplayed the concerns.

There is no crisis at Netflix in our view. Fewer 3Q11 domestic subscribers than guidance is a disappointing development. We believe we are seeing temporary churn related to the pricing change, but not a long-term crack in the business model. The company’s facts show the company’s subscriber mix is shifting even more rapidly to the streaming service. This trend should be positive for the company’s franchise and margins as spending on postage and fulfillment can more quickly be shifted to streaming content purchases. The real message here is that the DVD is even more dead than we thought; short the post office, but support your local postal worker.

Related:

Netflix, Starz to break up: One crazy ride ahead to Feb. 28

Topics: Hardware, Banking, Mobility

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47 comments
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  • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

    I just downgraded my service from 2 DVD + Streaming to Streaming Only. If they loose Starz content, then I'll cancel my service and stick with Redbox, and iTunes rentals. I think Netflix pulled the trigger too soon on price increases. They should have waited to see if Starz was going to pan out first. Now they are painted in a corner. Streaming will be worthless if they loose a bunch of content, and then they will go down hill fast.
    davidljames
    • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

      @davidljames
      FYI: It is lose instead of loose. Loose is when something is not tight.
      BubbaJones_
      • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

        @RicD_ Stop being a dick. This isn't the Webster Dictionary website.
        gplex86
      • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

        @RicD_
        It is just a typo man. Let it go.
        dhmccoy
      • Angry, people are,

        @RicD_ on this site.
        maromiga
      • Guys, enough.

        Is there a tendency towards grammer Nazism here? At times, yes.

        Is there an excuse to misspell words, given the availability on the PCs we're using to access & respond on these forums...PCs that will usually have access to a spellchecker, if not at least a quick check on a web dictionary? *No*.

        We're adults, we're (supposedly) educated, & we're not "txtng" or using l33t-speak here. If nothing else, as we're reading our words in our minds as we type we should be able to tell if it's spelled right or not.

        Plus, he didn't resort to name-calling or other insults. He calmly & rationally pointed out the misspelling.

        +1 to RicD_
        spdragoo@...
      • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

        @RicD_

        You may correct my error at any time.
        rdiablo
    • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

      @davidljames I kept my 2 DVD and eliminated streaming. I really don't understand why anyone would pay to stream from Netflix, their content really sucks and is not worth the money IMHO.

      "Despite the guidance revision, we remain convinced that the splitting of our services was the right long-term strategic choice???We know our decision to split our services has upset many of our subscribers, which we don???t take lightly, but we believe this split will help us make our services better for subscribers and shareholders for years to come."

      The only comment above which I believe is "better for shareholders". The rest is a bunch of BS...
      Masari.Jones
      • More of a personal opinion, though.

        @Masari.Jones

        I've had Netflix (streaming only) since January, & as yet have items in my Instant Queue that haven't been watched...primarily because I've still been adding items to it. It provides me with a better selection of TV shows & documentaries to watch than network or cable TV, & the selection of "classic" & "B-grade" films to watch is still cheaper than renting them one at a time.
        spdragoo@...
      • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

        @Masari.Jones
        It is great for my kids who are under 6, because it gives them a huge variety of programs that are "wholesome", unlike the cr@p on Nick and Disney. If it were for me, then I agree not worth it.
        davidljames
    • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

      @davidljames I switched to 2 DVD and eliminated streaming because the streaming content available compared to my Comcast Cable TV is very very very limited in regards to current TV Shows. Many of the current top rated shows are not available on Netflix.
      Also, if you want the Closed Captioning/Subtitles and extras like Deleted Scenes, the DVD is the way to go.

      I did watch a couple of movies that were Only available on streaming and that was nice, but not worth paying the monthly extra fee.
      John Hanks
    • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

      @davidljames

      Gee, how friggin anal do you have to be to point out someones typo or spelling error?
      NoAxToGrind
  • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

    I like Netflix, but they just do not get it. The main draw for me is the "Watch Instantly" feature so that I can watch movies, and TV shows that I missed. But Netflix is very, very slow in getting various seasons of TV programs. I mean when a show is in season six and they only have season one on Watch Instantly it is aggravating.
    Also with the competition from HBO Go and other sources, Netflix does not offer a unique service as it once did.
    If Netflix does not get it act together, it will be heaped on the pile of once great companies who died too soon.
    ric822@...
    • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

      @ric822@... +1 on that. Why can't they work out a deal with the studios to provide better content at a higher price? My kids find a lot of stuff to watch so it is worth the $8 but if they offered a lot more current content at say $30, I could ditch cable and just use netflix for TV and pay per movie on amazon if we want to watch a more recent release.

      What kills me is that they are so close to providing a really great service but they just don't quite get the job done.
      redhaven
      • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

        @redhaven

        I agree. They have to work harder in keeping their current subscribers happy and to stay put. I already ditched my cable and went all in with Netflix and dvds. We've been happy for the most part, but Netflix have to do its part in keeping us from straying. Work hard on getting other networks besides Starz. I won't mind paying a little more for a premium service, it still wont compare to the money I was handing out to Comcast each month for endless annoying commercials, and the bundles channels I didn't care about.
        dave95.
  • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

    Bottom line, poor value for the money and subscribers know it.
    NoAxToGrind
    • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

      @NoAxToGrind +1 here. I collect movies, but there are some movies I'd like to see before I buy. I was about to sign up for Netflix when they nearly doubled the DVD/stream package price. At the old price, it was a good value. At the new price, it's a waste of money for me. I'd rather wait for the movies to show up in Best Buy's bargain bin for $5 than waste $16 a month and still not own them. I can buy up to 36 bargain bin movies per year for the cost of their new plan. I'll never sign up for Netflix, now.
      BillDem
    • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

      @NoAxToGrind Very poor, but clearly 36 million subscribers don't know it.
      Masari.Jones
    • RE: Netflix cuts subscriber targets: Customer rebellion or just a blip?

      @DonRupert

      Don't subscribe Don instead of wasting energy complaining about it.
      DonRupertBitByte
    • I strongly disagree.

      @NoAxToGrind

      For the price of renting 8 movies per month (or maybe renting 3 from a Blockbuster Express or a brick-and-mortar rental store), I can watch a lot more movies. Not to mention having access to shows & documentaries that, unless I shell out $50/month or more for cable/satellite TV, I won't have access to.
      spdragoo@...