Netflix Drops 800,000 U.S. Subscribers In Q3

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Unhappy Netflix customers voted with their wallets, with the video-rental company dropping 800,000 U.S. subscribers in the third quarter after an ill-advised decision to split apart its DVD-plus-streaming plans -- and the company anticipates shedding at least 2.6 million DVD accounts in the fourth quarter.

The company previously said it expected to lose 600,000 domestic subscribers in the quarter ended Sept. 30 as a result of the price change, which raised rates for many by 60%.

"Our primary issue is many of our long-term members felt shocked by the pricing changes, and more of them have expressed that by cancelling Netflix than we expected," Netflix CEO Reed Hastings and CFO David Wells wrote in a letter to shareholders.

For the third quarter, Netflix posted $822 revenue (up 49% year over year) and net income of $62 million (up 63% from a year ago).

However, Netflix said its revenue and net profit will be lower in the fourth quarter of 2011 than expected as it suffers more fallout from the pricing change. The company anticipates overall revenue of $841 million to $875 million, and net income of $19 million to $37 million.


Overall, Netflix ended September with 23.79 million U.S. customers and 1.48 million international subs, for a total of 25.27 million worldwide.

That's down 29,000 from the previous quarter, when Netflix had 25.56 million subscribers (24.6 million in the U.S., 970,000 in Canada). In the third quarter, it began selling service in Mexico and 42 countries in Latin America and the Caribbean.

Earlier Monday, Netflix announced it plans to expand to the United Kingdom and Ireland in early 2012. Outside the U.S., it offers only video-streaming services.

The net loss of 800,000 U.S. subscribers represents 3.4% of its current domestic subscriber base. It's only Netflix's second ever customer decline, after a 1% drop in the second quarter of 2007 in the face of ramped-up marketing by Blockbuster of its own DVD-by-mail service.

In the U.S., Netflix anticipates ending 2011 with 20.0 million to 21.5 million streaming subscriptions and 10.3 million to 11.3 million DVD subscriptions. That's compared with 21.5 million streaming and 13.93 million DVD subscribers at the end of Q3. Internationally, it expects to have 1.6 million to 2.0 million subs.

Since July, Netflix has been on the receiving end of customer ire after the company eliminated its bundled DVD-plus-streaming plans. Netflix now offers U.S. customers the streaming-only plan for $7.99 per month, as well as DVD plans starting at $7.99 per month for one disc out at a time. The price change went into effect for existing customers Sept. 1.

Then Netflix last month made another marketing gaffe in announcing it would split off DVDs into a separately operating unit called Qwikster -- before doing an about-face and scrapping the idea in the wake of subscriber complaints.

"[W]e greatly upset many domestic Netflix members with our significant DVD-related pricing changes, and to a lesser degree, with the proposed-and-now-cancelled rebranding of our DVD service," Hastings and Wells wrote. "In doing so, we've hurt our hard-earned reputation, and stalled our domestic growth."

About 7% of new members in the third quarter opted for the $15.98-per-month combination of streaming and one DVD out at a time, Netflix said. "One could argue that this percentage would increase if we reduced the price for hybrid [plans], but if we were going to lower prices, we would do it on streaming," the executives wrote.

Netflix also could suffer a blow in February 2012, when its streaming deal with Starz Entertainment expires.

But the company has downplayed the loss of Starz. According to Hastings and Wells, Starz content is currently running about 6% of viewing hours on the service. Factoring in movies from Sony -- which Starz pulled from Netflix earlier this year because of a clause that would have triggered a significant price escalator in what it pays the studio -- the viewing hours would rise to about 10%.

"From this perspective, Netflix has about ten times the streaming content selection of full Starz, in terms of what consumers actually choose to watch," they said.