Netflix's Streaming Growth Slows

Shares Fall As Much As 17% in After-Hours Trading

Netflix added 1.16 million net streaming subscribers in the U.S. for the third quarter of 2012 -- at the low end of its expectations -- and the company said it will miss its target of adding 7 million subs for the full year.

After the earnings were released, Netflix shares fell as much as 17% in after-hours trading. Prior to the earnings announcement, Netflix shares closed up 0.5%, to $68.22 per share Tuesday.

“While we are not growing membership as fast as in 2010, we think that over time nearly all U.S. households will be broadband households, nearly all video will be Internet video, and that as our content and member experience continue to improve faster than competitors, our long-term domestic market opportunity remains 2-3x that of linear HBO,” CEO Reed Hastings and CFO David Wells said in a letter to shareholders.

At the end of September, Netflix had 25.1 million domestic streaming customers and 4.3 million non-U.S. streaming subs (after adding a net 690,000 in the period).

For the fourth quarter of 2012, Netflix expects the U.S. streaming membership base to increase to between 26.4 million and 27.1 million, up more than 20% year over year from 21.7 million members in Q4 2011. However, the company had anticipated adding 7 million domestic customers this year.

Netflix previously said it expected 1 million to 1.8 million U.S. net adds for the third quarter, citing NBCUniversal's coverage of the 2012 London Olympic Games as potentially having a "negative impact" on U.S. viewing and subscriber signups for the quarter.

Overall, Netflix reported revenue of $905 million for the third quarter (versus $822 million a year ago) and net income of $8 million (compared with $62 million in the year-ago period). For the fourth quarter, Netflix projected revenue of $919 million to $943 million and earnings ranging from $2 million net income to a $13 million net loss.

Company executives said content obligations have “stabilized” at this point. At the end of Q3, Netflix’s streaming commitments were flat sequentially at $5 billion, with $2.1 billion due within the next 12 months, Hastings and Wells said.

Netflix’s stock still has not recovered from the hit it took after the company's decision last summer to split apart DVD and streaming plans, a change that amounted to a price hike for most customers.

In the third quarter, Netflix's previously exclusive online distribution deal with Epix expired, and added the premium programmer's content to its Prime Instant Video service.

"While we were interested in keeping Epix movies exclusive to Netflix, we and Epix could not reach terms that made sense to both of us. We could better spend the incremental dollars on high-profile TV titles," Hastings and Wells said, adding that Epix's movies constitute only about 5% of time spent viewing by members.

"In general, to maintain a great service and low prices, we have to be choosy about what we are licensing," the executives added.

Netflix touted its original-content strategy, with four original series to debut exclusively on the service in 2013 (House of Cards on Feb. 1, followed by a fourth season of Arrested Development in the spring, then Hemlock Grove and Orange Is the New Black) plus a second season of Lilyhammer.

"Our goal is to produce unique and compelling serialized content for a cost comparable to similar
licensed exclusive content, using these original series to strengthen our reputation and build deeper
emotional ties to consumers," Hastings and Wells said.

Subscribers of the Netflix DVD-by-mail service, available only in the U.S., fell by a net 630,000 to 8.61 million. "We expect DVD subscriptions to continue their decline but we’re pleased the decline slowed in Q3," Hastings and Wells said. In the fourth quarter, the company expects DVD subscribers to decline by a net of 460,000 to 760,000 (to 7.85 million to 8.15 million).

Also during the quarter, Netflix launched a new interface for iPhone and Android smartphones and introduced a feature to let smartphone users control the Netflix TV experience on the Sony PlayStation3.