Investors sent Netflix shares plummeting Thursday after the video services company cut U.S. subscriber estimates for the third quarter of 2011 by 1 million -- meaning it expects to lose about 600,000 domestic customers -- following a pricing plan change that went into effect this month.
After dropping 15% in early-day trading, Netflix shares shed 19% of their value, finishing the NASDAQ trading session at $169.25.
In July, Netflix threw many customers into a fury after announcing a price change that eliminates the combined DVDs-by-mail and 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.
Previously, Netflix expected 25 million total U.S. subscribers, comprising 10 million streaming-only, 3 million DVD-only and 12 million on both plans. On Thursday, the company said it now anticipates 24 million total subs -- 9.8 million streaming-only, 2.2 million DVD-only and 12 million on both.
At the end of June, Netflix had 25.56 million subscribers (24.6 million in the U.S., 970,000 in Canada).
The sequential net loss of 600,000 subscribers represents 2.4% of its U.S. subscribers as of mid-2011. A decline in the period would be only Netflix's second ever, after a 1% drop in the second quarter of 2007.
"Despite the guidance revision, we remain convinced that the splitting of our services was the right long-term strategic choice," Netflix CEO Reed Hastings and CFO David Wells wrote in a letter Thursday to shareholders.
Netflix's stock opened Thursday at $177 per share, 15% lower than the previous closing pricing. It was at about $179.20, down 14%, in mid-morning trading amid a broader uptick in the markets.
The executives reiterated the four-part strategy behind the pricing change: (1) to create a dedicated DVD rental division "that takes pride in great execution and maximizes the opportunity for disc rental over the coming decade"; (2) to enable Netflix to "improve our global streaming service even more rapidly, because it is not meshed with a domestic DVD business"; (3) allow the company, with the growth in revenue, to license more streaming content; and (4) to "remain very price aggressive", with $7.99 per month for unlimited streaming and $7.99 per month for unlimited DVD rentals with one disc out at a time.
"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 Netflix duo wrote.