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Summary:

Netflix shares have fallen 15 percent after the company issued new guidance on domestic subscriber numbers. The company originally expected 25 million users by the end of the quarter but lowered that number by 1 million after a price hike that went into effect this month.

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Netflix shares have fallen 15 percent after the company issued new guidance on domestic subscriber numbers for the third quarter. The company, which originally expected 25 million users by the end of this month, has lowered that number by 1 million subscribers, as it feels the effects of a change in its pricing.

The price change, which went into effect at the beginning of this month, split its combined DVD-by-mail and unlimited streaming services, which had cost $9.99 together, into separate plans, which cost $7.99 each. That change has been seen by many as a rate hike, raising the cost of the combined plans to $15.98, a 60 percent increase over the previous price.

That appears to have had an effect on the number of people subscribing to the service. By the end of the third quarter, Netflix expected to have 22 million streaming customers and 15 million DVD customers, with about 12 million users subscribing to both plans. About halfway through the first month in which the new prices apply, Netflix has updated that forecast, now with an expected 21.8 million streaming users, 14.2 million DVD subscribers and an overlap of 12 million.

That revision has sent Netflix stock into a tailspin, declining about $31, or 15 percent, to $177. That’s also significantly off its 52-week high of more than $300. The correction marks a stark contrast to Netflix’s stock increases over the previous 12 months, as it rode a fast wave of consumer adoption that saw its subscriber numbers grow by more than 60 percent.

Despite the guidance update, Netflix says it “remain[s] convinced that the splitting of our services was the right long-term strategic choice.” Its reasons are as follows:

(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 us to improve our global streaming service even more rapidly, because it is not meshed with a domestic DVD business;
(3) to enable us, with the growth in revenue, to license more streaming content and thereby improve our streaming service even more;
(4) to remain very price aggressive, with $7.99 per month for unlimited streaming of a huge library of TV shows and movies, and $7.99 per month for unlimited DVD rentals, 1 out at-a-time.

Photo courtesy of Flickr user Ross Catrow

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  1. If you have a streaming device why would you want to subscribe to both the streaming and the snail mail service? Why would you want to wait for snail mail to bring you movies when you can have them instantly? If you have a decent download speed and a streaming device, streaming customers should look at the price changes as a price reduction, not an increase. It’s now $7.99 to stream versus $9.99 previously. DVDs will fade away into obscurity soon enough.

    1. That’s the problem Trevor, as of now you can’t stream the good movies, first run movies and many TV shows. A lot of stuff that is available for streaming is stuff that I don’t want to see. Lately I’ve been just streaming the first season of Star Trek.

      1. Exactly — it’s the only reason my family still subscribes to the DVD portion. I would rather never see another DVD and do 100% streaming — but Netflix’s library still falls short on streaming TV shows/movies, and the DVDs help bridge the gap. I am hoping they’ll be able to work out new rights deals so that their streaming library opens up.

      2. I wanted to keep both streaming and 1-DVD-out options. But there is no incentive to having both…A reduced price of 12.99 for the combo deal would have worked wonders for Netflix …but instead they chose to double the price…
        Viewers have a fixed amount of time to watch …they are not going to pay double for teh same amount of watching

    2. You’re correct that DVDs will fade, but at this time catalogs are not equal. Though I prefer on-demand, I cancelled streaming because the available content isn’t as good as DVD.

    3. uh.. not until the crappy streaming selection matches the DVD selection.

    4. So… I am guessing you are not a Netflix subscriber. The streaming service has a tiny fraction of the movies available that the DVD business has. If steaming had 100% of the DVD content, I would be willing to pay $50/month for that service. Seriously. Instead, they have a lousy streaming service (that is better than anyone else, but still lousy), and they just raised prices on the DVD business where all the content is. I can get lousy streaming on Amazon for free.

      1. So why doesn’t Netflix offer the same to its online subscribers than its mail-the-snail subscribers? That doesn’t make sense.

      2. I’ve been saying that forever. If I could stream anything whenever I wanted, I would also pay a premium price for that service. I don’t understand why the studios can’t get on board with the future.

    5. Right now I can stream a show I don’t care to watch or wait for a disc of something I actually want to see.

      How Netflix values these two services equally is still my biggest gripe.

      Streaming is a second rate service with the library they provide.

    6. I agree about the reason is that streaming is not even 10% of the DVD library. But a bigger issue is no closed captioning and no extras on streaming. If you guys have not watched a movie with subtitles, you don’t know what you are missing. There is all kinds of important dialogue that you simply can’t hear that CC brings out.

    7. You are an idiot. You obviously don’t know jack abou Netflix. You can get much newer movies on DVD. Beside, some people still want to put a DVD on for the entire family to watch. They are going to keep loosing market share until the got bought or go out of business. The later hopefully soon.

      1. HAHA i love people who call other people idiots when you spell loosing the way you do. It’s losing like to lose and football game or for instant i have some LOOSE change in my pockets.

    8. Not all movies available on DVD are also available streaming. I left because their selection for streaming was laughable.

    9. Because, as of now, you can only get the movies new to dvd on snail mail. The ones offered on streaming are still older, in general. Hence the need for both services.

  2. Netflix rapid price hikes have forced customers down a path of the company’s choosing; which flies in the face of what made them a successful company in the first place. http://brandsandbottomlines.wordpress.com/2011/07/13/netflix-and-the-new-red/

  3. If these two points are reached:

    (2) to enable us to improve our global streaming service even more rapidly, because it is not meshed with a domestic DVD business;
    (3) to enable us, with the growth in revenue, to license more streaming content and thereby improve our streaming service even more;

    , than the price hike is justified.

  4. Back to the bottom line for the consumer: “what’s in it for me?” All the promises of what is to come apparently did not translate to ‘value’ for a significant number of consumers. Will they come back? Maybe. If not, the cost of replacing them will be also be significant.

  5. If the reduction is mainly due to change in the service plans, shouldn’t it be mainly among the people subscribing to both the formats? But that remains the same. What gives?

    1. Good question. In fact the only number here that is really impacted was the number of DVD only customers (the 200K shortfall in streaming customers is noise vs. 20M). Long term (and probably even medium term) while I doubt they wanted to lose 800K customers the price change had exactly the effect desired – which is to push folks over to the streaming side of the business. As for the stock price hit, seems like typical overreaction; I don’t personally see anything to be overly concerned with yet (if the DVD declines continue without a commensurate increase in streaming customers, then we can talk).

      Oh – and I was a customer who was in it mostly for the streaming, so I saw this as a price *cut*, not increase (sure we’d take the extra DVD, but it mostly collected dust).

    2. Well, I know that I was one of those both plans and cancelled streaming. And if Netflix does not shape up, I’ll be going to redbox or back to Blockbuster.

  6. As a customer, I’m not a fan of the split, but stockholders would be crazy to think that it wasn’t a smart and essential move to improve long-term profitability.

  7. Of course Netflix remains optimistic. What are they going to say we are screwing our customers because our business model is broken and is failing??

  8. Netflix’s issue is: many Executives within the Digital Media Streaming Industry made a big mistake by not understanding BANDWIDTH ECONOMICS.

    Fact is, the “public internet” was not built to stream video, especially the NFL Sunday Tix via DirecTV. Make note of how sluggish the public internet is this NFL Sunday. The public internet was brutally slow this past Sunday b/c of DTV’s streaming NFL Tix.

  9. I dropped streaming and went with DVD only. I have been 3 DVD out (and some times 4 out during summer). So there is really very few movies that I have not seen. This past summer is the 1st time that I really used streaming and that was to watch old cable shows like Mad Men. I think I watched only 3 actual movies the whole summer. NF will not be able to compete in the streaming ‘fresh’ movies until 2015/2016. That is when those long term contracts that the movie studios have with HBO, Starze, etc. come up for renewal.

  10. You have both for one reason..
    New releases Netflix’s can’t stream.
    On another note, I thought I had canceled my Netflix’s account. Thanks for reminding me again to cancel it.

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