Netflix stock tanked this morning. Here’s why

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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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