LOS ANGELES — After miscalculating how consumers
would respond to a surprise price increase and an aborted attempt to
split its streaming and DVD businesses, Netflix Inc. also underestimated
how many would ditch the service as a result.
Shares
in the once-hot but recently troubled subscription video company
plummeted 27 percent in after-hours trading Monday after it reported a
loss of 800,000 U.S. customers in the third quarter, more than the
600,000 it told investors to expect.
As of Sept. 30, Netflix’s total number of U.S. customers was 23.79 million, down from 24.59 million three months earlier.
Perhaps
even more troubling to Wall Street is that the defections have
continued in October, leading Netflix to predict lower-than-expected
growth through the end of 2012.
Shares in the Los
Gatos, Calif., company, which were trading at nearly $300 in July, fell
below $100 for the first time in more than a year late Monday as
disappointed investors dumped their stock.
The
damage to a brand that seemed flawless only a few months ago has been
undeniable. Netflix Chief Executive Reed Hastings admitted in a letter
to investors that the company’s missteps have “hurt our hard-earned
reputation and stalled our domestic growth.”
He also for the first time apologized to the stock owners, who have seen the company’s value plunge more than two-thirds.
“We know it has been extremely challenging time to be a shareholder these past few months,” he said.
Hastings
acknowledged that customers were infuriated by Netflix’s up to 60
percent price increase announced in July and its failed plan to rebrand
its DVD service Qwikster.
Also, in late August,
pay channel Starz said it would stop providing new movies from Sony
Pictures and Walt Disney Pictures to Netflix’s online service when its
contract expires in February. In good news for TV fans, however, a
recently signed deal with the CW network will allow Netflix to stream
prior seasons of most of its programs.
Hastings
said he expects Netflix to start adding subscribers by December, as
cancellations have been slowing since the implementation of higher
prices for combined DVD-streaming plans. As a result, the company
predicts it will have slightly more customers by year’s end.
“There
was a large number of disgruntled consumers, but most of them have
left,” said Hudson Square Research analyst Daniel Ernst.
Three
months ago, Netflix predicted it would be back on a strong growth path
by now and could have its first $1 billion quarter. Instead, the company
is now expecting less than $875 million in revenue in the current
quarter.
But competitors Amazon.com Inc. and Dish
Network Corp.-owned Blockbuster have not yet made any impact on
Netflix’s business, Hastings said. That gives the company an opportunity
to recover.
“If they stop making mistakes, this
is fixable,” said Dan Rayburn, a principal analyst at consulting firm
Frost&Sullivan. “The saving grace is that unlike a lot of other
companies that get into this kind of situation, there isn’t a competitor
eating Netflix’s lunch.”
There was better news
from overseas: Netflix added more than 500,000 customers in Canada and
Latin America, which launched in September, bringing its foreign total
to 1.51 million. In early 2012, the company will expand into Britain and
Ireland, a costly investment that probably will make the firm
unprofitable.
But in a salve to upset investors,
Hastings said Netflix will not expand into any more foreign markets
until it returns to profitability on a global basis.
During
the most recent quarter, Netflix’s revenue rose 49 percent from a year
earlier to $822 million, and net income jumped 63 percent to $62
million.
Hastings said Netflix plans to keep
prices stable and invest heavily in content, doubling the amount it
spends on television shows and movies for its streaming service next
year.
“The focus for us is in building back our
reputation and brand strength, but that’s not through grand gestures,”
he said. “It’s the same type of steps we have been using for the past 10
years.”
Netflix shares closed at $118.84, up 1.5 percent, before financial results were released.
———
%uFFFD2011 the Los Angeles Times
Visit the Los Angeles Times at www.latimes.com
Distributed by MCT Information Services
