Netflix pwned, "strategy" backfires

[Homeslice]

BRIAN STELTER, On Thursday September 15, 2011, 10:01 am EDT
In wake of new prices that force some customers to pay more, greater numbers of people are canceling their Netflix subscriptions than the company expected.

The company on Thursday morning revised downward, incrementally, its subscriber estimates for the quarter of the year that ends in two weeks. It did not change its financial guidance for the quarter. Still, its stock dropped almost 15 percent in heavy trading when the market opened Thursday.

The revision reflects the negative reaction to Netflix's decision, announced in July, to separate its DVD-by-mail service from its faster-growing Internet streaming service. Before, DVD-by-mail was a $2 add-on for some streaming subscribers; now, each service now costs $8.

Some subscribers were upset by what was effectively a price hike, and a subset of them have cancelled their Netflix accounts.

In July, the company said it expected that it would end the third quarter with 22 million subscribers to the streaming service, 12 million of whom would also opt for the DVD-by-mail service. It expected back then that 3 million would opt only for the DVD service.

Now, it's expecting that just 2.2 million will opt only for DVDs, a drop of 800,000.

Netflix also anticipates a slight drop in streaming subscribers, to 21.8 million, a difference of 200,000 from the earlier estimate. It still expects 12 million of those streaming subscribers to also pay for DVD-by-mail, helping it to generate more revenue overall.

"Despite the guidance revision, we remain convinced that the splitting of our services was the right long-term strategic choice," the company wrote in a letter to shareholders on Thursday.

Earlier this summer, Netflix's chief executive, Reed Hastings, said he recognized that "we have to face those subscribers who are upset by the price hike this quarter."

He said then that the price change would benefit Netflix in the fourth quarter and beyond, and that the company intended to spend the increased revenue on its streaming service, partly on research and development. "As our subscriber base continues to grow, we're able to spend more on improving that service, both on the R.& D. side and on the content availability side," he said.