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Netflix Price Increase Causes Bigger Subscriber Loss Than Expected

The Huffington Post    
First Posted: 09/15/11 12:46 PM ET Updated: 11/15/11 05:12 AM ET

The exodus from Netflix has officially begun.

Netflix, in a note to investors, has said that they are set to lose about one million more subscribers than they thought they would following the big price change of July 2011.

The revised estimate breaks down like this: On July 25th, Netflix expected to have 10 million streaming-only customers, 3 million DVD-only customers and 12 million with both; now they expect to have 9.8 million with streaming, 2.2 million with DVD only and (still) 12 million with both. Effectively, Netflix had projected 25 million users at the end of this month; now they think they'll have 24 million users.

To illustrate the loss, Netflix included the following charts in its letter to shareholders:

In trading this morning Netflix stock is down over 14 percent at press time and reached a low of over 15 percent down previously.

This continues the rough patch for Netflix, which, after years of growth, seems to have cooled somewhat in the eyes of consumers. In July it announced that it was doing away with its popular $9.99 DVD-plus-streaming plan in favor of two separate plans priced at $7.99 each, which led to a huge Internet backlash. More recently Starz, which provides Netflix with over a thousand streaming movies from the likes of Disney and Sony, announced that it would not renew its contract with Netflix when it expires in February 2012. Despite a rollout to over 40 Latin American countries earlier in the month, NFLX is falling hard on these revised consumer data.

In the letter, Netflix's optimism is unflagging:

Despite the guidance revision, we remain convinced that the splitting of our services was the right longterm strategic choice. The strategy behind the split of our services is four-fold:

(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.

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.

Netflix, facing an insurgent Redbox, a rumored Blockbuster streaming service in October and costly contract negotiations with movie studios upcoming in 2012, is certainly in a trying time; but even with 24 million subscribers instead of 25 million, it does not seem in danger of going out of business anytime soon.

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