News Column

Netflix Shares Plunge After Warning on 2012

Oct. 25, 2011

Jeff Gelles


If Netflix hadn't screamed it loudly enough before, the upstart that slew the DVD store made it clear Monday that it is first and foremost an Internet company. And it insisted it sees a bright future in that growing niche even as it rattled investors once again by warning that overseas expansions would push it into the red next year.

Netflix shares ticked up Monday -- rising about 1.5 percent, to $118.84 -- before the company announced the inevitable: It ended the third quarter with about 23.8 million U.S. subscribers, down nearly 800,000 since June 30. That's what you get when you bump your basic price 60 percent, then announce -- abortively -- that you're separating your DVD-rental business into a new brand and website.

The company's shares then plunged more than $30 in after-hours trading as investors digested the 2012 warning. In addition to the dip in U.S. subscribers, a little deeper than it had predicted, Netflix said it faced "a few quarters" of global losses because of the costs of its expansion into the United Kingdom and Ireland.

Even before the after-hours plunge, Netflix shares had already lost nearly two-thirds of their value since peaking above $304 in July.

In a question-and-answer session after its announcements, Netflix executives sought to put the best possible face on the latest episode of troubling news.

"We're putting a pause on international until we get back to global profitability," said chief executive officer Reed Hastings.

But Netflix officials tried to stress reasons for hope, as Hastings and chief financial officer David Wells did in a 12-page "Dear Fellow Shareholders" letter that said the company was committed to being "the best streaming video subscription service on the planet."

Some saw Monday's events as more evidence that Netflix is still struggling from self-inflicted wounds.

"They're trying to put the best face on it, but this is a kick in the gut," said Jeff Kagan, an Atlanta analyst.

Netflix's ability to recover, Kagan said, may depend on its success at reading a rapidly changing market -- a market that Hastings portrayed as ripe for Netflix's new business model. Some reasons Hastings said he was hopeful:

U.S. revenue was up 44 percent, to $799 million for the quarter, compared with the same quarter in 2010.

Despite the net loss of subscribers, Netflix added 4.7 million members in the quarter -- and only 7 percent of new streaming subscribers are signing up for DVD rentals.

In just one year of offering unlimited streaming for $7.99 in Canada -- the same price Netflix now charges in the United States -- the company says it penetrated 10 percent of Canadian households.

Netflix continues to add movies and video, including "prior season television content from all five U.S. broadcast networks and 95 percent of the U.S. cable networks."

The company said cancellations hit in a two-phased wave: The first after the price hike was announced, to $16 for subscribers who wanted both streaming and DVDs, and the second after credit- and debit-card statements reflected it at roughly the same time that Netflix "further dented our reputation" by announcing plans to rebrand DVD rentals as Qwikster.

The good news in that?

"The wave peaked a few weeks ago, and cancellations are now steadily declining," the letter said.

Source: (c) 2011 The Philadelphia Inquirer. Distributed by MCT Information Services

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