Shares of DVD rental and streaming video company Netflix Inc. continued to decline Friday amid fallout from its lowered expectations for its U.S. subscriber base.
THE SPARK: Netflix announced plans in July to split its DVD-by-mail and video streaming services, raising the price of a monthly subscription for people who still want both. The decision was met with anger from some customers, and on Thursday Netflix lowered its guidance for U.S. subscribers by 4 percent to 24 million in the third quarter, saying more customers had dropped their subscriptions than it expected.
That means the company will have 600,000 fewer customers in the U.S. at the end of September than it did at the end of June.
THE BACKGROUND: Netflix kept its forecasts for its earnings and international subscriptions intact. But its July guidance was already below analyst expectations. Despite the subscriber exodus, Netflix maintains that the split was a good idea.
But investors may be worrying that this is just the start of Netflix's troubles. The company had another setback this month when it couldn't agree with Starz Entertainment on new licensing terms, which means Netflix users will no longer be able to stream Starz's popular mix of recently released movies and TV shows after the current deal expires early next year. This could cause more customers to leave.
ANALYST COMMENT: The lowered numbers "reflect a degree of customer disinterest in streaming only (which features improving content that is far from spectacular) and DVD only (for low volume renters, Coinstar's Redbox still presents a better value option), as well as displeasure with Netflix's subscription plan changes," Wedbush Morgan analyst Michael Pachter said in a note to investors.
The analyst added that while the plan changes "clearly" hurt subscriber growth, their full effect on Netflix's revenue earnings growth is difficult to predict. That's because the mix of Netflix's subscriber base is unclear, he added. That is, some customers could be switching to cheaper plans while others could be switching to more expensive ones.
"Until Netflix provides greater detail about the composition of its subscriber base, the uncertainty caused by mix will remain," Pachter added.
He kept an "underperform" rating on Netflix.
SHARE ACTION: Netflix shares fell $14.09, or 8.3 percent, to $155.16 on Friday. The company announced the lowered forecast early Thursday, and the shares tumbled 19 percent that day. They have traded between $140.02 and $340.09 that past year.
The stock is down 45 percent since July 12, when Netflix announced it was splitting its subscription plans.
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