Netflix Chops 1M Subs From Q3 Forecast

Netflix Inc. (Nasdaq: NFLX) shares plunged more than 13 percent Thursday morning after the video streaming specialist lowered guidance, predicting it will end the third quarter with 24 million U.S. subscribers, 1 million below previous expectations.

The decision comes soon after Netflix hiked its rates and separated its video streaming and DVD subscription plans. As the graphic below shows, the bulk of the lowered guidance originates from customers who only rent DVDs from the company.

The reduced U.S. subscriber projection didn't affect Netflix's financial guidance or its international subscriber forecast, but, in a letter to shareholders, reiterated its belief that the separation of its subscription tiers will help it "improve our global streaming service even more rapidly, because it is not meshed with a domestic DVD business."

But Netflix likewise acknowledged that the decision to split its services "has upset many of our subscribers."

Why this matters
Many were expecting Netflix to cut domestic subscriber guidance after it announced the new plans and rate hikes, but Thursday's confirmation represents yet another patch of turbulence for a high-flying company that's been striking fear into MSOs and other pay-TV operators.

Among other recent setbacks, Netflix's Watch Instantly service will lose access to coveted Starz Entertainment LLC content when their deal expires on Feb. 28, 2012. It's believed that Starz walked away from a $300 million-plus deal after Netflix would not agree to offer the programmer's content in a pricier tier that would placate Starz's pay-TV affiliates. (See Did Starz Reject $300M Netflix Offer?)

Netflix shares were down $28.31 (13.61 percent) to $180.30 each in early trading Thursday.

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— Jeff Baumgartner, Site Editor, Light Reading Cable

Jeff Baumgartner 12/5/2012 | 4:53:41 PM
re: Netflix Chops 1M Subs From Q3 Forecast

Netflix taking a sub hit was a given with the rate hikes, but this looks like a bit of an over-reaction.  The biggest hit is coming from the DVD side of the house, which is where Netflix probably doesn't want to be long-term , anyway.   I think losing Starz was worse news than this is. 

It's  another thing if this news is just a bump in the road or the start of a bad trend, but I'd guess that most of the damage caused by subs fleeing due to the rate hikes will have been done inQ3.  JB

jdbower 12/5/2012 | 4:53:39 PM
re: Netflix Chops 1M Subs From Q3 Forecast

Given the magnitude of the rate hikes and only about a 5% loss in subs this still seems like a win for NetFlix - however, long term growth may also be impacted.  I agree losing Starz will potentially be a bigger hit on their streaming side of the house once it kicks in.  If Amazon concentrated a bit on mobile apps and a better non-PC interface to their Prime streaming I think it could take a big chunk of NetFlix' fleeing subs.

Cooper10 12/5/2012 | 4:53:37 PM
re: Netflix Chops 1M Subs From Q3 Forecast

Time will tell - with today's revised guidance, they are forecasting 1M fewer subs than they previously forecast, but don't forget the change in momentum...Netflix has averaged >2M net adds per quarter for last 6 quarters, and they're going to a loss of 600k over a single quarter, so this is more like a change of 2.5M to 3M subs vs. what they would have done w/o a rate increase (so more like a 12% sub loss).  Much of their skyrocketing content costs have been rationalized by the assumption that subs would continue to grow to fund the content expense.  That doesn't appear to be a foregone conclusion anymore.

Jeff Baumgartner 12/5/2012 | 4:53:36 PM
re: Netflix Chops 1M Subs From Q3 Forecast

Also interesting that they are getting hit on the DVD-only (heavily) and streaming-only plans. Looks like the number of subs taking the  bundled tiers that tie DVDs with streaming will remain unchanged. 


After the price hike I changed from DVD (and Blu-ray)+streaming to streaming only.   Anyone else change tiers or churn out after Netflix announced the change?  JB

msilbey 12/5/2012 | 4:53:35 PM
re: Netflix Chops 1M Subs From Q3 Forecast

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We stopped actively using the DVD portion of our subscription at least a year ago. However, we've held onto it out of inertia. The price hike is finally motivating us to drop it.&nbsp;

As for overall impact, I'm still curious to see if Netflix decides to experiment with subscription tiers. The company made it pretty clear it wasn't interested in such a move during the Starz negotiation, but that may only have been because it didn't want to get bullied into the model by a programmer. In order to afford content licensing deals and continue to attract customers, Netlix may have to look at tiering its service in the future. Personally, I think there's significant room in between what Netflix offers today and what you can get from a cable provider. Does Netflix move up in the market, or does cable move down? Or do they meet in the middle?


DCITDave 12/5/2012 | 4:53:34 PM
re: Netflix Chops 1M Subs From Q3 Forecast

I cancelled Netflix and picked up HBO. I love the HBO Go product but, weirdly, they make MUCH more content available via the online service than U-verse's VOD system.

So I gave up a wide variety of content for a handful of movies and the ability to watch The Wire all the way through on my wife's iPad.

I hardly notice a difference now, but football season just started. (finally)


AESerm 12/5/2012 | 4:53:28 PM
re: Netflix Chops 1M Subs From Q3 Forecast

Given decline in momentum, I found it interesting to re-read Whitney Tilson's explanation of why he covered his NTFLX short back in Feb. See this Seeking Alpha note. http://bit.ly/gu5wMm

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