Netflix Rate Hikes Will Hammer Growth

The effects of Netflix Inc. (Nasdaq: NFLX) separating its video streaming and DVD rental plans and jacking up monthly rates will come in the form of sluggish subscriber growth rate in the third quarter, officials said as part of Monday's earnings announcement. (See Netflix Subs Revolt and Netflix Splits Unlimited DVD, Streaming Plans.)

Now, it's not about to go all cable on us and actually lose subscribers, but Netflix's hot streak will certainly show signs of cooling off.

In its second-quarter earnings statement and letter (PDF) to shareholders, Netflix said it expects to end the third quarter with 24.6 million to 25.4 million domestic subscribers, implying zero to 900,000 adds. That's compared with 1.8 million domestic subscribers added in the second quarter, which gave Netflix a total of 24.59 million. (See Netflix Dips on Q2 Revenue Miss .)

Officials expect third-quarter revenues to be US$780 million to $805 million, meaning they might shrink from the second quarter's $789 million.

Netflix thinks this hiccup will be short-lived, with normal levels of sub and revenue growth returning in the fourth quarter. In fact, Netflix said quarterly revenues could breach $1 billion for the first time.

Hulu hoopla
With rumors about who's flirting with Hulu LLC -- Apple Inc. (Nasdaq: AAPL) and Yahoo Inc. (Nasdaq: YHOO) being mentioned, among others -- Netflix said it doesn't intend to bid, "because most of its revenue is from providing free, ad-supported streaming of current TV shows, which is not our focus." (See Hulu Offers Programming Perks With Sale and Hulu Nears 1M Paid Subs.)

While remaining "mindful" of Hulu and Amazon.com Inc. (Nasdaq: AMZN) as competitors, Netflix views cable operators and other multichannel video programming distributors as its greatest long-term competition, especially the companies that embrace Internet VoD.

Other tidbits from Netflix's quarter:

  • Nearly 75 percent of Netflix's new subscribers in the quarter signed up for the streaming-only plan, with the company acknowledging that DVD shipments for the company "have likely peaked."
  • Netflix is still trying to extend its distribution agreement with Starz Entertainment LLC beyond the first quarter of 2012.
  • Netflix hopes to launch its Facebook integration by its next earnings report, but only in Canada and in Latin America (Netflix's next international market to launch), because the company says the U.S. Video Privacy Protection Act is ambiguous on how and when a user can give permission for video viewing records to be shared. (See Netflix Pops on Facebook Integration Buzz .)

— Jeff Baumgartner, Site Editor, Light Reading Cable

Pete Baldwin 12/5/2012 | 4:58:07 PM
re: Netflix Rate Hikes Will Hammer Growth

They really thinking $1B is possible in Q4?

I mean, anything is *possible*, but that'd be something like 70% yoy growth and 20-25% sequentially.  Analyst consensus before today's earnings was for $922M in Q4.

gocowboys 12/5/2012 | 4:58:06 PM
re: Netflix Rate Hikes Will Hammer Growth

This is pretty amazing....Netflix has essentially raised their prices 60% in a lousy economy and in the face of rising competition. Their streaming offering is minimal and most of the movies are antiquated. The new content is available on DVD, but they want to de-emphasize that part of the business.

Personally, I have cancelled my Netflix subscription. I was a casual user and clearly created significant margin. I will avail myself of other entertainment options.

The Netflix business decision to raise their prices is right up there with the likes of "new coke". :-)

shygye75 12/5/2012 | 4:58:02 PM
re: Netflix Rate Hikes Will Hammer Growth

"New coke" is a good comparison -- Netflix has decided to force its customers to adopt a new product even though those customers were satisfied with what they were already getting.

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