NEW YORK—Netflix Inc., the one-time technology industry darling, saw its shares tumble again on Tuesday due to customer defections, mounting costs, analyst downgrades, and business missteps.
The Los Gatos, California-based movie rental and digital streaming service company fell by more than 34 percent on the Nasdaq Stock Market Tuesday. Its shares (Nasdaq: NFLX) have declined by more than 72 percent over the last three months, after approaching $300 per share in July. It closed Tuesday at $77.37 per share.
Pressure on Netflix’s shares came from the company’s announcement this week that it lost 800,000 subscribers in the third quarter, from 24.6 million to 23.8 million as of Sept. 30. In addition, Netflix said that total subscribers in the fourth quarter will likely fall short of the 24.9 million predicted by analysts.
Fallout from Summer Plan Changes
Netflix has suffered since July, when it announced drastic changes to its subscriber plans. Customers previously received both DVDs in the mail and streaming services for a flat $10 per month charge, but in July Netflix announced a pricing change to charge customers $8 for DVDs-by-mail and $8 for streaming, for a total of $16 per month for the same service.
There was an initial outrage. Although Netflix considered the possible customer defection as a result of the change, it nevertheless said that the change was necessary due to higher costs to procure content licenses from movie and television studios. A few weeks later, Netflix revealed that it would call its DVDs-by-mail service Qwikster, and it would separate the two services into separate companies.
Those moves backfired, and the company was surprised by the amount of customer backlash and cancellations. CEO Reed Hastings had predicted that Netflix would still finish the third quarter with 25 million customers, but in the end he was far off. Defections totaled 800,000 last quarter, after gaining more than a million customers every previous quarter in the last two years. Even worse, investors began worrying about Netflix’s stock and sold off shares.
This month, the company abandoned its plans to rebrand the DVD-by-mail business, saying that both services will remain on one website because Netflix made a mistake. In a letter to shareholders this week, Netflix stated, “We’ve hurt our hard-earned reputation and stalled our domestic growth. But our long-term streaming opportunity is as compelling as ever, and we are moving forward as quickly as we can to repair our reputation and return to growth.”
Analyst Downgrades
By all accounts, Netflix’s costs are rising.
The reasons are twofold. One, many of its content licensing contracts for digital streaming were signed years ago, when Netflix was small. Many of those agreements are up for renewal, and studios are asking for large increases in signing a new contract. Most analysts believe that Netflix is unable to financially survive without increasing prices—should these costs rise as expected.
Secondly, Netflix has planned aggressive expansion outside of the United States. This year, it expanded service into Canada and Latin America and is planning a European expansion. Most of these expansion plans are streaming-only, but there are massive costs associated with such expansion plans.
As such, the company has dialed down its forecast for fourth quarter earnings and says that profits will come down, to between $19 million and $37 million. These factors led Wall Street analysts to downgrade the company’s shares—Citigroup Inc. and JPMorgan both cut Netflix’s rating from “Buy” to “Neutral” on Tuesday.
Many customers say that while digital streaming is the future, Netflix’s current library, which is limited, does not justify price increases. Both company officials and analysts have said that DVDs-by-mail will probably decline going forward.
While it remains to be seen whether Netflix’s recent declines are temporary setbacks due to their overconfidence about long-term success, or the company’s current business model is inherently unsustainable, recent events serve as a cautionary tale for any company that abrupt business changes could have severe consequences.
