Netflix jolted its shareholders again with a third-quarter financial report that portrayed a company in crisis.
The video subscription service’s latest blooper reel, released Monday, included an even larger customer exodus than the company had foreseen after announcing an unpopular price increase in the U.S. in July. What’s worse, the report contained a forecast calling for more defections during the next few months.
The backlash will deprive Netflix Inc. of some of the revenue that management had been counting on to finance the company’s expansion plans while it pays higher fees for internet video streaming rights. The result: Netflix expects to post losses next year when it starts selling its streaming service in Britain and Ireland. The company didn’t offer further specifics besides saying it won’t go into any other overseas markets until it’s making money again.
Netflix lost its lustre among consumers and investors by raising prices as much as 60% in the U.S. and bungling an attempt to spin off its DVD-by-mail rental service.
Raising the prices had to be done, according to Netflix CEO Reed Hastings. He said, however, that Netflix should have taken more time to explain to subscribers that the company needed the money to pay movie and television studios for rights to stream more video over high-speed internet connections.
“We became a symbol of the evil, greedy corporation,” Hastings said in a Monday interview with The Associated Press. “Then we faced a reputational hit that created significantly more cancellations than we anticipated.”
The company, which is based in Los Gatos, California, ended September with 23.8 million U.S. subscribers, down about 800,000 from June. Netflix had predicted it would lose about 600,000 U.S. subscribers in a forecast released last month.
Management expects to gain U.S. subscribers in the current quarter, although Netflix didn’t set a specific target. But a substantial number of Netflix’s customers are expected to choose between renting DVDs through the mail, or streaming internet video, instead of paying for both services.
The biggest hit is expected on the DVD side, a service that Netflix has been de-emphasizing to save money on mailing costs as its spends more to license movies and TV shows for its internet video library. The company expects its DVD subscribers to fall from 13.9 million as of Sept. 30 to as low as 10.3 million at the end of December.
Hastings said he expects Netflix’s DVD subscriptions to steadily decline, much like what has happened to AOL Inc.’s dial-up internet connection service during the past decade as high-speed alternatives became more affordable.
Netflix’s streaming subscriptions in the U.S. may rise by as much as 100,000 subscribers in the quarter, according to the company’s projections.
The company’s outlook looks even grimmer compared with how rapidly Netflix had been growing. From the end of 2009 through June of this year, Netflix had gained 12.3 million U.S. subscribers, adding an average of 2 million customers every three months.
From a financial perspective, Netflix did better than analysts expected in the July-September period.
The company earned $62.5 million in the third quarter, compared to $38 million the same time last year. Netflix’s revenue climbed 49% from the same time last year to nearly $822 million — about $9 million above analyst estimates.
Netflix’s downfall leaves Hastings — the only CEO the company has ever had — in a precarious position.
Once regarded as one of the savviest leaders in technology and entertainment, Hastings has turned into a punching bag for frustrated Netflix customers and shareholders. Many of them are still befuddled by his recent decision making.
After Netflix’s higher prices kicked in on Sept. 1, Hastings amplified the outrage by outlining a plan to toss the DVD rental business onto a separate website called Qwikster. The split from the internet streaming service got panned so badly that Hastings reversed course in less than three weeks.
“I am not a quitter,” Hastings said Monday after the AP asked if he would heed some investor calls for him to resign. “We made some mistakes, but I think our 10-year track record is extremely positive. We are going to focus on making this a great global streaming business. I am very excited about that.”
