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Netflix spooks Wall Street with rare stumble in U.S. subscribers

Netflix spooks Wall Street with rare stumble in U.S. subscribers
The Netfilx headquarters is seen in Los Gatos, Calif. The company reported its quarterly financial results on Wednesday, Oct. 14. (Paul Sakuma / Associated Press)

Netflix appears to be showing rare vulnerability on its home turf as the number of U.S. subscribers failed to meet the video streaming service's own projections.

The Los Gatos, Calif., company said Wednesday that it added some 880,000 U.S. subscribers in the third quarter, well below its forecast of 1.15 million. The big miss raised fear that Netflix may be starting to have trouble keeping subscribers amid increased competition from rivals like Hulu, Amazon and HBO's newly launched stand-alone service.

Investors dumped the stock in after-hours trading, where it plunged as much as 15% after Netflix released its quarterly earnings report. The stock had risen nearly 126% on the year through Wednesday's close.

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"I think Wall Street tends to overreact to these things," EMarketer analyst Paul Verna said. "But it is telling that Netflix had issued guidance for U.S. subscriber growth that they fell pretty well short of — and the only reason their overall subscriber growth wasn't a huge miss is they made up for it on the international side. And that is reflective of their focus overseas."

Overall, Netflix added 3.62 million streaming subscribers worldwide in the third quarter, above its forecast for 3.55 million. The company reported 69.17 million streaming subscriptions for the three-month quarter that ended Sept. 30.

The numbers were largely fueled by growth in international subscribers, which added 2.74 million new customers and exceeded the company's projections. The streaming giant, whose list of programs include "Orange Is the New Black" and "Narcos," ventured into Japan in the third quarter. By year's end, it will enter Portugal, Spain and Italy, with more countries slated for next year.

Netflix Chief Executive Reed Hastings and Chief Financial Officer David Wells pointed out during a call with analysts that the weak growth in U.S. subscribers might be partly blamed on the company's inability to collect payment from subscribers whose credit and debit cards transitional to chip-based technology.

Hastings said he still expects Netflix will add 5 million to 6 million new U.S. subscribers annually for the next several years despite rising competition. Netflix anticipates it will add an additional 1.65 million U.S. subscribers in the current quarter, 13% fewer than the same time last year.

"Sure, there are a lot of competitors, but there always have been," Hastings told analysts. "We've competed against cable and satellite, we've competed against YouTube.... Netflix keeps growing because we keep improving."

But that might not be enough to quell Wall Street concerns about how much of the U.S. subscriber miss is due to competition from streaming rivals.

"Netflix is getting big," Verna said. "It gets harder to grow over a big base. Now people have a lot more choices than they did even a year ago."

This year HBO launched its stand-alone streaming service, called HBO Now, at $14.99 a month. Showtime followed soon after with its own service priced at $10.99 a month. Hulu recently announced a limited-ad tier for $11.99 to make it more desirable to commercial-adverse viewers.

But to keep and attract viewers, Netflix is finding it has to keep its supply of content flowing. The company said it would spend about
$5 billion in programming costs over the next year to fund original content and also license the rights for TV shows and films.

"Some studios will choose to license content to SVOD services like Hulu, Amazon Prime Instant Video and Netflix. Others may not," Hastings and Wells wrote in their quarterly letter to shareholders. "We have a lot of content to select from."

Netflix has also shown a growing focus on acquiring exclusive rights to TV and movies. For instance, Netflix decided to not renew a deal with pay TV channel Epix because it was not exclusive. Epix, which already had a deal in place with Amazon, signed a nonexclusive deal with Hulu instead.

As a result, Netflix lost thousands of movies from Paramount, MGM and Lionsgate. The company said it has not seen any material reduction in viewership since the Epix deal ended.

"When we entered into our deal with Epix, we were kind of de facto exclusive," said Ted Sarandos, Netflix's chief content officer. "Since then, they dramatically expanded their cable distribution. They did a deal with Amazon, they were about to do a deal with Hulu when our deal was coming up for renewal. We agreed that our strategic initiative and theirs were diverging and we went out separate ways."

Focusing on creating original content as it rolls out across the globe has put a damper on Netflix's earnings.

The company reported a profit of $29.4 million, or 7 cents a share, compared with $59.2 million, or 14 cents, a year earlier. Revenue rose to $1.7 billion from $1.4 billion. Analysts expected a profit of 8 cents a share on $1.75 billion in revenue, according to Thomson Reuters.

But the company hopes to complete its global expansion by the end of 2016 and expects to see profit increase the following year.

To help make up for its heavy spending on content, Netflix recently raised the price of its popular streaming subscription plan by a dollar to $9.99 a month for new subscribers in the U.S., Canada, and Latin America.

"We're not making any prognostications about the future on pricing," Hastings said. "But it is related to the value. The more that we have incredible value, the more that we have amazing originals, then over time we're going to be able to ask consumers for more."

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