After miscalculating how consumers would respond to a surprise price hike and an aborted attempt to split its streaming and DVD businesses, Netflix Inc. also underestimated how many would ditch the service as a result.
Shares in the once-hot but recently troubled subscription video company plummeted 27% in after-hours trading Monday after it reported a loss of 800,000 U.S. customers in the third quarter, more than the 600,000 it told investors to expect.
As of Sept. 30, Netflix’s total number of U.S. customers was 23.79 million, down from 24.59 million three months earlier.
Perhaps even more troubling to Wall Street is that the defections have continued in October, leading Netflix to predict lower-than-expected growth through the end of 2012.
Shares in the Los Gatos, Calif., company, which were trading at nearly $300 in July, fell below $100 for the first time in more than a year late Monday as disappointed investors dumped their stock.
The damage to a brand that seemed flawless only a few months ago has been undeniable. Netflix Chief Executive Reed Hastings admitted in a letter to investors that the company’s missteps have “hurt our hard-earned reputation and stalled our domestic growth.”
He also for the first time apologized to the stock owners, who have seen the company’s value plunge more than two-thirds.
“We know it has been an extremely challenging time to be a shareholder these past few months,” he said.
Hastings acknowledged that customers were infuriated by Netflix’s up to 60% price increase announced in July and its failed plan to rebrand its DVD service Qwikster.
Also, in late August, pay channel Starz said it would stop providing new movies from Sony Pictures and Walt Disney Pictures to Netflix’s online service when its contract expires in February. In good news for TV fans, however, a recently signed deal with the CW network will allow Netflix to stream previous seasons of most of its programs.
Hastings said he expected Netflix to start adding subscribers by December, as cancellations have been slowing since the implementation of higher prices for combined DVD-streaming plans. As a result, the company predicted it would have slightly more customers by year’s end.
“There was a large number of disgruntled consumers, but most of them have left,” said Hudson Square Research analyst Daniel Ernst.
Three months ago, Netflix predicted it would be back on a strong growth path by now and could have its first $1-billion quarter. Instead, the company is now expecting less than $875 million in revenue in the current quarter.
However, competitors Amazon.com Inc. and Dish Network Corp.-owned Blockbuster have not yet made any impact on Netflix’s business, Hastings said. That gives the company an opportunity to recover.
“If they stop making mistakes, this is fixable,” said Dan Rayburn, a principal analyst at consulting firm Frost & Sullivan. “The saving grace is that unlike a lot of other companies that get into this kind of situation, there isn’t a competitor eating Netflix’s lunch.”
There was better news from overseas: Netflix added more than 500,000 customers in Canada and Latin America, bringing its foreign total to 1.51 million. In early 2012, the company will expand into Britain and Ireland, a costly investment that probably will make the firm unprofitable.
But in a salve to upset investors, Hastings said Netflix would not expand into any more foreign markets until it returned to profitability on a global basis.
During the most recent quarter, Netflix’s revenue rose 49% from a year earlier to $822 million, and net income jumped 63% to $62 million.
Hastings said Netflix planned to keep prices stable and invest heavily in content, doubling the amount it spends on television shows and movies for its streaming service next year.
“The focus for us is in building back our reputation and brand strength, but that’s not through grand gestures,” he said. “It’s the same type of steps we have been using for the past 10 years.”
Netflix shares closed at $118.84, up 1.5%, before financial results were released.