Will Streaming Kill Netflix? 800,000 Members Flee this Quarter
"What we are seeing here is a second wave of cancellations from the pricing increase," stated Reed Hastings, CEO of Netflix on yesterday's earnings call.
Those comments, part of a quarterly call that saw revenues increase but subscribers revolt, set the backdrop for an exodus of customers that exceeded Netflix's calculations by almost 25 percent beyond its public projections.
Cancellations streamed in, to a tune of 800,000 in the last quarter, as consumers showed their disapproval for Netflix's one-two punch: an increase in fees and a peeling off of the core business -- DVD rentals by mail.
The company backtracked on the price increase, with Hastings issuing an apology; but he used the apology to announce the splitting of streaming and DVD rental services into Netflix and Qwikster, respectively.
Within a few weeks, the company reversed course again, killing Qwikster and leaving everything under a single-bill, single-name option (albeit with the price increase intact).
"We greatly underestimated the appeal of the single website and a single service," said a company spokesperson.
Hastings tried to spin the greater-than-expected exodus of customers by pointing out two key facts: the overall size of the Netflix customer base and the potential slow-down of cancellations.
Cancellations came in waves, he said, with the first occurring immediately after the price increase, and the second occurring in late September. The overall effect is to leave the company with 23.8 million subscribers in the United States.
"That wave [of cancellations] has been declining very steadily over the past couple of weeks," said Hastings. "We have substantially less weekly cancels now that we did just three or four weeks ago."
The bigger issue, though, is the potential drop in streaming subscribers. The company projects that it will lose approximately 600,000 streaming subscribers, dropping from 21.4 million to 20.8 million. If the company's under-projected cancellations on overall subscribers are taken into account, it's possible it could see streaming subscriptions reduced by 800,000 or more.
This decline in streaming subscribers has to be of particular concern to Netflix, as it bet the farm on streaming-only delivery, telegraphing its intent several years ago and then implementing a streaming-only service during the attempt to spin off DVD rentals.
Between the time that Netflix announced its streaming-only solution and the after-market trading that took place yesterday, after the Netflix earnings call, the company's stock plunged from a high of around $300 in July to a low of $86.50. For those keeping score, the stock closed at $118.84 before the earnings call, meaning that it lost 26 percent, or more than $31, over the course of a few hours of after-market trading.
The drop in share price by more than 66 percent in three months calls into question Netflix's ability to execute its vision of streaming-only services across the U.S. -- and in the U.K. Yesterday, it announced it will offer a streaming-only subscription to compete with LoveFilm and other premium streaming services.
Netflix plans to double-up on its content spend, negotiating deals for streaming delivery -- a challenge when its number of subscribers is declining.
The other uncertainty in Netflix's streaming-only future is its pricing problem: with the increase in price and splitting apart of fees for streaming and DVDs-by-mail, Netflix is essentially forcing its customers to choose either a full range of content delivered a few times per month or limited content delivered instantly.
This choice will play out over the next sixty days, and Netflix is projecting that DVD rentals will decrease by several million subscribers. What is less than certain, however, is how many customers will convert to streaming-only delivery.
If Netflix fails to make a compelling case for why its streaming service is better than a one-mile trip to a local Redbox, that will call its entire strategy into question, damaging both the brand and the revenue stream.
By working with a partner, Redbox is putting its reputation in another company's hands. But will the new service dilute the brand?
While cord-cutting is a minor trend, subscribers now have more reasons to turn from pay TV.
LoveFilm is about to get some competition, but will subscribers welcome the new option?
Reaching that number took ten months; the one millionth subscriber is getting free lifetime service.
Economic reasons and growing use of online video are cited as the reasons.