Netflix Lowers Subscription Expectation and Shares Fall 19%

After Netflix has been ridiculed and loathed for raising their DVD subscription fee by 60%, the company has lowered their subscription forecast. According to “Netflix lowers U.S. subscriber forecast; shares fall” by Yinka Adegoke and Lisa Richwine, the company “cut its third-quarter forecast by 1 million U.S. subscribers”. The immediate result was an almost 19% drop in shares Thursday.

In the article, Analyst Barton Crockett states the less-than-expected forecast for the third quarter could be a foreshadowing of a bad fourth quarter. CNBC’s "Fast Money" also had the same feeling. Analysts and anchors of the show felt that Netflix literally shot themselves in the foot by raising their prices 60%. The decrease in shares and forecast is just the obvious result of angry customers, which could lead to the downfall of the company.

Although Netflix claimed that they were not phasing out the DVD division, the article states that Ted Sarandos, chief content officer, “said the pricing decision gave customers a chance to choose whether to keep DVD services or move to a cheaper streaming-only option”. To me, this translates as “we raised the price in order to force you to choose streaming-only option” or even better put, “we are phasing out the DVD division”.  Then the article actually has Sarandos quoted as saying

“Being able to precisely forecast and predict the behavior of that many people on fairly radical change is something we’ll get better at all the time”

Obviously, raising prices allows any company to correctly predict they will lose customers.

Netflix has left me in awe. I absolutely admired Netflix for creating the streaming industry, leading with results, and challenging the cable/media industry. Raising prices by 60% when there is competition is stupid (remember, there was a time when Netflix didn’t have direct competition). Now, customers have options and competition is attracting media content, content that could leave Netflix just as Starz recently decided. Netflix may be the leader of its industry but they are not invincible. Let’s see if they can keep their industry position when Starz pulls their content in February.