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Netflix has adjusted its third quarter forecast today, lowering its subscriber outlook by about one million. In July, the company thought it would close the period with 25 million subscribers, including 22 million customers accessing Netflix's streaming platform and 15 million people receiving DVDs through the mail (12 million using both services).
In its latest update, the video outfit believes the third quarter will conclude with 24 million subscribers – 21.8 million streaming, 14.2 million renting DVDs and 12 million doing both. The million subscriber loss has been attributed to the company's recent price adjustments, which went into effect on September 1 and costs more for the same services.
The company's new DVD-only plans cost $8 a month for one rental at a time or $12 for two. Additionally, it separated its unlimited DVD and unlimited streaming services, which were previously offered together for only $10 a month. Now users must pay $8 per month for unlimited streaming and another $8 to receive DVDs via mail.
Netflix's guidance update seems to have spooked or otherwise disappointed investors, as the company's share price witnessed a double-digit drop to its lowest point in 2011. As of writing, shares are $169.25, down some 19% since the company's announcement on Thursday morning. Neflix shares were $300 earlier this summer.
Nonetheless, the company stands by its decisions. "Despite the guidance revision, we remain convinced that the splitting of our services was the right long-term strategic choice," Netflix executives said in a letter to shareholders. To justify its moves, the company gave investors its four-fold strategy, which we've included at the end of this post.
In addition to raising its prices, Netflix caught flak this month after losing its contract with Starz Entertainment. The pair signed a four-year deal in 2008 that gave Netflix access to over a thousand videos from Sony, Walt Disney and others. The companies failed to reach a new agreement and the existing contract expires on February 28, 2012.
The strategy behind the split of our services is four-fold:
(1) to create a dedicated DVD rental division that takes pride in great execution and maximizes the opportunity for disc rental over the coming decade;
(2) to enable us to improve our global streaming service even more rapidly, because it is not meshed with a domestic DVD business;
(3) to enable us, with the growth in revenue, to license more streaming content and thereby improve our streaming service even more;
(4) to remain very price aggressive, with $7.99 per month for unlimited streaming of a huge library of TV shows and movies, and $7.99 per month for unlimited DVD rentals, 1 out at-a-time.
We know our decision to split our services has upset many of our subscribers, which we don't take lightly, but we believe this split will help us make our services better for subscribers and shareholders for years to come.