Netflix Inc.’s (NFLX) shares plummeted almost 19% in yesterday’s trade after the company cut down on the projected subscriber base for its third quarter of fiscal 2011. Estimates for the total subscriber base declined by a million.
The new estimate pins the company’s DVD-only subscriber count at 2.2 million, down from the previously projected estimate of 3 million. Netflix also lowered its estimates for its streaming subscriber base to 9.8 million, down from the previously-guided estimate of 10 million.
However, the company retained its projection of 12 million customers in the third quarter using both services. Netflix also has not changed its financial forecast for the third quarter despite the projected loss of its subscriber base.
Netflix’s subscriber loss is likely on account of its new subscriber plan that was formulated in July, which divided its mail-order and streaming services into two separate plans. It raised the prices by 60% to $15.98 a month. The new rates were immediately effective for new subscribers that opted for both DVDs and online streaming services. For existing subscribers the new rental plan becomes effective from this month.
Netflix had expected a decline in its subscriber base when it announced the new rental plan, but the company never expected this type of repercussion. This would be the second time Netflix has posted a net loss in domestic subscribers, the last time being in 2007 due to stiff competition from Blockbuster.
This recent development is likely to be a heavy blow to Netflix after the license renewal talks between Netflix and Starz Entertainment LLC failed in Sept 1, 2011. With that deal falling through, Netflix lost out on content from Walt Disney Co. (DIS) and Sony Corp. (SNE) movies.
In this context, the intensifying competition in the online streaming market from large players such as Amazon.com Inc. (AMZN), Apple Inc. (AAPL) and Google Inc. (GOOG) act as an additional pressure as it will further push up the license fee and also make subscriber acquisition more difficult.
Netflix has a growth plan that includes overseas expansions, which along with higher license and renewal fees and technology investments could result in some cost escalation. Moreover, this expansion plan and the subsequent cost escalation come at a time when the shrinking subscriber base looks likely to weigh on the company in the coming quarter.
Additionally, Movie Gallery Inc. and Red Box, the kiosk company owned by Coinstar Inc. (CSTR), are also increasing competition for Netflix.
Thus, we have a Neutral recommendation on Netflix’s shares in the long term.
We currently have a Zacks #3 Rank for Netflix Inc., which translates into a Hold rating in the short term.
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