Netflix Stock Tanks After New Q3 Forecast

Netflix shares took a tumble on Thursday after the company revised its guidance on domestic subscriber numbers for the third quarter (PDF). The news arrives after the company revamped its subscriptions and essentially raised the price 60-percent on those who previously streamed and rented video on DVD simultaneously.

Last summer the company originally predicted 22 million subscribers in its streaming service and 15 million subscribers in its DVD service by the end of September 2011. But on Thursday the company was forced to reduce the number of streaming subscribers down to 21.8 million and the number of DVD subscribers to 14.2 million thanks to its clever price hike which took place at the beginning of the month.

According to reports, Netflix shares actually dropped 14.5-percent after the revised guidance was released, reducing the price-per-share down to $178.56 USD, taking a $30 per-share hit. In addition to the new Q3 numbers, the share drop may also be associated to Starz Entertainment's decision to not renew its streaming deal with Netflix, citing the inability to reach an agreement with the streaming/rental service.

"This decision is a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content," Starz said on September 1. "With our current studio rights and growing original programming presence, the network is in an excellent position to evaluate new opportunities and expand its overall business."

Thursday's revised Q3 guidance backed up the company's decision to split its streaming/DVD service into two entities, claiming that it was the "right long-term strategic choice" despite the drop in subscribers. "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," the company said.

Netflix also outlined its reasoning for dividing the streaming/DVD service into two separate subscriptions:

  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.

Still, with subscribers jumping ship and stock value falling, maybe Netflix didn't make the best decision. It remains to be seen when Blockbuster launches its own video streaming subscription service next month. Will Blockbuster reclaim its throne?