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Netflix shares tumble as subscribers leave after price increase

Netflix: Price increase affects shares

This post has been corrected. Please see note at the bottom for details.

The hottest success story in the entertainment industry until this summer, Netflix is losing subscribers as well as stock-market value in the wake of a controversial price increase.

The video rental company's shares plunged 17% on Thursday after it warned investors that it would end the current quarter with fewer subscribers than it previously predicted.

Netflix says it now expects to have 24 million subscribers in the U.S. on Sept. 30, down from 24.6 million subscribers the company had at the end of June. Netflix previously estimated it would have about 25 million subscribers at the end of September.

The reason for the reversal: The company's decision to charge separately for the two ways it distributes movies: Internet streaming and DVDs by mail. Each plan costs at least $8 a month, which works out to a price increase of as much as 60% for customers who continue to use both delivery methods.

The reduction in Netflix's expected subscriber numbers came mostly in the figures for customers paying only to get DVDs through mail. The company had projected it would have 3 million DVD-only subscribers at the end of the third quarter, but now says it expects 2.2 million. Its estimate for streaming-only customers fell slightly to 9.8 million from 10 million. The company still expects 12 million people to pay for both services.

"This highlights the difficulty Netflix has internally of forecasting consumer response to the major price change," Lazard Capital Markets analyst Barton Crockett wrote in a research note. He called the news "a rare, large and surprising misstep" for the company.

Netflix did not change its revenue or profit estimates or its predictions of growth in Canada and the Latin American countries where it recently launched, but investors still punished Netflix's stock, fearful that it indicated a turn in the company's growth prospects.

In a brief letter to investors, Netflix Chief Executive Reed Hastings and Chief Financial Officer David Wells continued to defend the price increase, saying it would allow the company to license more digital movies and television shows.

In the short run, however, Netflix is facing the loss of some of its highest-profile content. Pay channel Starz, which controls the rights to movies from Sony Pictures and Walt Disney Pictures, has said it will not renew a deal allowing Netflix to stream those films. That deal expires Feb. 28.

With about three hours left in the trading day, Netflix shares were trading at $174.23, down $34.59, or 17%. The stock is down from a high of almost $300 in July.

[For the Record, 12:45 p.m.: An early version of this post incorrectly said Netflix stock is up from its price at the beginning of the year.]

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-- Ben Fritz

Photo: Netflix Chief Executive Reed Hastings in Mexico City on Monday. Credit: Netflix

 
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