Netflix subscriber loss triggers panic selling

Investors dumped shares of Netflix in after-hours trading after the company announced Monday afternoon that it had lost 810,000 subscribers in the third quarter while warning that sales and earnings would fall short of expectations in the fourth quarter.

At one point, shares of Netflix fell more than 31% in response to the disclosure, which accompanied the company's Q3 earnings announcement.

Netflix finished the quarter with 23.8 million subscribers period, falling short of the 24 million subscribers management had forecast. Management expects to gain U.S. subscribers in the current quarter, although Netflix didn't set a specific target. The company earned $62.5 million, or $1.16, per share, in the third quarter. That compared to income of $38 million, or 70 cents per share, at the same time last year.

Netflix's customers began a revolt when CEO Reed Hastings decided to raise prices for a popular subscription plan. Instead of paying $10 for access to both DVD-by-mail operations as well as streaming video, Netflix broke up each delivery method into separate plans that coast $7.99 each.

He followed up on that by announcing last month he would spin off DVD-by-mail operations into a separate service called Qwikster. It didn't help boost confidence much when he abruptly scrapped the Qwikster plan three weeks later. Netflix appeared rudderless.

In a letter to subscribers it issued, Netflix detailed the chronology of errors that it said would hurt its fourth quarter performance:

We think that $7.99 for unlimited streaming and $7.99 for unlimited DVD are both very aggressive low prices, relative to competition and to the value of the services, and they are the right place for Netflix to be in the long term. What we misjudged was how quickly to move there. We compounded the problem with our lack of explanation about the rising cost of the expansion of streaming content, and steady DVD costs, so that absent that explanation, many perceived us as greedy. Finally, we announced and then retracted a separate brand for DVD. While this branding incident further dented our reputation, and caused a temporary cancellation surge, compared to our price change, its impact was relatively minor. Our primary issue is many of our long-term members felt shocked by the pricing changes, and more of them have expressed that by cancelling Netflix than we expected.

Because of this, our revenue and profits in Q4 will be lower than we had anticipated, but we'll remain profitable on a global basis. In Q1'12 we'll be launching in the UK and Ireland, as we had planned. For a few quarters starting in Q1, we expect the costs of our entry into the UK and Ireland will push us to be unprofitable on a global basis; that is, domestic profits will not be large enough to both cover international investments and pay for global G&A and Technology & Development. After launching the UK and Ireland, we will pause on opening new international markets until we return to global profitability. We plan to do that by increasing our global streaming subscriber base faster than we increase our costs.

"The last few months...have been difficult for shareholders, employees, and most unfortunately, many members of Netflix," Hastings wrote in the letter to investors. "We've hurt our hard-earned reputation."