Oct 15, 2014 5:25 PM

Netflix's stock plunges as subscriber growth lags

The Associated Press

SAN FRANCISCO (AP) This is a sequel that Netflix shareholders never wanted to see: The world's largest Internet video service has once again turned off potential viewers with a price increase that is punishing the company's stock price.

The backlash surfaced in a third-quarter earnings report that Netflix Inc. released Wednesday. Netflix's subscriber growth lagged well below management forecasts, a shortfall that CEO Reed Hastings traced to a $1-per-month price increase imposed in the U.S. about five months ago.

The disappointing performance spooked investors already on edge after Netflix rival HBO announced plans for an Internet-only package in the U.S beginning next year.

Netflix's stock plunged $111.49, or nearly 25 percent, to $337.107 in extended trading. If the downturn is mirrored in Thursday's regular trading session, it will wipe out nearly $7 billion in shareholder wealth.

The sell-off evoked unwelcome memories of the battering that Netflix absorbed beginning in July 2011. It raised prices by as much 66 percent for customers who had been subscribing to the company's DVD-by-mail option as well as the Internet video option. The company lost 800,000 subscribers and its stock slumped more than 80 percent over the next year.

But it bounced back, and the customer reaction hasn't been anywhere as harsh this time. The 13-percent increase only affects subscribers who signed up since May. Prices for households with subscriptions prior to the price increase remain at $8 per month in the U.S. through May 2015.

There are still plenty of people who apparently view Netflix as a bargain the company added 3 million worldwide subscribers during the three months ending in September.

But those gains missed management's projected gain of 3.7 million subscribers for the period, rattling investors. In the U.S., Netflix added about 1 million subscribers, missing the target of 1.3 million set by the Los Gatos, California, company.

"As best we can tell, the primary cause is the slightly higher prices we now have compared to a year ago," Hastings wrote in his quarterly letter to shareholders. "Slightly higher prices result in slightly less growth."

Netflix is also facing fiercer competition from the likes of Amazon.com Inc., which also recently raised its prices, and Hulu. Hastings, though, brushed off those concerns, insisting there was no evidence that Netflix is losing Internet video viewership to its rivals.

Time Warner Inc.-owned HBO's decision to sell an Internet version of its popular pay-TV channel also won't damage Netflix either, according to Hastings. "Many people will subscribe to both Netflix and HBO since we have different shows, so we think it is likely we both prosper as consumers move to Internet TV," he wrote.

Hastings also reiterated his belief that Netflix eventually will have 60 million to 90 million subscribers in the U.S. The company ended September with 37.2 million U.S. subscribers and expects to add nearly 2 million by the end of this year.

Netflix's debut in France and Germany last month helped the company pick up 2 million subscribers in international markets. That left Netflix with nearly 16 million subscribers outside the U.S.


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