Netflix lowers US subscriber forecast; shares fall

Netflix Inc cut its third-quarter forecast by 1 million U.S. subscribers, sending its shares down nearly 15 percent, after a price increase earlier this month caused customers to shy away from its DVD-only service.

In what Wall Street has called a “rare, large and surprising misstep” by Netflix Chief Executive Officer Reed Hastings and his team, the company said it would have 24 million subscribers at the end of the third quarter, down from a prior forecast of about 25 million.

Fewer customers than expected are opting to take Netflix’s DVD-only subscription package. The company now expects to have 2.2 million such subscribers, down from a previous forecast of 3 million.

The company also cut its forecast for streaming-only subscribers, to 21.8 million from 22 million.

Lazard Capital analyst Barton Crockett expressed concern that the changes might also hurt Netflix’s fourth quarter.

“Clearly, if the third quarter is slipping, there’s risk to the fourth quarter, as the year-ago period was a time when everything went right for Netflix,” he said in a research note.

The Los Gatos, California, company’s decision to increase the monthly subscription for a joint streaming and DVD rental service by as much as 60 percent caused an uproar among customers and bloggers.

Netflix, which is under pressure from Hollywood studios and pay-TV rivals on its aggressive pricing, has argued that it sees the future in lower-cost streaming services.

“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 in a statement on its blog

Hastings, who is also on the boards of Microsoft and Facebook, is often seen as a visionary for building Netflix into a successful competitor first to Blockbuster and then, with the introduction of streaming, to traditional cable and satellite TV distributors.

But the cable and satellite TV companies have been pressuring Hollywood studios not to allow Netflix to undermine the $100 billion pay-TV ecosystem.

Hastings now has to prepare himself for the possibility of another subscriber backlash as soon as February if Netflix loses some of its popular programming and movies.

Earlier this month, Starz ended talks to renew a deal that expires on Feb. 28. After that, the pay-TV channel controlled by Liberty Media will stop providing its content, which includes exclusive rights to first-run Sony Corp (6758.T) and Walt Disney Co (DIS.N) movies for streaming on Netflix.

Netflix “can’t grow as fast the Street thinks,” said Wedbush Securities analyst Michael Pachter, who rates the company’s stock at “underperform.” “They can’t have the perfect world where content stays cheap and people sign up at low prices.”

However, Netflix maintained its third-quarter financial outlook as well as its international subscriber forecast.