Last updated: October 25, 2011 3:08 pm

Netflix down 40% as subscribers drop

Netflix shares dropped sharply in early trading on Tuesday after the company revealed that subscriber numbers had fallen by more than expected and warned that its UK launch would push it into the red.

The stock fell 40 per cent in the first minutes of trading, before settling at $76.01, a 36 per cent fall.

Shares in the online streaming and DVD subscription group have tumbled in the last three months after a series of gaffes, including a sharp price increase and an ill-judged rebranding exercise, sparked an exodus of customers.

Netflix shares touched $300 in July but at the market close on Monday they were $118. In a letter to investors, a contrite Reed Hastings, chief executive, said that many of the company’s “long-term members felt shocked” after the company increased prices by about 60 per cent, adding “more of them have expressed that by cancelling Netflix than we expected”.

The number of US Netflix subscribers fell in the quarter for the first time, with 23.79m people subscribing to the service, compared with 24.59m in the previous quarter.

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Netflix has been trying to shift its customers away from the DVD subscription service to the higher margin streaming business, and recently said it would separate the two businesses, rebranding the DVD business as “Qwikster” – only to abandon the plan weeks later.

Netflix users have cancelled their DVD subscriptions in droves but the company warned on Monday that the number of streaming customers had also fallen as customers with bundled subscriptions left the service. “Those subscribers are cancelling streaming, which reduces revenue and streaming subscriptions,” Mr Hastings wrote in his letter.

The pace of streaming cancellations had slowed, he added, although the company expects streaming cancellations to continue to fall until December when it expects a return to positive territory. The effect of these cancellations and the company’s uncertain outlook could be found in the broad earnings guidance range for the fourth quarter, with Netflix anticipating earnings per share to be $0.36-$0.70.

Revenues for the three months to September 30 were $821.8m, compared with $553.2m in the same quarter the previous year. Net income rose from $38m to $62.4m while earnings per share were $1.16, compared with $0.70.

Netflix is set to launch its online TV and movies subscription service in the UK and Ireland early next year, putting it head to head with Tesco, Amazon.com and Google’s YouTube as well as new start-ups such as Vdio.

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