Netflix reports first subscriber quarterly loss
Announces price cuts, customer service improvements
By Jennifer Netherby -- Video Business, 7/23/2007
JULY 23 | After recording its first ever quarterly loss in subscribers, Netflix said Monday it is lowering prices and investing in improving customer satisfaction as part of a shift in strategy meant to hold its market share as it battles Blockbuster Online.
Netflix closed its second quarter June 30 with 6.74 million subscribers, 55,000 fewer than it had at the end of the first quarter. Execs blamed increased competition from Blockbuster Total Access, which allows users to rent movies online and in-store for one monthly fee.
On Sunday, Netflix said it would cut $1 off the price of two of its plans to match prices offered by Blockbuster Online. Netflix's three-movies-out, unlimited rentals plan, the company's most popular, is now $16.99 a month, and its one-movie-out, unlimited plan is $8.99 a month. Both plans allow users to rent an unlimited number of movies each month. The price cuts take effect Tuesday.
Netflix already slashed $1 off the price of its two-movies-out plan, which had been $14.99 a month, and off of its $5.99, one-movie-out plan.
During the earnings call, Hastings said Netflix continues to test lower prices.
The company is predicting Blockbuster will stick to its current pricing strategy as long as it can, despite thin margins, to gain a larger share of the growing online market.
To compete, CEO Reed Hastings said Netflix also will open 10 new distribution centers this year to improve customer satisfaction. The company plans to cut back spending on marketing to partly pay for the shift.
“We believe Netflix is well-positioned to compete effectively and to emerge from the current battle strong, growing and profitable,” Hastings said.
However, the company expects to face “intense” competition from Blockbuster for the remainder of the year. Netflix lowered its full-year forecast, now expecting net income of $42.4 million to $52.4 million, down from a forecast range of $55 million to $60 million in April.
Despite the competition, the company reported near-record net income during the second quarter, boosted by lower advertising spending and a settlement payment from Blockbuster. Net income rose 50% to $25.6 million for the quarter ended June 30. Revenue was up 27% to $303.7 million.
The company disclosed that Blockbuster paid a one-time $4.1 million payout to settle the patent infringement lawsuit Netflix had filed.
Netflix CEO Reed Hastings said he doesn’t expect Blockbuster to change its pricing strategy this year, predicting the next few years would see both companies fighting for a bigger share of the growing online rental business.
“Consumers aren’t shifting away from DVD rental, but they are shifting away from store rental to online rental,” he said.
Netflix said 3.7 million new subscribers joined an online service in the last 12 months, up from 2.5 million who joined between mid-2005 and mid-2006. He predicted another 4 million would join by next year. Hastings forecast that in three years, most rental will be done through online services such as Netflix rather than in stores.
Hastings said viewing of Netflix's online Watch Now service is relatively small but steadily growing. He said the company would introduce TV viewing for Watch Now next year but didn’t give any details.
Netflix released its earnings after the close of market. The company’s stock was down throughout Monday, closing down 12% at $17.27, after it announced subscription price cuts.
