Coverage: Netflix shares drop as subscriber growth slows

Netflix Inc. reported Monday that its subscriptions in the second quarter grew much less than analysts expected, sending its stock down 13 percent in after-hours trading.

Shalini Ramachandran and Maria Armental of The Wall Street Journal had the news:

However, the Los Gatos, Calif.-based company also reported earnings that handily beat analysts’ earnings estimates and its prior guidance, thanks in part to lower content costs.

Netflix added 1.68 million streaming subscribers in the June quarter, missing its projection of 2.5 million, and ended the quarter with 83.18 million subscribers, including 79.9 million paid subscriptions.

During the second quarter, Netflix added 160,000 subscribers in the U.S. and 1.52 million abroad, below expectations of 500,000 in the U.S. and 2 million abroad. The company’s domestic subscriber growth has slowed year-over-year over the past four consecutive quarters.

The company had warned it would feel the effects of earlier price increases, particularly in the U.S., where it had said more than half of its customers had been “grandfathered” under the lower prices.

Peter Kafka of Recode noted that Netflix blamed the slowdown on media coverage of its rate hike:

Netflix also told Wall Street that it would added 300,000 U.S. subscribers in Q3, and another two million internationally. Those numbers are also below Wall Street’s projections.

Short story: Netflix has growth problems.

Longer story: Netflix says it added the number of subscribers it expected — but it lost more than it planned.

Why? Hastings blames the media, sort of. He says reports about the price hike Netflix is instituting this year, which raises the price of its most popular plan by a dollar a month, confused people and got them to stop paying even before their actual price hike kicked in.

“Churn ticked up slightly and unexpectedly, coincident with the press coverage in early April” of the price hike news, Hastings said. Except he doesn’t say “price hike” — he says “our plan to un­grandfather longer tenured members.” Which is a very confusing way to say “price hike,” and reminiscent of the contortions Netflix went through to avoid saying “price hike” during its Qwikster debacle in 2011 — a move Hastings eventually said he handled poorly.

Lucas Shaw of Bloomberg News writes that subscribers are sensitive to price hikes:

The results and the forecast show viewers are sensitive to prices at Netflix, just as they are to prices for cable television, now that they have an array of streaming options to choose from in the U.S., from Hulu to Amazon.com Inc. to HBO Now. Netflix discounted the growth of competitors as a factor in its slowdown.

“We are all growing primarily against linear TV hours and that competition did not contribute materially to our miss in Q2,” the company said.

With more than 47 million customers in the U.S., exceeding any domestic premium cable network, Netflix is relying on overseas markets to provide most of its new subscribers in the years ahead. Most analysts anticipate the company’s international customer base will surpass the domestic total in the next couple of years.

Netflix introduced its TV service to 130 new markets in January, completing its international expansion save for one major market: China. The company has reiterated its interest in entering the world’s most populous country, but has provided few updates on its efforts to do so.