Not surprisingly, recent Netflix price hikes took their toll, with approximately 800,000 angry customers dropping the service in recent months, the company revealed today.
Netflix ended this quarter with 23.8 million domestic subscribers, down from 24.6 million in July. In all, Netflix had 21.4 million streaming subscribers and 13.9 million DVD rental customers.
The drop in U.S. customers was "driven by a higher than expected level of cancellations and a reduction in acquisitions driven by the PR storm that engulfed our brand and its impact on word-of-mouth," Netflix wrote in a Monday letter to shareholders.
Netflix irked customers over the summer by announcing plans to split its DVD and streaming plans and charge $7.99 for each service, raising the price of accessing both from $9.99 per month to $15.98 per month. Later, Netflix said it would split those businesses entirely and call the DVD rental business Qwikster, but backlash prompted the company to abandon those plans. "Qwikster became the symbol of Netflix not listening," Netflix CEO Reed Hastings said during a conference call with analysts.
Netflix said today that it was the price hikes that were more damaging to its reputation. "While the branding incident further dented our reputation, and caused a temporary cancellation surge, compared to our price change, its impact was relatively minor," the company said.
The current pricing scheme is the right decision for Netflix in the long term, the company said, but it "misjudged" when to make that move. "Many perceived us as greedy," Netflix said, but the decision was made because of the rising cost of streaming deals and steady DVD costs.
Resulting cancellations were higher than Netflix expected. When the price hikes showed up on peoples' debit and credit card statements in September, it kicked off a wave of losses, which peaked a few weeks ago, Netflix said. Those, however, "are now steadily declining."
Netflix revealed that only 7 percent of new customers select the hybrid DVD plus streaming, and today, less than half of streaming subscribers also get DVDs by mail. When asked by investors why it does not offer a discount for those who opt for both, Netflix said if anything, it would reduce the price on streaming because "our future is in rapidly expanding streaming." The company does not want to incentivize people to switch to DVDs, Hastings said, and Netflix thinks that "$7.99 is such a great price" that it should focus on building up its streaming library.
It's All About the Content
Netflix downplayed the loss of Starz content on its streaming platform as well as competition from the likes of Amazon and HBO.
Starz content, however, accounts for 6 percent of its viewing hours via Watch Instantly; when Showtime was still available, that number was at 10 percent. Netflix spun these stats to say that "Netflix has about 10 times the streaming content selection of full Starz, in terms of what consumers actually choose to watch."
In terms of Amazon Prime, Netflix said it examined the company's instant library and "we have essentially all of this content on Netflix, and that content contributes a small fraction of Netflix viewing." Hulu Plus, meanwhile, is a different beast because it offers access to current seasons of TV content, which Netflix does not. It is, therefore, a "complementary model to us, like sports or news subscriptions," Netflix said.
"We have dramatically more content than any other subscription service or network, but given the existing licensing structure of the cable network industry, the total content available will likely remain carved up between Netflix, Showtime, HBO, Hulu, and others," Netflix said.
"We don't have to 'beat' Starz or other networks to succeed," the company said. "We won't have every movie or TV series; but we do provide enough value that consumers also want to subscribe to Netflix."
Part of the Qwikster plan, meanwhile, including the addition of video game rentals, but that is now on hold. "We have yet to decide whether or not to offer video game discs," Netflix said. "The decision will have little financial impact either way."
Netflix today announced plans to expand into the U.K. and Ireland. Hastings was asked why Netflix selected such an expensive and competitive market considering that Sky Movies has exclusive deals with six major movie studios. Hastings said Netflix has a "huge opportunity" when it comes to TV content and movies not released by those studios. Sky Movies, he said, is also rather expensive at about $25 per month, so Netflix can capitalize there.
But given the troubles in the U.S., Netflix will temporarily halt international expansion until the company returns to global profitability, Hastings said, which could take several quarters. Netflix launched in Canada in September 2010, and came to Latin America in early September.
For more, see Netflix Ditches Qwikster: What You Need to Know.
Editor's Note: This story was updated at 6:30pm Eastern.