Netflix Account Losses Much Higher Than Expected After Pricing Backlash

Netflix has lost 800,000 subscribers in the last three months, according to numbers released as part of the company's third quarter financial report on Thursday. The streaming-and-DVD site is down to 23.8 million users as of September 30, 2011, compared to 24.6 million users on June 30, 2011.

The reason for the loss, per a letter to investors written by Netflix CEO Reed Hastings and CFO David Wells:

Our primary issue is many of our long-term members felt shocked by the pricing changes, and more of them have expressed that by canceling Netflix than we expected.

In June, Netflix announced the separation of its DVD and streaming services, which effectively made the cost of bundling the two together $16, a 60 percent increase from the previous price of $9.99. This price hike, and the seemingly callous way in which Netflix carried it out, caused an incredible subscriber backlash in the form thousands of comments on the Netflix blog and even more outraged tweets.

The perception that Netflix was out-of-touch gained momentum in September when Netflix announced that DVDs would be available only on a separate website, called Qwikster; that the Twitter account @qwikster belonged to a foul-mouthed teenager did not help matters, and Netflix quickly reversed course and killed the Qwikster service before it even launched. Hastings and Wells analyze the saga briefly in the letter to investors:

While we dramatically improved our $7.99 unlimited streaming service by embracing new platforms, simplifying our user-interface, and more than doubling domestic spending on streaming content over 2010, we greatly upset many domestic Netflix members with our significant DVD-related pricing changes, and to a lesser degree, with the proposed-and-now-cancelled rebranding of our DVD service. In doing so, we've hurt our hard-earned reputation and stalled our domestic growth.

The devastating subscriber loss announcement comes on the same day that Netflix unveiled plans to open a website in the UK and Ireland, continuing an international rollout that began with Canada in 2010 and over 40 Latin American and Caribbean countries earlier in 2011. The letter to investors also cautioned that this rollout could push the company into the red briefly in the fourth quarter, as international losses could outpace domestic profits.

Netflix stock is down to a price point of under 100 after hours; just before the price hike was announced, it sat at a 52-week high of about 324.