Netflix Shares Fall as Subscriber Growth Hits a Wall

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Shares of Netflix fell sharply Tuesday after it reported lower-than-expected second quarter earnings, which the company blamed on subscriber growth that fell short of forecasts.

Netflix added 1.7 million subscribers in the quarter, pushing its total membership to more than 83 million, the company said in a letter to shareholders. However, that growth was far less than the 2.5 million it had projected.

"We are growing, but not as fast as we would like or have been," reads the letter. "Disrupting a big market can be bumpy, but the opportunity ahead is as big as ever and we continue to improve every aspect of the business."

Netflix shares fell more than 13 percent to US$85.84 Tuesday from its previous close of $98.81. Shares ticked up on Wednesday to $88.17.

Gross additions were on target, but churn ticked up slightly and unexpectedly due to this spring's media coverage of the company's plan to "un-grandfather" its longstanding members, which led to the perception of a new price increase, according to the letter.

Although the un-grandfathering and related media coverage may moderate near-term membership growth, it will provide the company with enough revenue to satisfy members, the letter says.

Netflix's new three-tiered pricing policy -- $7.99 for standard definition, $9.99 for high definition and $11.99 for ultra high definition -- is working well for the company and for new members, the company maintained.

Its earnings came in slightly below forecast, with operating income of $70 million and net income of $41 million, compared with a forecast of $47 million and $9 million, due to lower-than-expected content and other costs, according to Netflix.

Subscriber growth in the U.S. came in at 160,000, compared with a 500,000 forecast; domestic revenue rose 18 percent, and domestic ASP grew at a rate of 4.5 percent.

The company forecast third-quarter net additions of 300,000 in the U.S., and predicted that domestic growth in the third and fourth quarters would improve on a year-over-year basis.

Netflix may have come close to maxing out audience penetration, suggested Tim Mulligan, senior analyst at Midia Research.

Also, its ability to deliver on some key content categories is still limited, compared to traditional cable and other streaming services, he told the E-Commerce Times.

"Without fully replicating the content diversity of the large pay-TV incumbents -- namely, the glaring absence of sports and news -- Netflix will always struggle to justify increased prices in its domestic market," Mulligan maintained.

A subscription price above $10 per month may lead to a "point of sensitivity" among streaming content subscribers, noted Michael Jude, a program manager at Stratecast/Frost & Sullivan.

Netflix still faces a host of competitors, including Hulu, Amazon Prime, YouTube Red and others, he told the E-Commerce Times.

Meanwhile, the company reported international membershp growth came at 1.5 million, compared with a forecast of 2 million. Un-grandfathering took place in the UK, Ireland, Canada, Latin America and the Nordic countries, leading to retention issues similar to those experienced in the U.S.

Netflix projected international net additions of 2.0 million in the third-quarter, and contribution loss of -$95 million. It forecast aggregate profit of $500 million in 2016.

The regulatory environment in China has become more challenging, the company said. The government shut down Disney's streaming service, as well as films from Apple.

Netflix is exploring other options to get that content out.

It began testing Google Play in-app payment on Android devices during the second quarter, as part of an increased investment in mobile due to more consumers viewing content on mobile devices.

David Jones is a freelance writer based in Essex County, New Jersey. He has written for Reuters, Bloomberg, Crain's New York Business and The New York Times.

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