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Netflix's higher prices lead to fewer customers

Netflix shares fell 19 per cent Thursday as it lowered its U.S. subscriber forecast.

Paul Sakuma/AP/Paul Sakuma/AP

When Netflix Inc . announced two months ago that it would hike prices for its U.S. subscribers, the company said it wanted to give customers more choice. Now, just two weeks after those prices came into effect for existing members, a number of them have made their choice: to walk away from Netflix altogether.

In fact, enough members have decided to drop the service as a result of the pricing change that on Thursday, Netflix was forced to adjust its predictions for how many subscribers it will keep this quarter. By the time it reports third-quarter results next month, it will have one million fewer subscribers than it predicted in its last earnings report released in July.

At the time, Netflix forecast that by the end of September it would have 25 million subscribers worldwide; it now expects to have 24 million because of losses in both its DVD-by-mail and streaming-only services.

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The price increases began in July for new customers, and hit existing subscribers' bills starting Sept. 1. The July announcement un-bundled the Internet streaming and DVD services in the U.S. – before, it was possible to watch unlimited movies streaming online, and receive DVDs in the mail for $9.99 (U.S.) a month. Customers now have to pay individually for streaming or DVDs, which are $7.99 each or $15.98 for both (taking out two DVDs at a time costs slightly more.) The changes do not affect subscribers in Canada, where only the streaming option is available.

"We know our decision to split our services has upset many of our subscribers, which we don't take lightly, but we believe this split will help us make our services better for subscribers and shareholders for years to come," Netflix executives wrote in a letter to shareholders on Thursday.

The announcement drove shares down about 19 per cent on Thursday to $169.25, continuing the stock's slide since the price hike in July and disrupting what has so far been a seemingly unending growth story. But even with the lagging performance, Netflix's stock is still trading at more than 40 times its earnings, leading some to warn that it is grossly overvalued.

"The question is, is this the right [share]price or is it lower? It's probably lower," said Michael Pachter, an analyst at Wedbush Morgan Securities. "They had a really nice balance with $8 and $10 [subscriptions]before, and they were able to acquire content … When they raised the price, they screwed up that customer balance."

But Netflix is attempting to increase subscriber revenue as it prepares to stare down more competition in the Internet-streaming video space, as well as higher prices to acquire the rights to the TV shows and movies on its service.

Content deals are getting harder to strike. This month, Netflix failed to renew its contract in the U.S. with premium pay TV channel Starz, robbing the service of movies from Sony Corp. and Walt Disney Co. as of next March.

Netflix launched in Canada last year and in Latin America this month, meaning that it has to negotiate entirely new deals for rights within those other countries' borders. This is why the Canadian service is thinner on titles than the American one, as Netflix slowly builds up a library specific to Canada only. The price increase is "an attempt to gain ammunition for the next war," Morgan Stanley analyst Scott Devitt wrote in a research note on Thursday.

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Netflix's competition has also been heating up, as well. now offers movies on its website with pay-per-view or subscription for unlimited viewing options, and there is speculation that Amazon is preparing to release a tablet device; popular U.S. streaming service Hulu has launched a $7.99-a-month service allowing viewers to pay for more content and fewer ads; Best Buy rents movies on its website; and rents movies in the U.S. and recently expanded that service to Canada.

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