Can Netflix recover from self-inflicted wound?

Video streaming company revises downward Q3 subscriber projections

Shares of Netflix (NASDAQ: NFLX) plunged nearly 20% Thursday after the DVD rental and streaming video company revised downward its third-quarter estimates for U.S. subscribers by 1 million.

The revised estimate comes two months after Netflix raised its rates by about 60% and split its video streaming and DVD-by-mail offerings into separate services.

The hefty price hike -- well, hefty on a percentile basis, though the actual amount comes to $6 a month for subscribers who opt to continue with both services -- sparked huge outrage in mid-July and forced Netflix to endure a subscriber exodus it hoped would be minor and short-lived.

In Thursday's statement, Netflix CEO Reed Hastings said the company expects to have 2.2 million DVD-only subscribers, down from the 3 million forecast on July 25, and 21.8 million streaming-only customers, down from the previously predicted 22 million.

"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."

We'll see about that. But on Thursday, at least, investors reacted negatively to the revised subscriber estimates (though Netflix maintained its financial guidance for the quarter).

Shares finished down 39.46, or 18.9%, to 169.25, after falling as low as 168.13. Since announcing its revised pricing plan on July 12, the company's stock is down 42%.

Netflix clings to the hope that the storm soon will pass, but Lazard Capital analyst Barton Crockett said in a research note quoted by Reuters that the fallout could extend beyond Q3:

"Clearly, if the third quarter is slipping, there's risk to the fourth quarter, as the year-ago period was a time when everything went right for Netflix."

While Crockett focused on the price hike -- which he termed a "rare, large and surprising misstep," according to Reuters -- Netflix faces other problems not of its own making. Besides the increasing video streaming competition from companies such as Amazon.com and Facebook, Netflix may soon be either paying more for content or offering less content to subscribers (and maybe even both).

One of its major content providers, Starz, abruptly cancelled renewal negotiations early this month for a deal that expires on Feb. 28, 2012. And even if the contract is renewed, Netflix can expect to pay much more for Starz movies under the current pact.

Offering less for more is not a recipe for long-term success or customer satisfaction. The question is how long before this perfect storm lasts, and how much damage it does to the value of the company.

The truth is, for all of his reassurances to shareholders, Hastings has no idea how this movie will end.

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