SAN FRANCISCO -- Netflix's decision to raise prices by as much as 60 percent is turning into a horror show.
The customer backlash against the higher rates, kicking in this month, has been much harsher than Netflix Inc. anticipated. That prompted management to predict Thursday that the company --the largest U.S. video subscription service-- will end September with 600,000 fewer U.S. customers than it had in June.
It will mark just the second time in 12 years that Netflix has lost subscribers from one quarter to the next. The last downturn occurred during 2007 when Netflix lost a mere 55,000 from March through June.
The current hemorrhaging exacerbated fears that Netflix is losing the magic touch that increased its stock 10-fold in the three years leading up to the company's July 12 announcement about its higher prices.
Since then, Netflix has turned into Wall Street's equivalent of a box-office flop. Its shares plunged $39.46, or about 19 percent, to close at $169.25 on Thursday, leaving Netflix's stock price more than 40 percent below where it stood before the company unveiled the higher prices.
It could get uglier if the worst-case scenarios play out. Netflix suffered another setback earlier this month when Starz Entertainment ended talks to renew the licensing rights to a key part of Netflix's video library for streaming over the Internet. The fallout from that decision will hit in March when Netflix will no longer be able to stream the popular mix of recently released movies and TV shows that it got from Starz, raising the specter of another onslaught of customer defections.
"Netflix isn't looking like it's as good a deal because their prices are getting higher and their content isn't getting any better," said Wedbush Securities analyst Michael Pachter. "It's like they have taken the beef away from the buffet."
The new pricing structure was driven by Netflix's desire to build up its service that streams video over high-speed Internet connections, even at the risk of hurting the DVD-by-mail rentals that used to be its main business. Netflix management believes the convenience of Internet video is the main reason that it has added 17 million U.S. subscribers during the past three years, establishing the company as a major player in the entertainment industry.
Even with fewer subscribers, Netflix expects to bring in $10 million to $25 million more from its customers than during the July-September period than it did April-June.
Netflix revenue won't keep rising, though, if more subscribers flee. Pachter thinks that could still happen because some customers won't be billed at the higher rates until the end of the month.