Netflix Discovers $8.99 a Month Might Be Too Much to Ask

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Netflix (NFLX) is still growing, but it's not growing fast enough. The world's leading premium video service took a hit after posting disappointing quarterly results on Wednesday night.

The stock-rattling shocker is that Netflix ended the third quarter with 53.06 million streaming subscribers worldwide. That's 3 million more than it had at the end of June, but Netflix itself was forecasting 53.74 million accounts.

Netflix is typically conservative with its guidance, making the shortfall as troubling as it is surprising. It has a scapegoat. It's pointing to its springtime rate increase as the primary cause for its blown forecast.

"Slightly higher prices result in slightly less growth, other things being equal, and this is manifested more clearly in higher adoption markets such as the U.S.," Netflix notes in its letter to shareholders.

When it issued its forecast in late July it was still basking in the magnetism of the second season of "Orange Is the New Black" that resulted in a healthy trickle of signups. Once that buzz subsided, new members became harder to come by.

Bucking the Trend

Netflix's move to increase the monthly rate in May didn't take the market by surprise. A few months earlier it had announced in an earnings call that it was entertaining a hike. It was pondering $8.99 or $9.99 as the new monthly rate, up from the original $7.99. It chose the lower of the two increases.

Existing subscribers were fine with the move. Netflix promised to grandfather them in at $7.99 a month for two years.

The market understood, and that was something that couldn't be said a few years ago when there was widespread outrage about Netflix splitting its DVD and streaming services. Customers on DVD-based plans would have to pay as much as 60 percent more if they wanted to continue to stream content, too.

May's increase was the first time that Netflix had increased the rate of its stand-alone DVD service. It seemed as if it would be able to pull it off without a hitch, but now, potential new customers appear to be balking.

HBO on the Go

With Redbox Instant shutting down and Streampix redefining its value proposition, the competition seemed to be caving in to Netflix. However, just hours before Netflix's report, Time Warner's (TWX) HBO suggested that it will roll out a stand-alone streaming service in this country.

HBO didn't offer pricing or a timetable for its availability, but it's an interesting move for a company that Netflix CEO Reed Hasting has often considered its biggest rival. This may make it seem like an unfortunate time for Netflix to be increasing prices, but since HBO charges roughly twice as much as Netflix for its cable-based offering, it's unlikely to be much of an issue here.

Netflix is looking to land more than 4 million net new streaming additions during the current quarter. It's targeting to surpass 57 million streaming members by year's end, and that forecast is taking into consideration the slowdown since the price hike. Netflix will be fine, even if the stock action paints a bleaker portrait.

Motley Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. Check out our free report on high-yielding dividend stocks.
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