After the market closes today Netflix will release its highly anticipated Q3 results, which will lay bare the full consequences of the company's decision to raise its rates, spin off the DVD operation as Qwikster, and then reverse itself, all of which happened during the chaotic quarter. The key thing to look at is how all of this affected U.S. subscribers - how many new ones were acquired during the quarter, how many churned out and of course what the ending total is. After all the ink that's been spilled speculating on management's decision-making, these metrics - plus its Q4 guidance - will reveal just how severe the impact of all these decisions really was.
The only thing that Netflix has said regarding subscribers was way back on Sept. 15th, when it reduced its guidance for ending Q3 U.S. subscribers by 1 million, to 24 million. This figure is below the low end of it original Q3 forecast of 24.6 million to 25.4 million subscribers. Since Netflix ended Q2 with 24.59 million U.S. subscribers, at a minimum it means that the company will lose at least 590K subscribers in Q3.
However, the important thing to remember here is that this revision was made only in response to the price increase; the Qwikster split-off wasn't announced until a few days later. So in effect, Q3's actual results really hinge on how severe the subscriber reaction was during the last 2 months of September. As I've said before, it's anyone's best guess how to quantify the Qwikster impact, but surely one proxy is the nearly 28K comments that were made to the blog post announcing the split-off, practically all of which were negative.
It's possible, of course, that those comments came from the vocal minority, and that anecdotal evidence of subscriber attrition won't really translate into the final results. Or they might. It's just not possible to know. Beyond the churn, all the negative PR also reduced the level of gross subscriber additions, Netflix's CFO conceded, meaning net subscribers were hit by a double whammy.
On the bright side, this morning Netflix announced that in early 2012 it will introduce service to the U.K. and Ireland, beginning a long-awaited European push that adds to its Canadian and Latin American expansions (though the timing of the announcement, on the morning of the Q3 results, could be interpreted as a diversionary tactic, suggesting ending subscribers will be at the low end of expectations). Then there's the question of Q4 - will Netflix project that it has steadied the ship going into the all-important holiday season, or is it too early to tell?
The only thing that's for sure is that Q3 will go down as the company's most tumultuous in its history.
Come back later today for more once the results are announced.
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