Netflix Stock Plunges After 800,000 Members Quit

Online video giant drops another 35 percent on Wall St.

ByABC News
October 25, 2011, 10:07 AM

Oct. 25, 2011 — -- Are you still a Netflix subscriber? Didn't think so. If you were angry enough at the company to cancel your membership, it now says there are 810,000 people just like you.

Do you own Netflix stock? If you haven't sold it, you've missed your chance; the stock -- already down 60 percent since the company announced a disastrous price hike in July, dropped another 35 percent today. Netflix stock briefly hit $300 per share on July 13. Today, it closed at $77.37.

Though it still does have 23 million members, Netflix managed to make the kind of mistake so massive that people will study it at business schools for generations to come. The company had a remarkably successful movies-by-mail service, but decided it would be left behind if it kept sending DVDs to people instead of streaming them online. So it tried to spin off its mail service to a new business called Qwikster. Customers revolted.

"They're making a transition from a 'momentum stock,' where you can do no wrong," said Vasily Karasyov, an analyst at Susquehanna Financial. "When the momentum's gone, you see the complete annihilation of the share value. That's why they call it a momentum stock."

Netflix actually beat Wall Street estimates when it reported profits Monday, but it warned that it would lose money in 2012. It needs to clean up the mess in the U.S., and it's trying to expand its service in the U.K.

"We moved too quickly," CEO Reed Hastings told ABC News last month. "We didn't give it enough thought. We didn't give it enough explanation, enough integration, and you know, that's legitimately caused our customers to be angry."

Silicon Valley analyst Rob Enderle said Netflix did not move too quickly, just badly.

"They took a service that was bundled and had a price folks were used to, and both unbundled and raised the price," he said in an email. "It was incredibly stupid. Effectively they motivated their most profitable users to either drop them or reduce their service level to be less profitable."

CEO Hastings was in full crisis-management mode on a conference call, conceding that splitting Netflix into two separate services was "hard to justify" -- at least in hindsight.

"I will tell you that the brand properties of DVD and [Internet video] streaming are quite different," said Hastings in the call to reporters and investment analysts late Monday. "DVD is complete, but it's got the by-mail aspect, which is quite slow. Streaming is instant and the selection is less. And so having separate brands representing really the different audiences that care about those two services can in theory make sense."

The company can recover, Enderle said, "but they have to reform their image, and that means they have to spend on marketing and remaking their image. They aren't doing that, showcasing that 'can' and 'will' are very different words."

Karasyov agreed, but he's among several analysts who have downgraded Netflix stock to "negative" from "neutral."

"There is no quick fix," he said. "It there were a quick fix, don't you think they would have done it by now?"