So much for the theory that Netflix (NASDAQ:NFLX) is built to weather the economic maelstrom.
The DVD-rental giant lowered its subscriber and revenue targets this morning. It's feeling the pinch as even consumers who decide to stay home fail to pounce on the company's value proposition of movies delivered by mail or streamed digitally.
Netflix closed out the third quarter with 8.672 million subscribers, just shy of its original target of 8.675 million and 8.875 million members.
Burn after reading
Netflix is still growing, thankfully. A tally of 8.672 million accounts is still 23% more than the company boasted a year ago. Despite the slowdown, particularly during the month of August, Netflix is on track to hit its original revenue and profit targets for the third quarter.
Unfortunately, the current quarter is a different story. Netflix is talking down its subscriber and revenue growth expectations, while keeping its net income guidance intact.
Netflix now projects that it will close out the year with 8.95 million to 9.25 million flick-loving subscribers. Its more ambitious earlier outlook called for the company to end 2008 with as many as 9.7 million members.
Where have all the people gone?
Ghost town
Netflix is a survivor. It outlasted the threat of Amazon.com's (NASDAQ:AMZN) foray into the DVD rental market. It got Blockbuster (NYSE:BBI) to blink first in its mail-based pricing war.
Its push for Web streaming -- a move that now finds Netflix subscribers with access to thousands of on-demand titles through their computers, branded set-top boxes, LG electronics, and eventually Microsoft's (NASDAQ:MSFT) Xbox 360 consoles -- is also paying off. You don't hear a lot from the premium digital video-downloading sites like Amazon, do you?
So what's going on here? If the whole "staycation" movement has any merit, one would expect Netflix to be the cornerstone of the home theater. Couch potatoes would rejoice over the availability of unlimited DVD rentals for as little as $8.99 a month (under the "1-at-a-time" plan). That's a fraction of their cable bills or gym memberships, and even less than the satellite radio fees they may be paying to Sirius XM Radio (NASDAQ:SIRI), especially now that they're not driving around so much.
And have you been to a multiplex lately? $8.99 is less than most cinemas are charging for a single prime-time ticket these days.
How to lose friends and alienate people
Most investors may not be worried by these minor guidance markdowns. The company is reaffirming its profitability projections for the third and fourth quarters.
But I'm not so optimistic, even though I'm a Netflix shareholder. Companies like Netflix, Sirius XM, and TiVo (NASDAQ:TIVO) spend plenty to acquire new subscribers. Decelerating growth has had a favorable near-term impact on these companies' bottom lines: Losses have narrowed in satellite radio, while TiVo has posted back-to-back profitable quarters. That may look like welcome improvement on the income statement, but I would rather see subscriber-based companies scaling quickly.
Of course, that assumes the company is lowering its subscriber targets because it's having more trouble recruiting new members. If the net subscriber tally is shrinking because of greater-than-expected member cancellations, Netflix has even bigger problems to tackle.
The move toward digital streaming isn't cheap. Since the company isn't charging its customers extra for the service, it shouldered those chunky bandwidth costs and studio royalties to help retain subscribers. Digital cable giants like Comcast (NASDAQ:CMCSA) may give away some of their pay-per-view offerings, but their model -- like Amazon and iTunes -- revolves around premium offerings.
Netflix's smorgasbord model makes it a standout. It's a great value, but where are the people?
Sure, missing the low-end of its third-quarter headcount by 30,000 doesn't seem like much of a problem. It's less than half of a football stadium. However, the company's new midpoint for the fourth quarter of 9.1 million members is a whopping 300,000 members short of its previous midpoint.
If Netflix has a reinvention trick up its sleeve, it better use it soon.
We recommend popcorn with these Fool classics:
The big question: Should Netflix add video game rentals to its service to make it stickier? Post your thoughts in the comment box below.
