Viewers gave Netflix the chill last quarter, as the company blamed a price increase for a dramatic drop off in its growth rate.
Netflix shares plunged 15% in the after-hours trading on Monday when the company announced that it added just 1.7 million members worldwide in the second quarter. As of last month, the streaming service has more than 83 million members.
The company had expected to add 2.5 million new members in the second quarter. Last year during that same period, Netflix member base grew by 3.3 million.
Netflix added just 160,000 US subscribers from April through June. This is the lowest quarterly gain in US customers reported since Netflix split its video-streaming and DVD-by-mail services five years ago.
“We are growing, but not as fast as we would like or have been. Disrupting a big market can be bumpy, but the opportunity ahead is as big as ever and we continue to improve every aspect of our business,” the company said in a letter to its shareholders.
Netflix revenue also missed expectations coming in at $1.96bn. Revenue for the second quarter was expected to be $2.1bn.
The drop in membership and lower-than-expected earnings were not due to other competing services such as Amazon prime Video, Hulu and YouTube Red, the company said.
The main reasons for the lack of membership growth is the company’s plan to un-grandfather members from their old plans, which cost $7.99 a month, Netflix explained. The price hike was announced in 2014, but the company promised members that they could keep their old rate for two more years. In May of this year, some of the members on the old plan were notified that their prices were about to go up. The members are usually notified 30 days before the cost of their plan goes up.
According to Netflix, the number of users who were “un-grandfathered” from their plans is “modest” and meets their expectations.
“While un-grandfathering and associated media coverage may moderate near-term membership growth, we believe that un-grandfathering will provide us with more revenue to invest in our content to satisfy membership, thus driving long-term growth,” the company said.
The company expects that Olympics coverage and further un-grandfathering will affect its ability to attract new users. In the third quarter, Netflix expects to attract 300,000 US users.
Un-grandfathering will finish in the fourth quarter, according to David Wells, company’s financial chief officer.
A survey conducted by Jefferies showed that existing users as well as potential users take into consideration both prices and content.
“The survey suggests that an increasing price point is an issue with both existing subscribers as well as non-subscribers,” the survey said, adding that Netflix’s focus on original content might not align with what its users want. “Surprisingly, the survey highlighted that both subscribers and non-subscribers may be more attracted to current TV/movies than Netflix originals.”
Prior to Monday’s announcement, Jefferies analysts lowered Netflix’ price target for its stock to $80 and changed its rating from hold to underperform.
In late June, shares of Netflix also fell 14.6% reaching a low of $85.33 after the United Kingdom voted to leave the European Union. Brexit, as the vote is referred to, hit shares prices across the board.
