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Netflix reeling from customer losses, site outage

Netflix Inc. frustrated investors and customers alike Tuesday as its stock price plunged to its lowest point in more than two years while its Web site was inaccessible most of the day because of unexplained technical problems.
/ Source: The Associated Press

Netflix Inc. frustrated investors and customers alike Tuesday as its stock price plunged to its lowest point in more than two years while its Web site was inaccessible most of the day because of unexplained technical problems.

The 7 percent drop in Netflix’s shares wasn’t a shock after the Los Gatos-based company reported the first quarterly customer losses in its history and dimmed its earnings outlook for the rest of the year.

But the Web site outage was a surprising — and embarrassing — setback.

The online hub of Netflix’s rental system went down Monday evening and remained unavailable until Tuesday afternoon, locking out subscribers for more than 18 hours. Spokesman Steve Swasey attributed the outage to an unanticipated problem that he declined to describe.

The breakdown didn’t appear to be related to San Francisco power outages that were blamed for temporarily knocking out several popular Web sites, including Craigslist, Technorati, Typepad and Livejournal.

Service to Netflix’s site was finally restored around 3 p.m. PDT after Netflix’s engineers had missed several earlier estimated times for fixing the trouble.

Netflix had been in the process of updating its computers to reflect price reductions that took effect Tuesday.

Netflix was the 74th most visited Web site in the United States during the week July 21, according to the research firm Hitwise. It accounted for about 12 percent of all U.S. online traffic to movie and entertainment sites, ranking behind only Inc.’s

The timing of the breakdown was especially awkward because it occurred shortly after Netflix management had briefed industry analysts on plans to improve its customer service in an increasingly bitter battle with rival Blockbuster Inc.

Lowering prices will erode Netflix’s profit — a sacrifice that the company is making in an attempt to regain market share from Blockbuster. The decision led to a further drubbing of Netflix’s already battered stock, which has plummeted by 38 percent this year.

The shares dropped as low as $15.62 early Tuesday, their lowest point since June 2005. The stock later rebounded, but still finished down $1.20 at $16.07.

Hoping to retain more of its current customers while enticing new subscribers, Netflix is decreasing monthly fees by $1 on its two most popular plans to match Blockbuster’s prices for comparable Internet-only services.

Netflix has been having trouble signing up subscribers since late last year, when Blockbuster began giving its online customers the option of swapping DVDs at one of its stores instead of relying on the mail and waiting at least two days for another movie.

“We are in a very competitive, large battle,” Reed Hastings, Netflix’s chief executive, said in an interview Monday after the company released its second-quarter earnings. “But we feel like we are still in a great position.”

Wedbush Morgan Securities analyst Michael Pachter believes Blockbuster may have exposed Netflix’s Achilles’ heel by aggressively promoting the convenience of Blockbuster stores to build its online service.

“Netflix has a broken model,” Pachter said. “They aren’t used to competition and now someone is competing against them very effectively.”

Netflix ended June with 6.74 million subscribers, a decrease of 55,000 customers from April. It marked the first time Netflix’s total subscribers have declined from one quarter to the next since the service began renting DVDs through its Web site in 1999.

Blockbuster is expected to update its online subscriber count Thursday when it releases second-quarter results. The Dallas-based company ended March with 3 million subscribers after outstripping Netflix’s customer growth for two consecutive quarters.

The gains haven’t helped Blockbuster financially. The company lost $49 million in the first quarter. Blockbuster last month indicated it might try to reverse that trend by raising the prices of its online service. If that happens, Netflix’s earnings during the second half of this year might not shrink as much as management currently expects.

Assuming Blockbuster holds steady, Netflix expects its performance during the second half of the year to lag 2006’s pace. Management expects Netflix’s full-year profit to range from $42.4 million to $52.4 million, down from an April forecast of $55 million to $60 million. Netflix earned $35.4 million through the first half of this year.