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Price hike haunts Netflix stock a year later

By Michael Liedtke

Associated Press

Published: Thursday, July 12 2012 11:22 p.m. MDT

Netflix customer Carleen Ho holds up a DVD in 2007. The company is moving away from physical media.

Associated Press

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SAN FRANCISCO — Netflix is more popular among couch potatoes than investors a year after its polarizing decision to raise U.S. prices for video subscription services.

The unexpected twist that Netflix unveiled a year ago Thursday triggered mass customer cancellations and a sell-off in its stock, which has wiped out more than $11 billion in shareholder wealth.

Netflix Inc. has bounced back this year to revive its subscriber growth. But even after a recent rally, its stock remains more than 70 percent below its peak price of nearly $305 about a year ago, largely because of concerns about what Netflix has been spending to attract and retain subscribers. The stock gained $3.33, or 4 percent, to close Thursday at $84.97.

The company increased its prices by as much as 60 percent as part of an effort to phase out its DVD-by-mail rental service and raise more money to license TV shows and movies for its Internet video library.

Preparing for the day when DVDs become obsolete makes good business sense as the ubiquity of high-speed Internet connections makes it easier and more convenient to watch video online. Promoting Internet streaming over DVDs also helps Netflix save money on postage as it mails fewer discs.

But DVDs still appeal to subscribers who want to watch the latest movie releases. That's because studios generally have refused to license their more recent material for online viewing, leaving Netflix's Internet video library with a less comprehensive selection than what's available on DVD.

The shortcoming wasn't a problem until last year because Netflix had been bundling DVDs with unlimited video streaming in a package that cost as little as $10 per month. With the price change, Netflix split video streaming and DVD rentals into separate services that raised the monthly minimum cost for both to $16.

As if the higher prices weren't aggravating enough, Netflix CEO Reed Hastings infuriated subscribers even more a couple months later with a ham-handed apology that dropped another bombshell: The company intended to spin off the DVD service into a separate website called Qwikster. That switch would inconvenience subscribers who still wanted both DVDs and Internet streaming by requiring them to maintain two separate accounts on different websites.

The ensuring uproar caused Hastings to quickly scrap Qwikster, but by then the damage had been done.

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