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Netflix subscribers down, Wall Street disappointed

Netflix shares get pummeled in after-hours trading after the Web's leading video-rental service reports fewer subscribers than expected.

As expected, Netflix subscribers deserted the company in droves last quarter, after it raised prices on a popular subscription plan and spooked them with a now scuttled attempt to spin off DVD-by-mail operations.

Overall, 800,000 customers fled the company in the quarter ending September 30. Netflix reported 23.8 million domestic subscribers in the quarter, 200,000 fewer than the 24 million the company projected it would have back in September. Even that figure had been revised down from initial estimates of 25 million.

Wall Street is treating the news as a disaster. In after-hours trading Netflix shares plunged $32, or 27 percent, to $86.99. The stock was trading at above $300 a share in July.

Netflix, the Web's No. 1 video-rental service, reported a profit of $1.16 per share on revenue of of $822 million, which is above the $1.05 a share on $812 million in revenue that analysts expected, according to FactSet.

Netflix's customers began to revolt after CEO Reed Hastings raised prices for a popular subscription plan. Instead of paying $10 for access to both DVD-by-mail operations as well as streaming video, Netflix broke up each delivery method into separate plans that cost $7.99 each.

Hastings followed up by announcing last month he would spin off DVD-by-mail operations into a separate service called Qwikster. It didn't help boost confidence much when he abruptly scrapped the Qwikster plan three weeks later. Netflix appeared rudderless.

What really might have sent Netflix's shares into a nosedive is fact that the company doesn't think the subscriber defections are finished.

"We started the current quarter with some (streaming) subscribers who were mostly DVD users but paying for both DVD and streaming and not using streaming enough to justify paying $7.99 for it," Netflix said in a letter to investors. "Those subscribers are cancelling streaming, which reduces revenue and streaming subscriptions.

"The cancellation wave," Netflix continued, "was triggered by the debit and credit card bills arriving with our new prices. The wave peaked a few weeks ago and cancellations are now steadily declining."

Let's put those 23.8 million total domestic subscribers into perspective. That number is a 41 percent increase from the same period in 2010, which is still very respectable growth. But the third quarter of 2011 also marks the first time in years that Netflix's audience has shrunk in sequential quarters.

The poor performance also ends Netflix's streak of seven consecutive quarters, nearly two years, in which Netflix added at least 1 million new subscribers.

"The last few months...have been difficult for shareholders, employees, and most unfortunately, many members of Netflix," Hastings wrote in the letter to investors. "We've hurt our hard-earned reputation."

Update, 2:46 p.m. PST: Added additional detail on subscriber trends.