By Adam E. John

“The last few months, however, have been difficult for shareholders, employees, and most unfortunately, many members of Netflix”, said Netflix in a Dear Shareholders letter during the announcement of its third quarter results. Just how many members has Netflix proved difficult to? Quite a few, as it turns out. 800,000 subscribers left Netflix around the time Netflix raised prices, split the movie rental service into separate websites, and then decided it would not have two websites after all. Netflix ended the quarter with 21.4 million streaming subscriptions, and 13.9 million DVD subscriptions. Unique domestic subscribers declined to 23.8 million users.

The letter to the shareholders is surprisingly candid, and while the Netflix team admits they messed up, they are also quite ready to move beyond, after the initial bump of Q4 goes away (see Domestic Outlook), it seems. Apart from the minor infraction of losing all those customers, Netflix has actually had decent results. The company acquired 4.7 million new subscribers, a roughly 20 per cent YoY growth. Domestic revenue grew 44 per cent YoY to $799 million in Q3, and domestic operating profit of $120 million (representing 15 per cent operating margin) exceeded the company’s previous margin target of 14 per cent.

Q4 Domestic outlook: Netflix thinks DVD subscriptions will continue to decline sharply in Q4, due to the price hikes. However, the weekly rate of DVD cancellation is shrinking, as the price effect washes through, and in future quarters, Netflix said, DVD subscriptions will shrink more modestly.

The company does not expect any additional material investment, and the majority of its DVD library is fully depriciated, so the segment is profitable, Netflix adds.

Netflix believes streaming users net additions is expected to be negative in October, about flat in November, and strongly positive in December. The contributing margin for domestic streaming is expected to be around 8 per cent.

Facebook integration with Netflix not happening:The Video Privacy Protection Act (VPPA) is a 1980’s law that creates some confusion over how Netflix can let users in America choose to automatically share their viewing history with friends on Facebook, and till the VPAA gets it act together (a bill to modernize the act is passed, in other words), Netflix will not be launching Facebook integration in the  United States. If you are thinking ‘Spotify,’ don’t. ‘Netflix is the content leader – but Video is not Music’ is the subhead of a section you will find in the letter, and several paragraphs explaining why not. Two words. Different licensing.

You can find the shareholders letter here.