Netflix Blames Chip Credit Cards for Slowdown in U.S. Growth

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Netflix is hooking fewer U.S. viewers than it hoped, even as its binge-watching addiction rapidly spreads to other parts of the world.

The Internet video service added 3.62 million subscribers during the three months ended September, it announced Wednesday as part of its third-quarter earnings. That's slightly more than the company had predicted.

But Netflix didn't gain as many U.S. subscribers during the latest quarter as management anticipated, a shortfall that it blamed on an unusually large number of accounts cancelled because the company couldn't charge their credit cards. The company believes the trouble is tied to the new credit-card account numbers banks are issuing as they adopt card technology based on computer chips instead of magnetic stripes.

More of the cards still need to be issued, raising the specter of more subscriber cancellations in the months ahead. Netflix also recently announced a price increase on its most popular U.S. plan.

In the third quarter, Netflix gained 880,000 subscribers in the U.S., below the 1.15 million customers that the company had predicted. It was also fewer than the 980,000 U.S. subscribers that the service added this time last year.

"The business is still growing by leaps and bounds," Netflix CEO Reed Hastings said in an interview. "We are taking it in stride because people want on-demand television. We are very excited about it."

Netflix has picked up 16 million more subscribers during the past year alone, leaving the service with 69 million worldwide customers through September.

Disappointing growth in the U.S. appeared to raise fears that Netflix may be having trouble attracting more subscribers in its biggest market. It's facing tougher Internet-video competition from, Hulu and an online-only application from pay-TV provider HBO. Netflix expects to add 1.65 million U.S. subscribers in the current quarter, 13 percent fewer than the same time last year.

Netflix's stock shed $2.68, or 2 percent, to $107.55 in extended trading after the numbers came out. Even with that dip, the shares have still more than doubled so far this year.

Nearly two-thirds of Netflix's subscribers, 43 million accounts, are located in the U.S. But the streaming service is turning into a global phenomenon; Netflix is pushing to offer its service in 200 countries by the end of next year.

Netflix is currently available in about 80 nations, meaning it will have to launch its service in an average of about eight more countries each month to meet its deadline. The service will start streaming in Spain, Italy and Portugal before the end of this year and then go into South Korea, Hong Kong, Taiwan and Singapore early next year.

Many of the countries located in Asia and Africa are likely to be more challenging to navigate than the mostly European and Latin American countries that Netflix has already entered.

The Los Gatos, California, company currently has 26 million subscribers outside the U.S., a 64 percent increase from the same time last year when it was in fewer countries.

The international push is costing Netflix hundreds of millions of dollars, although the company has remained profitable. Netflix earned $29.4 million in its latest quarter, a 50 percent drop from the same time last year. The company expects to break even next year.

Netflix's profit margins are also being squeezed as it pours more money into original programming such as the "Orange Is The New Black," which can only been seen on its service (at least initially). In the latest quarter, Netflix lured viewers with a series called "Narcos" and on Friday will debut a critically acclaimed movie called "Beasts of No Nation" that is also being shown in theaters.

Although the original programs have been a key factor in Netflix's recent success, the licensing bills are starting to take a toll. Netflix's programming costs are expected to rise from $3 billion this year to about $5 billion next year, with even more increases expected in subsequent years.

To help cover its expenses, Netflix last week announced it's raising the price of its most popular video plan by a dollar to $10 per month. Netflix has insulated its current subscribers by guaranteeing their rates will remain unchanged until October 2015.

Copyright AP - Associated Press
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