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UPDATE 2-Netflix shipments back on track after severe outage
August 15, 2008 / 5:35 PM / 9 years ago

UPDATE 2-Netflix shipments back on track after severe outage

(Adds analyst comments, details throughout)

By Alex Dobuzinskis

LOS ANGELES, Aug 15 (Reuters) - Online DVD rental pioneer Netflix Inc (NFLX.O) said it resumed normal shipping on Friday after a three-day disruption, the worst in the company’s decade of operations.

The company’s earnings are not expected to take a big hit as a result of planned refunds, but the outage could tarnish Netflix’s reputation for good customer service, analysts said on Friday.

Netflix said all customers whose shipments were delayed will get a 15 percent credit to their next billing statement. New customers using the service on a free two-week trial basis will have their trial extended by a week.

“We don’t have in our terms of agreement that if you miss a day you get a credit,” said Netflix spokesman Steve Swasey. “We just do that voluntarily because it’s the right thing to do.”

He said that backlogged shipments should all move on Friday, with “possible rare exceptions.”

Netflix shares closed down 1.8 percent to $31.26.

The company has declined to give specific reasons for the outage that hit about a third of its 8.4 million customers.

The company also declined to reveal the total cost of the refund and extensions of free trials for new customers.

“We’re not breaking out that level of detail,” Swasey said.

The disruption was only the second delivery outage for Netflix since the company started mailing out DVDs in 1999. The company had a one-day delivery meltdown in March and gave subscribers a 5 percent discount for their troubles.

This time the site was up but its shipping system was down, Swasey said on Thursday.

This week’s problem prevented Netflix from mailing out any DVDs on Tuesday, but the company did have partial deliveries on Wednesday and on Thursday.

But still analysts did see the potential for damage to the company’s strong reputation for service.

“So anytime something like this happens you risk hurting that brand and that can end up hurting you in the long term,” said Andy Hargreaves, an analyst with Pacific Crest Securities.

The disruption could cost Netflix one or two cents in earnings per share for this financial quarter, or up to about $2 million in profit, Hargreaves said.

Jim Friedland, an analyst with Cowen and Co LLC, said an extended disruption would cost Netflix customers if it lasted a couple weeks, but the company’s short disruption this week would not significantly affect subscriber growth.

It will cost Netflix about one cent per share for this financial quarter, Friedland said.

“From our point of view it’s really a non-event,” he said.

Netflix reported second quarter net income of 42 cents per share.

Netflix in recent years has become a staple of home entertainment for many Americans who like the user friendly Internet ordering system for DVDs and rapid delivery by mail. It also has increased its online video offerings.

The company has competed fiercely with DVD rental titan Blockbuster Inc BBI.N but it has also faced challenges from online providers Apple Inc (AAPL.O) and Amazon.com Inc (AMZN.O).

Late last month, Netflix posted a better-than-expected second-quarter profit and raised its 2008 forecast. That eased analysts’ concerns over the company’s decision to spend more to deliver content via the Web.

This week’s disruption did not affect Netflix’s Watch Instantly Web streaming service, which is offered free to subscribers. (Editing by Mary Milliken and Carol Bishopric)

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