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Was A Netflix Slowdown In The Cards?

Netflix said last week that “involuntary churn” hit its U.S. subscriber base as chip and PIN changeovers shut down subscriptions and payments. But the company seems a lone voice in the wilderness amid a deluge of new cards across businesses large and small that have gone through without incident.

Though the chip-and-PIN switch may be a long-term boost for safety amid the continued EMV rollout, one early and inadvertent casualty has been Netflix, the online streaming media company.

In its latest quarterly results for the period that ended Sept. 30 and as reported earlier this month, Netflix said that it added 880,000 subscribers in the United States in the third quarter, a far cry from the 1.2 million Wall Street analysts had expected and the 1.15 million the company itself had expected.

The culprit? Netflix said that the weaker than expected growth came amid bank transitions to chip-and-PIN cards. As more cards came (and are still coming) into the field, the company found itself unable to put through payments from some U.S. subscribers who had debit and credit cards that had been changed to the chip-based technology.

Though the changeover would theoretically be seamless if customers had the same account numbers on cards, Netflix found that was not necessarily the way things worked out.

In a video call with analysts after earnings were reported, David Wells, Netflix’s chief financial officer, said that a continuum of account numbers was not “consistently the case,” further noting that for Netflix “as a recurring merchant, where we really want to reduce the friction of renewal … certainly the transition to chip cards isn’t helping.” Consumers may not have been mindful of the changes or updated their cards.

One wonders if and when they might get around to doing so, and in that case, could there be a lingering impact of such “involuntary churn?” The issue seems to be one where subscriptions lapse on a technicality and one that eventually gets addressed.

Wall Street seemed at least somewhat mollified by the explanation, as shares had plummeted as much as 14 percent in the wake of the earnings announcement but finished the Thursday (Oct. 15) session down a relatively less disastrous 8 percent.

If you’re inclined to believe the chip-and-PIN issue may be a one-off, there’s some evidence to back that up. Though the U.S. showed mixed results, international expansion was better than many observers (and Netflix) had expected, with growth beyond the U.S. coming in at 2.7 million, above company forecasts of 2.4 million. That implies that the chip-and-PIN stutter in the U.S. may be isolated — at least that’s what the brass at Netflix implied and certainly hope — and not a hint of saturation in the U.S.

For now, however, the United States remains the core market for the streaming media company. An international rollout proceeds apace, with a goal to finish by 2016, bringing service to new markets, such as Hong Kong, Taiwan and Singapore. Costs go hand in hand with expansion, both in terms of region and in terms of content, which helped send profits down 50 percent year over year to $.07 a share (vs. $.14 a share last year) on sales that were up 23 percent over the same timeframe to $1.7 billion, driven in part by price increases.

But.

Maybe there’s something else going on? Netflix is, at this point, one of the only companies to point to a significant disruption in the wake of the chip-and-PIN submission. The finger has been pointed squarely at the subscribers, the banks and behavior that ties in with renewing and updating cards, so wouldn’t it stand to reason that other companies, indeed even industries, would be seeing the same impact of “involuntary churn?”

The card industry itself takes issue with the Netflix form of “j’accuse,” as The Wall Street Journal reported late in the week. The key refutation to the Netflix claims — not just that other businesses should be raising the alarm on the same issues, and they are not — comes as merchants can, have and should join programs offered by Visa and MasterCard aimed at the changeover. The programs ensure that security codes and expiration dates are automatically updated, saving subscription-based companies the payment interruption.

Netflix said that it indeed participates in those programs, but a significant portion of its subscriber base, between one-third and one-half, have cards that are not enrolled in those programs. Moreover, not all the cards issued by all banks are enrolled in the programs, so banks may not be opting in.

So, who is right? Netflix or the payments industry? Maybe both? It might be a while before we see any concrete data from the company, perhaps as long as the next quarterly announcement, so stay tuned to see if U.S. subscribers are, in fact, staying tuned.

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