Summer doldrums hit Netflix, stocks plummet

Users love Netflix, it's something of a cultural phenomenon in America. But slow subscriber growth in the United States, high content acquisition costs, and the high overall cost of rapid global expansion have kept the company from net profitability in the most recent quarters.

Tuesday evening, the company released its second quarter earnings, which triggered a massive 25 percent drop in stock value based upon the appearance that Netflix wasn't performing up to expectations. At the closing bell Wednesday, Netflix stock hovered at $60.28

The drop was triggered by the announcement that Netflix earnings fell by a shocking 91 percent this year, and that the continued slowdown in its DVD/Blu-ray by mail business has resulted in a net loss of subscribers.

In the course of one year, earnings went from $68.2 million all the way down to just $6.2 million in the most recent quarter. Granted, this is still an improvement over the first quarter, but only marginally. The first quarter ended with earnings of $4.6 million.

Approximately 850,000 DVD subscribers cancelled during the quarter, and Netflix's lower cost streaming-only service added 530,000 users, resulting in a net loss of 320,000 subscribers.

Netflix's strategy is to move into new markets, build back up to profitability, and then move into more new markets. This is, quite literally, what Netflix CEO Reed Hastings said in a question and answer session following the release of the earnings report.

"Our model, as we've explained, is to get back to profitability, and then open a new market, get back to profitability, open a new market…That's based on the view that there's an extraordinary, once in a lifetime, or once in a generation opportunity to build a franchise in many markets as we've been building. As long as there are good markets to enter, we will be taking our US, or global profits and putting them toward faster international expansion," Hastings said.

The problem right now is that the DVD business in the US is declining so rapidly that the company could conceivably not meet its needs to fuel this ambitious expansion plan.

"We've made the decision to raise our 'content spend' in the UK as we have in Canada, because we've been encouraged by the early results we've seen," Hastings said. "So I think it's the ability for us to demonstrate the growth in those markets quickly and in the engagement in those markets that gives us the confidence to break even and show profitability."

Netflix expects to add between 1 and 1.8 million US streaming subscribers in the upcoming quarter, but reaching its annual goal will require that number to be on the high end.