Netflix Apologizes For Mail Glitch, Offers Discounts

by Laurie Sullivan, Mar 27, 2008, 5:00 AM

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When a system glitch kept thousands of DVDs from reaching consumers' mailboxes on Tuesday, Netflix shifted quickly into damage control. Subscribers found emails in their inboxes apologizing for the inconvenience, and the promise of a 5% credit to their account scheduled to appear on their next billing statements.

Declining to disclose the exact number of subscribers affected by the outage, Steve Swasey, Netflix VP/corporate communications, says it wasn't the majority of the company's 7.5 million members. "When you love someone, you forgive them for their mistakes," he says. "People love Netflix, so they're very forgiving when we have a bad day."

On average Netflix ships 1.8 million DVDs daily from 52 distribution centers across the country--Monday being the slowest, and Tuesdays and Wednesdays the busiest. The outage knocked out the Netflix Web site for about 11 hours.

The company apologized to subscribers for the "extreme anomaly" and took steps to financially compensate those who expected DVDs for the mistake. One member who received the email message says of it: "Nice. And no, I didn't notice that they hadn't shipped on Monday."

Daniel Ernst, Hudson Square Research Soleil analyst, called the refund generous, suggesting the move demonstrates the company's ability to step up to the plate.

"This type of [glitch] usually happens when traffic on sites spikes or accelerates quickly," Ernst says. "It has happened with Apple, Microsoft, and Research in Motion."

In February, Netflix boosted its revenue and earnings targets for the first quarter in 2008, amid stronger-than-expected subscriber growth. The online DVD-by-mail company expects earnings of 15 cents to 20 cents per share, up from a prior estimate of 13 cents to 21 cents. The bump lifts the revenue forecast between $324 million and $328 million--up from $323 million and $328 million in earlier estimates.

Ernst says Netflix will have added 700,000 new subscribers--totaling 8.2 million--in the first calendar-year quarter, ending March 31. This compares with 481,000 new subscribers, totaling 6.8 million, for the year-ago quarter.

Ernst estimates that Netflix will report $325 million in Q1, up from $305 million in the year-ago quarter. He attributes the uptick in growth to a pull back in marketing by Total Access from Blockbuster and ongoing deterioration at Movie Gallery.

Netflix spent $391.3 million on advertising in 2007, up from $369.2 million in 2006, according to Nielsen Monitor-Plus. The research firm estimates Netflix will have spent $52.9 million in January, excluding outdoor ads.

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