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Netflix: 3 Reasons Q3 Can Be Worse, 1 Big Reason It Can Be Better

Image source: Netflix.

Shares of Netflix (NASDAQ: NFLX) were getting slammed after yesterday afternoon's second quarter report, and it's hard to sugarcoat the situation. Netflix closed out the quarter with just 1.68 million more subscribers than it had three months earlier. It was well short of its earlier guidance calling for 2.5 million net additions.

This is the first time since Netflix began breaking out streaming subscription tallies in 2011 that it has posted a year-over-year decline in net subscriber additions. That's bad, but things can still get worse.

Netflix is targeting just 2.3 million in net additions for the third quarter. Pitted against the 3.62 million it tacked on a year earlier this will almost certainly be back-to-back periods of year-over-year declines in subscriber growth. 

The leading provider of streaming video services fell short of its guidance during the second quarter. There are more than a few headwinds that could make things equally difficult for the current quarter. Let's go over a few things that can eat away at that target. 

1. Next month's rate increases should weigh on growth

Netflix gave subscribers in the springtime of 2014 the promise of keeping monthly rates at $7.99 through at least two years. That window closed in May, and even though Netflix said it would wait until later in the year to increase rates -- up to the current $9.99 a month -- it apparently had an impact on the second quarter.

Press coverage of April's announcement that the two-year window of grandfathering would be coming to an end is being credited by Netflix for an increase in churn. It doesn't matter that this is news that's more than two years old. Just imagine what will happen when the increases actually roll out through August.

Someone paying $7.99 a month for the past 26 months wasn't likely to cancel in the past, knowing that the rate will be $9.99 a month upon renewal. That incentive to stay will be gone next month, and longtime subscribers will be tempted to stray if they are not making the most of the platform.

2. The Olympics are coming

The world will turn its attention to the Olympics for a couple of weeks next month, and that can freeze viewership as folks take a break from binging to consume live sporting events. There's a cost benefit to sparing Netflix's servers, but that will likely be more than offset by folks canceling the service or not signing up at all. 

CEO Reed Hastings isn't beating around the bush when it comes to the major sporting event that only happens once every four years. 

"Our global membership forecast for Q3 includes an impact from the spectacle of the Olympics," he writes in Monday's quarterly letter to shareholders.

Hastings offered a similar warning four summers ago. Netflix went on to fall short of that year's third quarter subscriber guidance. 

Things can get even worse this time around. Roughly half of Netflix subscribers will see their rates increase during the Olympics. That's a perfect storm, and it's being brought to shareholders through a fiery torch that never goes out.

3. The "Pokemon Go" effect is real

There's been no shortage of companies that stand to benefit as a result of the runaway success of the Pokemon Go mobile app inspired by Nintendo's (NASDAQOTH: NTDOY) character-catching franchise. From wireless carriers to theme park operators, the augmented reality game is sweeping the nation this quarter with plenty of companies riding Nintendo's coattails.

It won't last. Mobile app success is fleeting. However, as long as Nintendo's franchise is inspiring people to go out and explore their surroundings the less likely that they'll be to stay in and fire up Netflix. That makes the dot-com darling one of the losers in the Pokemon Go craze.

The Olympics are bad, but at least we know that will come and go in a span of two weeks. Pokemon Go can linger, and that's more dangerous.

I promised you a silver lining

As bad as Netflix's report may have been and as many oil slicks as await in the coming weeks one of them is actually a bullish catalyst. Netflix may lose subscribers as a result of the price hike, but those sticking around will also be paying as much as 25% more for the service. 

Netflix now has a record 83 million global streaming subscribers, and it's about to milk more money out of its subscribers that were paying the least. Netflix may be in for another rough quarter in terms of attraction and retention, but it still has the right ingredients to experience healthy improvement on both ends of the income statement.

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Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.