Netflix backtracked on its plans to separate its DVD-by-mail and streaming services and re-brand the DVD business Qwikster. So far, Wall Street analysts have been largely supportive of the move, although Netflix stock is down modestly in mid-afternoon trading after opening higher this morning.
Morgan Stanley analyst Scott DeVitt was mostly positive on the move, saying in a research note Monday that getting rid of Qwikster removes some short-term friction for Netflix customers who wouldn’t want to manage two separate accounts. It also lets Netflix continue to take advantage of its bundled offering. DeVitt wrote:
“By recanting its decision to create two semi-autonomous brands (one for DVD-by-mail and another for its growing streaming business), Netflix is not only showing its [subscriber] base a ‘good faith gesture’ but it is also back to leveraging one of its most powerful assets, its cross-platform recommendation algorithm. We believe this is a step in the right direction for the business model and should be viewed favorably by the market.”
JP Morgan analyst Doug Anmuth wrote in a research note that Netflix will be able to continue operating streaming and DVD businesses separately internally with the split being “mostly opaque to customers.” Anmuth also expects that the company will be able to turn things around after facing some short-term pain:
“We recognize that Netflix results will not turn around quickly and the company has lost a considerable amount of goodwill with consumers. However, we remain positive on the shares as we expect solid domestic growth to resume in 2012 once churn normalizes and we believe the stock assigns little credit for international potential going forward.”
“Subscriber attrition/churn likely continued to meaningfully worsen following the company’s mid-September pre-announcement that its [third quarter] ending subs would be 1 million lower than anticipated,” Stern Agee analyst Arvind Bhatia wrote in a research note Monday morning. Bhatia also wrote that the change in Netflix’s plans makes it unlikely that the company will sell off either its DVD or streaming businesses in the short term.
Ingrid Chung of Goldman Sachs disagrees with the assumption that Netflix saw additional churn as a reaction to the Qwikster announcement, instead believing the Netflix line that the about-face is due to a humbled management attempting to reduce “high friction” points and “mitigate the… lack of integration.” She wrote:
“We view this as a significant positive for the following reasons: (1) Better visibility into 4Q subscriber metrics –- if the company had gone ahead and divided the websites and customer queues, we believe they could have lost the majority of the 12 mn hybrid subscribers (representing roughly half of US subscribers) the company currently has. Today?s move means that the number of 4Q subscribers will be relatively similar to the number of 3Q subscribers; and (2)Management is listening to its customers (finally) and working to fix its relationship with customers.”