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What Wall Street is saying about Netflix’s Qwikster retreat

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Netflix (s NFLX) 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 (s MS) 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 (s JPM) 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 (s GS) 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.”

Photo courtesy of Flickr user Ross Catrow

3 Responses to “What Wall Street is saying about Netflix’s Qwikster retreat”

  1. Will White

    Separating the billing for DVD and streaming rentals was the right move, creating Qwikster was idiotic. While the company will definitely need to eventually kill DVD rentals, this can happen over time and they can slowly push customers over to streaming with pricing incentives.

    Until that time, one queue and a whole host of customers to slowly migrate out of a business line with decreasing profit margins into one with increasing profit margins.

    Short of a licensing restriction by studios pushing Netflix into streaming which seems counter-intuitive, this will not hurt them.

    That said, much of the damage has been done.

  2. If Wall St. analysts like it, it must be a bad move. The split eventually has to be done, and they should do it now and allow both organizations to do what’s best for each one, instead of each one compromising. Normally, a company should act as a whole, and manage each unit in a way that benefits the entire company, but the DVDs have a terminal disease, and the health and chances for success of the streaming business should not be compromised by the inevitable decline of the DVD.