Zacks_Analysts' Blog : Netflix Decides Against Splitting - Analyst Blog

In a complete turnaround of Netflix Inc.’s (NFLX) earlier decision, the company has now scrapped its plan of separating its streaming and mail-order DVD businesses. Therefore, both the segments will continue to operate under the Netflix banner.

Last month, Netflix had announced that the company was in the process of splitting its business into two separate entities. Netflix was to separate its DVD-by-mail business into a wholly owned subsidiary, which would have been called Qwikster, while the streaming-only business would have retained the “Netflix” brand. (For details please read: Netflix Splits Business )

Now, customers won’t have to search for separate websites for the availability of the films, be it online or DVD.

Though Netflix’s management admitted that separation of the business was a wrong decision, it still stood by the decision of increasing the subscription price by 60%. The price rise has already backfired as the company is estimated to lose 1.0 million subscribers in the third quarter, which ends on September 30, 2011. However, in the present scenario where content additions are the prime factor to stay competitive, the price rise is one of the ways for financing the licensing agreements.

Since July, the company has been under tremendous pressure due to the Starz licensing debacle and then the price hike. The earlier decision to split the company also acted as a serious headwind. Investors and customers were flustered and the share prices have dropped nearly 60%, subsequently plunging toward its 52-week low.

However, the company also reaffirmed that the future of the company was in the online streaming business. Thus, to emphasize on the fact and to retain its subscriber base, Netflix has been signing in new partners for content additions through license agreements.

Recent agreements with AMC Networks Inc. (AMCX), DreamWorks Animation SKG Inc. (DWA) and Discovery Communications should be beneficial for the company in the long run in gaining subscriptions.

Content additions will enable Netflix to reduce its dependence on cable TV operators and provide it with the necessary competitive edge over its peers in the emerging market of online video streaming. Moreover, strategic partnerships will also be beneficial, helping it to expand its geographical footprint.

However, intensifying competition from large players such as Amazon.com Inc. (AMZN), Apple Inc. (AAPL) and Google Inc. (GOOG) in the online streaming market is a headwind, as it will further push up license fees and also affect subscriber additions.

We maintain our Neutral recommendation on Netflix over the long term (6-12 months). Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.