Netflix ($NFLX) Dumps Qwikster Very Qwickly

Netflix Changes Course, and More Questions Get Raised
When Netflix ($NFLX) announced a split between its video streaming and DVD/Video Game delivery services, this blog suggested that it was the right, albeit unpopular, move. Today, when Netflix announced that it had changed course, and ended the idea before it got launched, the stock rocketed in pre-market trading to $128.5/share. However, the afternoon saw a dramatic turnaround, and the stock hit a low of $107.31 before recovering to above $111 a share.

Now, The Questions
The question is why the change of course. There could be three potential scenarios that this post will address.

a. Netflix is listening to its customers. This is what Netflix' management has said in public. This is what management would like you to believe. This is most likely true, in part. The company was pilloried in the press, and on its blog, with complaints. However, the problem with that is that there are now two other scenarios.

b. Netflix has seen a massive bailing out by customers. It is more likely, although unconfirmed, that Netflix has seen a huge outflow of customers. Given the negative attention resulting from the loss of Starz, and the upcoming Kindle Fire (with accompanying Amazon Prime video streaming service), management probably had to stem the tide. That cannot be good.

c. Netflix may have given up its only real hope for survival. This is most troubling. The way forward, perhaps the only way forward, over time, is to partner with either a consortium of studios, or a consortium of cable companies (unlikely). Netflix controls absolutely none of the main sources of entertainment. It is entirely subject to agreements with studios, etc, which control the creative process. By re-combining the DVD delivery service with the streaming service, it has lost the only way for it to sell itself, or to permanently combine with sources of distribution. Streaming service itself can be a viable business model. In countries with acceptable download speed, there is IPTV, which streams live TV, and video on demand, and doesn't use the traditional cable companies. Could that occur in the U.S.? Well, Time Warner, Cablevision, Direct TV, etc charge an enormous amount of money to its customers. An alternative would be welcome. Unfortunately, recombining DVD delivery with streaming effectively ends a clean path of exit or M&A for Netflix.

Finally: you know the company is in trouble, when Saturday Night Live does a parody, which can be seen here.

Disclosure: The writer has no position in Netflix, but has entered into daytrades, with the opening position as short.