Outlook for Netflix After Elimination of DVD Queue from Streaming Devices

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Netflix ( NFLX ) is an online movie streaming company that competes with cable and satellite operators like Time Warner Cable ( TWC ), Comcast ( CMCSA ), Dish Network ( DISH ) and DirecTV ( DTV ) for streaming and pay-TV services, as well as video rental services like Redbox.

Our price estimate for Netflix's stock stands at $106 , significantly below the current market price. The price difference is largely attributable to our concerns over market saturation for Netflix. In our previous article on the subject, we quantified the subscriber base outlook implied by Netflix's current market price ( Netflix Stock is a Risky Bet with Market Saturation on the Horizon ).

One developing trend in this market is the growing popularity of streaming. Netflix has made moves to beef up its online content, striking deals with Starz, Epix, Disney and Relativity Media. This gradual shift has led to decreases in DVDs shipped per subscriber, as illustrated in the chart below and examined more thoroughly in one of our earlier analyses ( Netflix Seeing Shift Towards Fewer DVD Shipments ).

However, Netflix now appears to be getting more aggressive on this front. While Netflix has passively benefited in the past from a shift towards fewer DVD shipments, its latest initiative will play a more active role in accelerating the trend.

Is Shift Away from DVDs Becoming More Forced?

Netflix recently announced that it is removing "DVD queue" functionality from streaming devices such as mobile phones, consoles, and tablet computers. Customers will no longer be able to build and manage their DVD queue from these devices, restricting their ability to make on-the-fly decisions regarding their DVD wish list; they will instead have to visit the Netflix website from a computer in order to access this functionality. The decision has triggered a widespread negative response from Netflix customers, as evidenced by recent comments on the company's blog.

Although Netflix claims that the decision was made in order to free up resources and better focus on streaming content, we think that the company may be looking to funnel more customers towards streaming, increasing profitability of this segment in the face of rising content acquisition costs. It is unlikely that Netflix is specifically moving to push existing customers towards streaming-only plans, as these offerings typically command lower per user subscription fees. But hybrid DVD/streaming subscribers would certainly appreciate the flexibility and convenience of having all features accessible from any device.

As consumers spend more time on mobile devices, could Netflix be looking to shift their focus away from the company's core DVD rental business? We note that a reduction in DVD shipments leads to cost saves on postage for Netflix.

We don't anticipate this move to be a catalyst for current subscribers to seek streaming-only plans, as the content available online still pales in comparison to the variety of DVD content. However, it will be interesting to see how the decision affects brand image and future subscriber additions. The chart below highlights Netflix's stock value sensitivity to subscriber growth.

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See our full analysis for Netflix stock here.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CMCSA , DISH , DTV , NFLX , TWC

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