Netflix Dodges Facebook Bullet

| About: Netflix, Inc. (NFLX)

Most investors, including me, have been very concerned about the threat that Facebook poses to Netflix (NASDAQ:NFLX). I am long on Netflix from $101.00. I carry a heavy weight on my shoulders as subscribers to ZYX Buy Change Alert are also long from $101.00, and I have often mentioned to the subscribers that Netflix is the most risky stock in the model portfolio. We have taken profits along the way and now hold only a small position.

My concern was heightened on March 8, 2011, when it was announced that Facebook and Warner Bros. had reached an agreement to make movies from Warner Bros. available on Facebook. Facebook with its own currency system and 600 million users certainly has the potential to kill Netflix.

I took solace in that neither party made a splash about the announcement. I also took a small comfort that the test included only one three year old movie Dark Knight. The Dark Knight cost 30 Facebook credits, which is $3.00 U.S., for a 48 hour viewing window. It was hard to imagine people exchanging $8.00 a month Netflix subscription for a single movie rental for $3.00.

The announcement today that Reed Hastings, CEO of Netflix, is joining the board of Facebook has come as a welcome relief. This development pretty much kills the idea of Facebook competing with Netflix.

In my analysis, Netflix poses less risk today than it did yesterday for a second reason. The second reason is that it appears a nexus of Facebook, Netflix, and Microsoft (NASDAQ:MSFT) will emerge.

Reed Hastings also serves on the board of Microsoft. Microsoft is an investor in Facebook. Microsoft also provides search capabilities to Facebook. Xbox 360 from Microsoft is no longer just a game console. It has become an all-in-one entertainment devise. Microsoft has big ambitions for Xbox 360. If Microsoft has its way, Xbox 360 will become the center of our living rooms.

Microsoft has some success in its quest. Now about 40% of all Xbox activity is non-game activity. Xbox Live members watch 30 hours of video a month on Xbox. The big source of this video is Netflix.

We may see tight integration between Facebook, Xbox, and Netflix. Such integration will pose a formidable challenge to the likes of Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), and cable providers such as Comcast (NASDAQ:CMCSA).

Can an acquisition of Netflix by Microsoft be far behind? Netflix has a market cap of $13.43 billion. Microsoft has a market cap of $207.7 billion. Netflix is easy prey for Microsoft.

My longtime readers know that I follow the ZYX Change Method. At present, Netflix satisfies only four of the six screens of the ZYX Change Method. If and when all six screens are satisfied, I will add to Netflix long position.

Disclosure: I am long NFLX.