On How Many Subscribers Netflix Will Really Lose

Sep.23.11 | About: Netflix, Inc. (NFLX)

Netflix (NASDAQ:NFLX) has been strongly defending its decision to separate its DVD business and streaming business. Netflix's decision to focus on streaming was definitely the right thing to do, but I have to disagree with how Netflix went about its change in business model. You could read more about my analysis in my article, Netflix will eventually sell its DVD business.

Research firm Frank N. Magid Associates estimate that Netflix could lose a third of its subscribers after the separation of its DVD and streaming business. The survey completed by the research firm show that sixteen percent of those surveyed are likely to cancel within the next 6 months and another fourteen percent are seriously considering cancellation. The survey asked 1,000 U.S. Consumers and was completed at the end of August.

The company announced that the two businesses will be divided into two separate divisions. The streaming business will retain the name Netflix and the DVD business will now be called "Qwikster." Netflix has seen three-fourths of new subscribers opting for the streaming service, this shows that the DVD business may be deteriorating at a lot faster pace than what the company is expecting. If you add in the possible 30% loss of subscribers from the survey and I see a lot more pain for Netflix.

I have been bearish on Netflix for some time now and still expect further downside. NFLX has had a pretty hard selloff over the last few days so I expect to see a relief rally. I don't think the market is done pricing in the full implications of the subscriber losses. I expect to see another leg down once those numbers come in, especially if the subscriber losses are worse than expected.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in NFLX over the next 72 hours.