Netflix separates its DVD, streaming businesses

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Netflix Inc. is moving to formally separate the DVD-by-mail plan it built its business on from the online streaming service it’s betting will be future of entertainment consumption.

In announcing the changes, CEO Reed Hastings also apologized to subscribers for the way the company communicated its decision to split the two services, which raised the prices for those who want both.

The mail order plan will be renamed “Qwikster.” In a few weeks, Netflix subscribers who want to get DVDs by mail will go to a separate website to access Qwikster. The streaming business will continue to be called Netflix.

Members who subscribe to both services will have two entries on their credit card statements. Instead of Netflix, the distinctive red envelopes will now say Qwikster.

It’s a risky bet. The amount of streaming content the company offers is still far less than the number of DVDs in its catalog. And competition, from Hulu, Amazon, Coinstar’s Redbox kiosks and other services, is growing. Netflix could even alienate customers further by asking them to now deal with two separate websites and accounts instead of just one.

Netflix CEO Reed Hastings apologized for the way the company communicated the price changes, but not for the price hike itself.

“I messed up,” Hastings wrote in a blog post Sunday night that was also emailed to subscribers.

The changes come as the company faces increasing scrutiny from customers and shareholders over the decision announced in July to separate its mail order and Internet streaming services into two separate plans. The change raised the prices for users who want both services, by as much as 60 percent for some.

“Our view is with this split of the businesses, we will be better at streaming, and we will be better at DVD by mail,” Hastings wrote.

Last week, Netflix lowered its U.S. subscriber forecast for the third quarter and the former stock market darling’s shares took a beating as a result.

Hastings said he “slid into arrogance based upon past success” when he did not adequately explain the reasons behind the plan separation and effective price hike. He said the reason is that instant streaming and DVD-by-mail are becoming “two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently.”

Explaining the reasons behind the plan change “wouldn’t have changed the price increase, but it would have been the right thing to do,” Hastings wrote.

Netflix announced its move just as the once-mighty Borders Inc. shuttered the last of its bookstores around the country. Hastings’ blog post seemed to take heed. He said that for the past five years, his “greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming.”

“Most companies that are great at something — like AOL dialup or Borders bookstores — do not become great at new things people want (streaming for us). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices,” he wrote.

Hastings said the DVD service will be the same as ever, “just a new name.” But customers will see a video games upgrade option for game rentals on the Qwikster website. Andy Rendich, who has been working on Netflix’s DVD service for 12 years, and leading it for the past four years, will be the CEO of Qwikster.

Hastings also said Netflix will add “substantial” streaming content in the next few months, and reassured that there are no more pricing changes.

Shares of Los Gatos, California-based Netflix rose $4.13, or 2.7 percent, to $159.32 in morning trading. The stock is about 45 percent since July 12, when the company announced the plan pricing changes.

One Response to Netflix separates its DVD, streaming businesses

  1. It was a huge slap in the face the way Netflix “announced” this change. Sending a two line email stating they would be charging me more in less than a week unless I logged in to netflix and changed my plan.What?! Charge me more! Especially since I used to get DVD’s two days after I put them in the mail and in the last 5 months have been getting them after four days at best. I did love Netflix but they have soured the love, and everyone else I know who has netflix feels the same. As soon as I finish researching I am switching to a different streaming video service since I CAN NOT afford both now. This is my one luxury, I do not have cable or any kind of TV service, netflix is all I have…. Maybe they should have sent a letter of exlanation out before the crappy email saying your rates went up like everything else. Funny I have to work 3 jobs to make ends meet, but I am sure Netflix will be flourishing now that it is double the cost for the same service! Good for them! Hope they enjoy all their profits! I know I do not enjoy netflix anymore.
    Thanks again for showing the love to your long time customers!
    Take care and good luck.
    Wishing you the best

    Sheena Pasko
    September 19, 2011 at 3:56 pm