Netflix Does the Splits

Netflix Inc. (Nasdaq: NFLX) is breaking out its streaming video and DVD-by-mail units as individual businesses and renaming the latter Qwikster, a move designed to counter the negative reaction to recent operational and pricing changes.

The news cheered investors: Netflix shares were up $7.47 (4.81%) to $162.66 in early trading Monday.

Netflix CEO Reed Hastings unveiled the new strategy Sunday night in an apologetic blog post that began: "I messed up. I owe everyone an explanation."

The mea culpa was for the way Netflix initially communicated its recent pricing changes and the way it began to separate its DVD-by-mail and streaming operations and subscriptions. "For the past five years, my greatest fear at Netflix has been that we wouldn't make the leap from success in DVDs to success in streaming," Hastings wrote, pledging to be "extra-communicative" as his company rapidly evolves. "In hindsight, I slide into arrogance based upon past success."

The plan now is to rebrand the DVD-by-mail service as Qwikster "in a few weeks," and to keep the Netflix moniker for streaming. Netflix veteran Andy Rendich, who's been involved with the company's DVD service for 12 years, will be Qwikster's CEO.

Qwikster will house the DVD service and provide access to customer DVD queues. The company intends to add a video games upgrade option, similar to how it handles Blu-ray titles today, but didn't disclose pricing on an enhancement that Blockbuster Inc. already offers.

Why this matters
The decision is Netflix's clearest indication that its business models for streaming and DVD rental subscriptions differ significantly.

The planned separation goes all the way to the customer data and interaction level: Users will be required to manage separate accounts and profiles at two distinct portals if they want to use both services. Additionally, any movie reviews and ratings made on Qwikster won't show up on Netflix, and vice versa.

The move follows a negative reaction to recent events, including the price hike, the failure to extend the content agreement with Starz Entertainment LLC and disappointing third-quarter guidance.

For more
Catch up on the Netflix follies.

— Jeff Baumgartner, Site Editor, Light Reading Cable

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DCITDave 12/5/2012 | 4:53:24 PM
re: Netflix Does the Splits

Why would movie reviews and ratings not be combined for those services? If a movie, like Avatar, is terrible, isn't it terrible on every format imaginable? (Hint: Yes.) That'd be like Amazon showing a different set of reviews for folks using certain kinds of computers. 

paolo.franzoi 12/5/2012 | 4:53:23 PM
re: Netflix Does the Splits

I suspect that they have decided that the 2 businesses are on completely different growth curves and business models.  I would say this is step one in making this 2 companies with 2 different stocks.

Nothing to do with reviews, I think they just want to dump the DVD business.



Jeff Baumgartner 12/5/2012 | 4:53:23 PM
re: Netflix Does the Splits

I thought this comment by Hastings was pretty telling: "DVD by mail may not last forever, but we want it to last as long as possible."

He tossed a caveat in there, but that doesn't sound like someone who thinks that part of his business has legs. And I also agree that this smells like a spin-off in the making.

I also don't get why they can't combine ratings. I realize the sites will be operated separately, but why can't that data be shared and calculated by both sites? They can split that data out after they did some sort of truer spin-off. JB


DCITDave 12/5/2012 | 4:53:23 PM
re: Netflix Does the Splits

I agree. I also wonder how much market share Netflix has lost because of DVD rental kiosks?

There are 50 Redbox locations within 10 miles of my house. Something tells me that kind of market penetration is kicking the ass of a DVD by mail service.


DCITDave 12/5/2012 | 4:53:22 PM
re: Netflix Does the Splits

Which brings us back to: What does Netflix give us without the DVD service? I always liked having them together as you could at least fall back on DVDs when the streaming service didn't have a particular movie or show.

Doesn't this present a nice opportunity for pay TV operators? Find those summer blockbusters that Netflix can't offer, create a tab under your VOD menu called, "Not On Netflix" and price those offerings at 30 to 50 percent off your normal rental rate.


sam masud 12/5/2012 | 4:53:22 PM
re: Netflix Does the Splits

Totally agree!

Jeff Baumgartner 12/5/2012 | 4:53:21 PM
re: Netflix Does the Splits

"Brand expert" Rob Frankel says this is a PR blunder on par with New Coke, even if this looks like Netflix may be looking to spin-off the DVD business later.  I agree that the decision, which creates two identities, makes things even more confusing for customers.


So how long before Netflix tries to change mid-stream and say, "Never mind! We're going to put those businesses back together again." ?  JB

Jeff Baumgartner 12/5/2012 | 4:53:21 PM
re: Netflix Does the Splits

To Phil's point, splitting things out to this degree is odd considering that Netflix's new Q3 forecast showed that customers who take the streaming and DVD products are the most stable. http://www.lightreading.com/document.asp?doc_id=212287&site=lr_cable&




ibarrera 12/5/2012 | 4:53:20 PM
re: Netflix Does the Splits

What I'm thinking is that legal entities and broadcasting companies haven't completely embrace the streaming business. By splitting, Netflix may get to continue streamming, and keeping networks/studios at ease with their DVD business.


My point being that some networks/studios want to run their own streamming business and this is hurting Netflix on both sides. So perhaps they're thinking that having two separate models will please the networks/studios, just because they're not the same (This seems like very  Hollywood reasoning)

Jeff Baumgartner 12/5/2012 | 4:53:19 PM
re: Netflix Does the Splits

Looks like we're just a few days away from learning more about how Dish is going to use Blockbuster to go after Netflix with a streaming service of its own.  The Dish and Blockbuster brass are set to host the announcement on Friday morning in San Francisco (along with a Webcast for the rest of us to tune into). according to Bloomberg, the streaming offer will initially be offered to Dish subs before it's offered to everyone else.



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