Netflix Does the Splits

LR Cable News Analysis Jeff Baumgartner, Senior Editor, Light Reading 9/19/2011

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