Netflix Separates Its DVD and Streaming Business

A customer backlash truly works — or perhaps I should say that a customer and investor backlash truly works. Netflix ($NFLX) has announced today that it’s separating its online streaming and DVD-by-mail service. The new division will be called “Qwikster” (who thinks of these names?).

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.

The stock fell from a high of $304 on July 13 to $154 last Friday. The company has been on the defensive ever since they announced a controversial price increase this summer.

The problem was that the stock was enormously over-priced so any disruption could cause the shares to plunge. Last week, Netflix had to lower its Q3 subscriber forecast and that caused even more pain for the stock.

Reed Hastings, the CEO, finally took hold of the issue and publicly said that they made a mistake:

Acknowledging that he “messed up,” 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.

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.

The real Qwikster, of course, is the stock market and how quickly it turned against Netflix. This apology may help in the short-term but the stock is still vastly overpriced.

Posted by on September 19th, 2011 at 10:09 am


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