September 19, 2011, 10:43 AM

Netflix deals a split decision

The entertainment content provider will split into two: Qwikster for DVD rentals by mail and Netflix for streaming. Qwikster will have its own e-commerce destination—Qwikster.com—and operate as Netflix.com does now for DVD-based subscribers. The move comes after the company lowered its estimate of the number of subscribers it would attract this quarter.

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Even as DVD-by-mail and entertainment content streaming company Netflix Inc. is anticipating fewer U.S. subscribers in the third quarter as a result of a controversial pricing plan, change at the company continues at a break-neck pace.

The latest news from Neflix, No. 13 in the Internet Retailer Top 500 Guide is a formal split in its business model, a rebranding of its DVD-by-mail business and a new CEO to run that operation.

In a corporate blog post yesterday, Netflix CEO Reed Hastings announced that the company will rename its DVD-by-mail operation as Qwikster. It will retain the Netflix name for its digital streaming business. Andrew Rendich, who joined Netflix in 2007 and most recently served as chief service and operations officer, will lead the Quikster unit as CEO. “We realized that 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,” Hastings writes in his blog post. “It’s hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best.”

Qwikster will have its own e-commerce destination—Qwikster.com—and will operate as Netflix.com does now, meaning subscribers can log on the site to manage their accounts, read movie and related content, and rent DVDs and Blu-ray discs. At launch, Qwikster.com also will rent  video games playable on Wii, PS3 and Xbox 360 consoles, although Hastings did not reveal the pricing for video game rentals. He also didn’t provide a specific timetable for the launch of Qwikster.com, saying only it will launch in a few weeks. “Qwikster will be the same web site and DVD service that everyone is used to,” Hastings says. “It is just a new name, and DVD members will go to Qwikster.com to access their DVD queues and choose movies.”

By splitting the company into two groups and giving each its own pricing strategy, Netflix will be better able to manage change in the rapidly evolving and competitive digital entertainment market, Hastings says. In July, Netflix said it was eliminating a combination DVD-by-mail and unlimited streaming rental plan priced at $9.99 in favor of offering consumers the option to subscribe to either format for $7.99 each. If customers want DVDs by mail and streaming they now have to subscribe to both and pay a minimum of $15.98 per month to have one DVD checked out at a time and access to unlimited streaming. With the split into Quikster and Netflix, consumers who subscribe to both mail and streaming services will still pay the same total price for their plans, but see two entries, one from Netflix and one from Quikster, on their billing statements.

"I messed up," Hastings writes. "It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes. That was certainly not our intent, and I offer my sincere apology."

With the name change, Netflix will move even more quickly into the digital streaming business. “My greatest fear at Netflix has been that we wouldn't make the leap from success in DVDs to success in streaming,” Hastings says. “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) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.”

But even if Netflix is looking to jumpstart its digital business even more, the company has had some recent setbacks. In a recent letter to shareholders released in a new filing with the U.S. Securities and Exchange Commission, Netflix projects the number of new subscribers for streaming digital content will total 9.8 million in the third quarter compared with an earlier projection of 10 million. The number of projected subscribers with both DVD-by-mail and unlimited streaming is expected to be flat at 12 million while the number of new DVD-by mail subscribers is expected to be 2.2 million, down from an earlier forecast of 3 million subscribers. Beginning next year, Netflix will also lose content from Starz Entertainment LLC, a premium movie and original programming entertainment service provider owned by Liberty Media Corp., No. 8 in the Top 500 Guide.

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