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Netflix separates its DVD, streaming businesses

By Barbara Ortutay

AP Technology Writer

POSTED:
LAST UPDATED: 07:58 a.m. HST, Sep 19, 2011


NEW YORK >> Netflix Inc. is separating its DVD-by-mail business from the online movie streaming service it sees as the 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 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 that end up in customers' mailboxes will now say Qwikster.

It's a risky gamble. 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, Calif.-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.







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Hapa_Haole_Boy wrote:
I'm a supporter of Netflix, the ingenuity of its product, and I enjoy its service. Netflix, however, should tread carefully. This pricing change and product bifurcation comes around the same time major studios (a la Starz) including Sony and Disney, announced they are withdrawing their content from Netflix in the months ahead. So now we have Netflix-- raising prices, losing content, and making it more cumbersome to access such content. Not what people originally signed up for. I still believe Netflix is, as entertainment consumption in the digital age goes, the way things will be; but Netflix should be taking steps to make that become more, and not less, of a reality.
on September 19,2011 | 09:07AM
Buido wrote:
Agrees totally with your comments and was preparing to write about Starz dropping live streaming to Netflix soon ... I dropped from full service to one DVD at a time ... I am totally cancelling my account today ... I discovered a Red Box at Longs !!! ... My sister just dropped her account after the rate increase and receiving 3 defective DVDs in one month ... the DVDs had obvious abuse on the label side from previous users ... Quality control has gone downhill at Netflix I believe ...
on September 19,2011 | 11:30AM
Hapa_Haole_Boy wrote:
I'm a supporter of Netflix, the ingenuity of its product, and I enjoy its service. Netflix, however, should tread carefully. This pricing change and product bifurcation comes around the same time major studios (a la Starz) including Sony and Disney, announced they are withdrawing their content from Netflix in the months ahead. So now we have Netflix-- raising prices, losing content, and making it more cumbersome to access such content. Not what people originally signed up for. I still believe Netflix is, as entertainment consumption in the digital age goes, the way things will be; but Netflix should be taking steps to make that become more, and not less, of a reality.
on September 19,2011 | 09:07AM
Anonymous wrote:
The CEO still does not get it. He apologized for not explaining the decision better. That was not the problem. The problem was that he raised the price significantly on his loyal customers for services that they were already receiving and the change seemed to have nothing to do with a corresponding increase in costs to the company. His initial letter was an insult to any thinking person as he tried to spin the price hike as good news for us all. At the very least, Netflix should have allowed existing customers to remain at the price or be given a much smaller increase. That is why I am a former Netflix customer.
on September 19,2011 | 04:32PM
tigerwarrior wrote:
In my opinion Blockbuster Online offers a way better deal than Netflix (i.e., cheaper subscription prices at around $20 for unlimited rentals 3-out-at-a-time, many new releases arriving 28 days before Netflix, unlimited in-store trade-ins).
on September 19,2011 | 11:28PM
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