Netflix Splits DVD-Streaming Business, Rebrands With Qwikster, Adds Video Games

A few short months ago, Netflix made the bold decision to increase the price for its DVD-by-mail and streaming subscription plan by 60%. The announcement inevitably inspired universal vitriol among customers, but Netflix stuck to its guns, saying in a recent earnings call the negative reaction hadn't been as bad as the company anticipated.

Now, however, only a short while since the price plans went into effect, Netflix is singing a much different tune: Mea culpa! Last week the company adjusted its guidance because of worse-than-expected subscriber declines (estimating a loss of 800,000 DVD-by-mail customers and 200,000 streaming customers); its stock price took a huge tumble of 19% (down 44% overall since the price plans were announced); and on Sunday night, CEO Reed Hastings took to Netflix's blog to apologize and offer a slew of (dramatic) solutions. It's yet another example of failing at the speed of light: The faster Netflix moves to innovate, the more bumps it hits on the way.

First let's explain the changes. Unfortunately, folks, you're not going to see prices reverted back to their pre-September prices--the changes are not that satisfying. Instead, Netflix has decided to separate its streaming and DVD-by-mail services into two separate brands: Netflix will remain the streaming part of the business, while DVD plans will be rebranded as Qwikster. Now, in order to access the latter service, you'll have to head to Qwikster.com to play around with your queue. That's right. Two websites for two services: You'll now have two credit card statements, two separate queues at two separate web addresses. The sites will have no integration at launch--even your ratings and reviews made on Netflix won't translate over to Qwikster, and vice-versa. (The only new feature? Video games will be added to the by-mail service.)

"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. 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: In a few weeks, we will rename our DVD by mail service to 'Qwikster,'" Hastings wrote. "Our view is with this split of the businesses, we will be better at streaming, and we will be better at DVD by mail. It is possible we are moving too fast--it is hard to say."

Moving to fast has always been a core principle at Netflix. Hastings had envisioned the split businesses long before writing today's blog post--he presciently named the company "Netflix"--rather, say, "Mailflix"--because he saw future success depended on bandwidth--not postage. (Postage is one of the company's biggest financial burdens.)

"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. 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," Hastings added. "Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover."

The point is clear: Netflix can't survive as a DVD-by-mail service forever. It's been pushing for the transition to digital for a long time. (Last year, Hastings even went so far as to say the company was no longer a DVD-by-mail company, but a streaming company that also offered DVDs.) And in reading his blog post, one can almost hear Hastings tick off examples of slow innovators (AOL, Borders) with Blockbuster ever in the back of his mind.

"Companies rarely die from moving too fast, and they frequently die from moving too slowly," he said.

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