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 that 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 rates--the changes are not that satisfying. Instead, Netflix has decided to split 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 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.

[Image: Flickr user Micah Taylor]

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11 Comments

  • carie benton

    "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"According to Arentt, Fritz, and Bell in Communications Ethic Literacy, "communication ethics in business and professional settings requires a commitment to two complementary actions: clarity and directions, and the courage to pivot and change direction if and when necessary." (page 176)The union of direction and change protects and promotes the goods of survival and competition.  The view of business and professional communication offers clarity and insight into the unethical: on one hand, a commitment to change that moves too easily in response to demands and pressure, unresponsive to a reflective tradition.  Unethical business and communication fails to acknowledge the dangers of both "full steam ahead", a tradition-saturated unresponsive to conditions for change, and a hyper-responsiveness that unleashes a chaos of change.  In the case of Netflix, they responded to changes not really grasping how users would respond.  AS you mentioned, "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." Much like the text I mentioned above describes as "Unethical business and communication fails to acknowledge the dangers of both "full steam ahead."The change created chaos, from which they have yet to recover.Carie BentonGrad StudentDrury University

  • Andrew Case

    I just got a $829.99 iPad2 for only $103.37 and my mom got a $1499.99 HDTV for only $251.92, they are both coming with USPS tomorrow. I would be an idiot to ever pay full retail prices at places like Walmart or Bestbuy. I sold a 37" HDTV to my boss for $600 that I only paid $78.24 for. I use (Bidsget) . (com)

  • Lawrence Carter

    Incredible... What NetFlix has done is create an opportunity for a new company to either to do what they were doing with the DVD mail service and streaming but do it better OR stream all movie content -- new and old at a higher price than the old NetFlix service but less than the newer NetFlix two site solution that obviously will cost more... Should that happen,both NetFlix and Qwikster could potentially bite the bullet since they have angered the masses...

  • Michael Bouton

    This is an amazingly stupid move. A bad idea going to a worse idea. This will be incredibly difficult managment task for users. Streaming is not yet ready for primetime. The content is way too thin. NetFlix had the best product, but two sites, two billings, two entirely seperate queues?  Get real! I'm going to start looking at other options.

  • Bruce Bensetler

    Mr. Hastings must not be a user of his own products. Otherwise he would realize that the business he wants to be in is the "content delivery business" which will continue to evolve. They made great moves in working with the TV manufactures to have their software included with the hardware, but in making the users go to two sites to determine if content is available via streaming or DVD is a huge step backward. I had thought they wanted to make Netflix the "go to" site for media. Now they are moving back into the pack with Hulu, Boxie, Crackle, Comcast, Vudu, etc.

  • acarr

    So, generally it seems you're all upset with the changes? Is anyone happy with Hastings' blog post?

  • Tiffany White

    It's obvious they're trying to dump their DVD-only service, so they're creating "Qwikster," which everyone is going to inevitably hate, so that they can off it sooner. Who's going to want to manage separate queue/logins/bills? No one that's who.

  • Jerry Winans

    Was thinking of buying Netflix stock since it's taken a 40% drop since the decision was announced. Now that Starz will be bailing out on Netflix in six months, and given this latest announcement (Netflix and evil twin Qwikster) I may wait to see how much of a further drop Netflix stock will take. I was an early adopter and advocate of Netflix. Too bad they've tied their shoelaces together with these moves.

  • Lisa T

    How is this an improvement?  Now I have to go to two websites whenever I search for a movie?  And without integration, how will I know when a movie on my DVD cue is available as an instant movie?  This keeps getting worse and worse...  

  • dw

    Netflix's split into "Qwikster" is ridiculous -- NOW I'm mad:  I don't want two companies, two credit card charges, two Web sites, two logins, and TWO queues to maintain.  Now I have to add movies to both an instant and a DVD queue?  I have to check both sites to see whether a film's available by instant or by DVD?  Life's complicated enough already.  Netflix (excuse me, "Qwikster" just made it worse.  And, does Reed Hastings thinks we're idiots:  making it two companies, with two charges, doesn't change the essential price dynamics; we can add.  Netflix just violated the first principle of good business:  it solved ITS problem, not ours.  This is the worst American marketing decision since New Coke, and I hope it's reversed just as quickly.