Netflix separates its DVD, streaming businesses

[September 19, 2011]  NEW YORK (AP) -- Netflix Inc. is formally separating its online streaming and DVD-by-mail service, naming the latter "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 will now say Qwikster.

The changes come as Netflix is facing 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.

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.

"Our view is with this split of the businesses, we will be better at streaming, and we will be better at DVD by mail," wrote Netflix CEO Reed Hastings in a blog post late Sunday. The post, which was also emailed to Netflix subscribers, was part apology and part explanation of the changes.

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.

Hastings also said it 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, slid $1.54 to $153.65 in premarket trading Monday.

[Associated Press]

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