In the wake of falling stock prices and customer outrage, Netflix announced it will spin off the DVD by mail service that made the company famous.
In a blog post Sunday evening, Netflix CEO Reed Hastings announced that the DVD business will be rebranded as Qwikster, while the streaming movie service will retain the Netflix name. Hastings will remain CEO of Netflix, and Chief Service and Operations Officer Andy Rendich will become CEO of Qwikster. Netflix, Inc. will retain ownership of both companies.
“We realized that streaming and DVD by mail are becoming two quite different businesses,” Hastings writes, “with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently.”
Hastings also apologized to customers for Netflix’s lack of clear communication with its customers regarding the split. “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,” Hasting writes. “I messed up.”
Last week, Netflix announced revised quarterly projections showing it was likely to lose net subscribers in the US, with the bulk of the losses coming from DVD-only accounts. The company’s recent price hikes, the impending loss of Starz’s streaming content and a studio-imposed 30-day post-release delay for new DVDs have frustrated even Netflix’s most devoted customers. Even with extra staffing, Netflix’s customer service lines have been reportedly jammed with angry callers.
Investors are worried about Netflix’s future, too. The company’s stock finished the week as the worst performer in the S&P 500, down almost 24% from the previous week’s close.
It’s possible that Wall Street might be pleased with the split; if the streaming business continues to grow, its balance sheets entirely separate from that of DVDs, it will be easier for CEO Reed Hastings to make the case that the primary company’s future is bright. Even if Netflix still owns Quikster, restructuring offers clarity and clear incentives for both sides of the business.
Hastings also announced that Qwikster will also offer video game rentals by mail to customers, a market previously uninhabited by Netflix. Games will be available for the Xbox 360, PS3 and the Nintendo Wii. This is a new market that could make many subscribers happy and breathe new life into the DVD side of the business.
However, it’s impossible to see how the split itself benefits customers. The price and plan changes that flustered many of them months ago are the same, but the company now directs them to two web sites with two search indexes, two queues, two entries on their credit card statements, and so forth. As last week showed, when customers leave a company, investors are quick to follow. Netflix’s myth of inevitability is simply gone.
The Qwikster web site will launch in a few weeks. Right now, you can watch Hastings and new Qwikster CEO Andy Rendich explain the spin-off and offer Netflix customers an extended apology in this YouTube video posted Sunday evening: