Netflix splits DVD and streaming businesses, prepares to let DVD rentals die off

After Netflix announced they were jacking up their prices (while acting as if they were enhancing services), there was a significant backlash. Now we’re seeing the effects of the price hike, and the results aren’t pretty (if you’re Netflix).

The company’s stock plummeted last week. Subscribers are beginning to flee. The price hike went into effect on Sept. 1 for new customers, but existing users saw the change when their monthly bill was due (that date varies, depending on when people signed up for the service). Now the company has apologized and announced they are splitting DVD rentals and streaming into two entities, and one of those entities has a very goofy name.

Netflix is becoming a streaming-only entity, while the DVD rental business is being spun off and renamed “Qwikster.” (Yes, that’s the real name, not the codename until they actually launch the product or something. That’s the name, courtesy of 1999.) The discs (and now videogames) will still come in the trademark red envelopes, but they will be stamped with the logo for Qwikster. There will be two distinct Web sites — one for Netflix and one for Qwikster — two separate payments, two separate subscriptions, two separate queues.

The company’s spin is that this will help streamline the process and let people more easily navigate the different and distinct services. The reality is that Netflix views the DVD rental game as a dying business, and this is just the latest way they’ve emphasized streaming as the compan’s future. There’s no other way to view this. They are putting the weight of their established brand name, Netflix, behind streaming services; the renting of actual disks will be done through a company related to Netflix, but not carrying the same banner.

There is a significant downside for customers. Netflix was great, in part, because everything was so centralized. You could assemble a queue of movies and TV shows, and if you wanted a DVD you could move it to the top of the list, or if you wanted to watch something on your phone or computer or TV, you could also snag anything from your queue. Now that they are splitting it, Qwikster becomes the latest stop a media consumer must make in their quest to find something to watch. Users already have to bounce from Hulu to YouTube to iTunes to Amazon to Netflix, and this just adds yet another stop.

It’s worth remembering that L.A. Times report about how Netflix’s deal with Starz fell through because Netflix didn’t want to create a pricing tier on par with what cable and satellite companies charge. Bill Gurley posits an interesting theory about why it made financial sense for Netflix to split the company in two: the very different cost structures of DVD rentals and streaming. When Netflix owns a DVD, they can rent it out an unlimited number of times; companies, beginning with Starz, want to demand a higher price from Netflix users who want to access and stream a movie.

Netflix could very well have priced things out and figured that since they want to focus on streaming anyway, keeping the two services joined would just lead to more price increases for all users (not just for streaming subscribers) down the line. If that’s the case, they’re clearly willing to suffer through a public flogging to keep from having to hike prices again on all customers in the future. Whether or not they were smart in taking the hit now as opposed to later obviously remains to be seen. At the very least, it’s hard to imagine a worse way to make this announcement. But time will tell on that front, because you have to figure more price hikes are coming at some point.

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  1. Pingback: “Arrested Development” will return on Netflix | Digressions

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