Netflix Admits It ‘Messed Up,’ Will Split DVD and Streaming Into Two Businesses

  • Share
  • Read Later
Jin Lee / Bloomberg / Getty Images

Over the summer, Netflix angered customers by splitting its popular DVD-by-mail and unlimited-streaming package into two separate services—and by charging what amounts to a 60% price hike for customers who wanted to keep the same services. Once the price changes took effect, it was evident that Netflix subscribers were fleeing, and the stock price tanked. Now, there are more big changes happening at Netflix, though no new price hikes (yet).

Yesterday, Netflix CEO Reed Hastings made a big announcement, which starts with an apology:

I messed up. I owe everyone an explanation.

In a long note, e-mailed to all subscribers and posted at the Netflix blog, Hastings says “the key thing I got wrong” was not fully explaining the pricing and membership plan changes announced a couple months ago. With that in mind, he wanted to explain what’s happening at Netflix right now.

(MORE: Netflix Renames DVD Delivery Service ‘Qwikster’)

The big news is that the service you originally got to know as Netflix—DVD by mail—isn’t going to be called Netflix anymore. It’ll be called Qwikster, and it’ll be a completely separate business from Netflix—which will become strictly a streaming operation.

When Hastings says the businesses will be separate, he really means it. They’ll have separate websites, and if you subscribe to both services, you’ll need to manage your queues separately. If you rate or review a movie at Netflix, it won’t show up at Qwikster, and vice-versa. On your credit card statement, you’ll be billed separately by Qwikster and/or Netflix.

It’s almost as if the two services will no longer be sister operations, and instead be frenemies, or perhaps even outright competitors in the same way that Redbox’s DVD kiosk business competes with Netflix’s streaming operation. They’re all competing to get consumers to pay for entertaining content.

(MORE: 145 Money tips: Get Free DVDs, Avoid Bad Restaurants, Save Money & Mother Nature at the Same Time)

In his message, Hastings doesn’t really explain (or apologize for) why Netflix had to raise membership prices, but he does offer reasons why the company needed to separate its streaming and DVD services:

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.

Why, you might ask, wouldn’t the original service (DVD by mail) get to keep the original name? Hastings doesn’t really explain that one either, though this part of the statement gives a clue:

DVD by mail may not last forever, but we want it to last as long as possible.

In other words, the best long-term business prospects are in streaming, not DVDs by mail. The streaming service gets the Netflix name because, odds are, it’ll be around longer.

(MORE: Netflix After the Price Changes: Fewer Subscribers, Plummeting Stock Price)

In recent weeks, Netflix has had to adjust its forecasts for subscriber numbers, and it now anticipates fewer members in both its streaming and DVD-by-mail divisions. But it’s expecting a much sharper dropoff (down 800,000) in DVD-by-mail subscribers. This shift could continue in the future. To spruce up its DVD-by-mail business, Netflix, err I mean Qwikster, will be adding an upgrade option to get video games as well as movies and TV shows on DVD.

But clearly, Netflix sees that the business model of the future is, well, Netflix, not Qwikster. By the way, good luck getting people to call the old DVD-by-mail service Qwikster; my guess is everybody’s gonna keep referring to it as Netflix no matter what logo is on the DVD sleeve that arrives in the mail.

Nonetheless, the split will occur sometime within the next few weeks, and all Netflix DVD-by-mail subscribers will immediately be transformed into Qwikster DVD-by-mail subscribers. Through pained half-smiles, while trying to avoid sounding like he’s giving a homily, Hastings made a video explaining all of the major changes and introducing Andy Rendich, CEO of the new DVD-by-mail business you used to know as Netflix but will soon be called Qwikster:

Brad Tuttle is a reporter at TIME. Find him on Twitter at @bradrtuttle. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.

0 comments
Sort: Newest | Oldest