Qwikster Split: The Real Reason Netflix Broke in Two

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It’s not hard to understand why Netflix decided to change its subscription plans over the summer, breaking apart the popular DVD-and-streaming combo into two services paid for separately by members. Streaming content via the web and sending DVDs by mail are two very different businesses, after all. It’s also easier to understand why Netflix CEO Reed Hastings apologized for how poorly the changes were explained (or not) to customers. Harder to understand is why Netflix finds it necessary to separate the operations into two distinct companies, and why it would go to the trouble of creating a whole new DVD-by-mail brand, Qwikster.

Why, for example, wouldn’t the DVD service be renamed something along the lines of Netflix DVD, to keep the brand in the family, so to speak?

One possible answer is that one of Netflix’s current services—DVD by mail, most likely—could be sold off down the line, says Tom Adams, principal analyst and director of U.S. media for the media research firm IHS Screen Digest. “The splitting up and re-branding going on at Netflix was certainly a surprise,” says Adams. “But it’d make sense if they envision selling one of the divisions off at some point. That’d be much easier to do if the businesses are completely separate, with different names and brands.”

Of course, a brand is more valuable once it’s established, and with its announcement over the weekend, Netflix has already begun building up Qwikster. Qwikster has its work cut out for it: Even with the name change and status as a separate business, everybody will surely call it Netflix for some time to come.

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In the short run, separating Netflix (streaming) from Qwikster (DVDs) into different companies—with different websites, queues, ratings, and billing schedules—is bound to accelerate a trend that began as soon as Netflix’s new pricing structure was announced in July. “It’s going to force customers to choose one service or the other,” says Adams. “Fewer people are going to want both, especially because of the annoyance of having to keep up with them separately now.”

Customers have one other choice, of course: neither Netflix nor Qwikster. Roughly one million Netflix customers canceled their memberships since the new pricing structure went into effect this month.

MarketWatch’s Brett Arends is one such former Netflix subscriber. Arends explains that he had sorta forgotten he had a Netflix account—until the company’s pricing plan changes made news over the summer, prompting him (and lots of others) to cancel. (In his column linked above, Arends also explains why he’s not a fan of Netflix stock at the moment, either.)

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If one unintended side effect of Netflix’s plan changes was an increase in cancellations, a side effect of the splitting up of the businesses could be that customers sticking with their subscriptions will try to get more out of them—because it’s top of mind after subscribers have just been reminded of their membership plan and how much it costs. “With all the changes in the news, people are forced to focus on their subscriptions, and there will be a tendency to use them more,” says Adams.

In the past, a customer might let a Netflix DVD sit unwatched and ignored for weeks. Now, though, with the customer freshly reminded of his subscription, he’ll be more likely to watch the DVD and ship it back to Netflix sooner, then repeat the whole scenario again when the next DVD arrives in the mail. If this same customer no longer streams Netflix content—because he didn’t want to pay the extra money when the pricing structure changed—that means there are fewer other things he could be watching other than the Netflix DVD awaiting his attention. Likewise, a streaming-only customer will also be more inclined lately to stream as much as his eyeballs can handle to get the most out of the subscription.

When Hastings made his apology/announcement Sunday, he made it clear that there wouldn’t be price changes accompanying the separation of the businesses:

There are no pricing changes (we’re done with that!).

But that doesn’t mean prices will stay the same forever. Right now, the streaming-only and one DVD-by-mail services cost $8 per month apiece. After all the grief and bad press the company has received (and continues to receive) because of price hikes, the rates will probably stay put for quite some time.

As the separate brands and businesses become more fully established, however, they’ll be freer to price their products however they choose. Adams foresees streaming customers as the first to be subject to a price increase: “They’re more likely to face a price hike in the long run, because the price for quality content will rise.”

Mark Suster, writing for Fortune, meanwhile, predicts DVD-by-mail rates will rise sooner, if only because mailing costs will do the same:

It wouldn’t be a surprise to see price increases in Qwikster in the future. No time soon. But eventually. It seems logical.

Both Adams and Suster warn that consumers shouldn’t get too attached to Netflix’s current all-you-can-eat streaming service. Suster writes:

Who says that “all you can eat” pricing is the right one for a streaming service? Maybe it is, maybe it isn’t. In the DVD world they could always limit you because you could only have a certain number of videos outstanding and any time. With streaming, this is harder to enforce.

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Both Adams and Suster also envision tweaks and additions to the streaming service that may include on-demand type pay-per-view content, digital sales, and different pricing tiers (new vs. older releases), perhaps in addition or in lieu of a regular monthly fee. “The infrastructure is all there,” says Adams. “Ultimately, I’d be more surprised if Netflix doesn’t go in this direction.”

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.

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