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Netflix Renames DVD Service, Adds Video Games

19 Sep, 2011 By: Chris Tribbey, Erik Gruenwedel

The move comes after service's stock and consumer reputation take hits following rate hike and management's indifference toward disc rentals

Netflix is splitting its streaming and DVD services into separate brands, renaming the latter Qwikster, company CEO Reed Hastings announced in a blog post late Sept. 18.

The two services will have separate websites, and DVD-by-mail subscribers will need to use Qwikster.com to access their DVD queues, rate content and choose movies. Subscribers to both services will receive separate bills for Netflix and Qwikster.

When it launches, Qwikster will have a video games upgrade option, offering Wii, PlayStation 3 and Xbox 360 games. A launch date for Qwikster and pricing for the video game subscription were not announced.

“ … We realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures [and] different benefits that need to be marketed differently, and we need to let each grow and operate independently,” Hastings wrote, apologizing to customers for how the company handled a price increase for subscribers of both DVD and streaming.

In July Netflix announced it would charge $7.99 a month each for DVD and streaming, angering consumers who had been spending $9.99 for both. On Sept. 15 Netflix announced it expected to lose 1 million more subscribers than forecasted.

“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,” Hastings wrote. “That was certainly not our intent, and I offer my sincere apology.”

“Our view is with this split of the businesses, we will be better at streaming, and we will be better at DVD by mail. It is possible we are moving too fast — it is hard to say,” he continued. “But going forward, Qwikster will continue to run the best DVD by mail service ever, throughout the United States. Netflix will offer the best streaming service for TV shows and movies, hopefully on a global basis. The additional streaming content we have coming in the next few months is substantial, and we are always working to improve our service further.”

Hastings wrote that the transition for DVD subscribers would be relatively seamless, and that the iconic red Netflix envelope would remain, with a Qwikster logo instead. 

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

Michael Pachter, analyst with Wedbush Securities in Los Angeles, said the fact that the Qwikster and Netflix service won't be integrated is a major no-no considering Netflix's heretofore reputation as an intuitive user experience. Pachter said the lack of integration means consumers have to search for movies separately on each site rather than having the option to "watch instantly" or place in a DVD queue.

"I think that many hybrid plan consumers will find this annoying," Pachter wrote in an email, adding Netflix could be positioning to spin-off Qwikster in the future.

Regardless, Eric Wold, research director with Merriman Securities in San Francisco, said Netflix renting video games strikes a blow to a pre-IPO offering by by-mail game rental pioneer GameFly.com. Wold said GameFly had 410,000 subscribers as of June 2010 who were paying from $16 to $37 month for games only — which now seems extremely expensive given the potential combination of movies and games from Qwikster.

"We believe subs will continue to seek out a less-expensive option in general and especially within an economic environment where fixed costs are being cut by household budgets," Wold wrote in a Sept. 19 note. "Last night's blog...could be an attempt...to keep subs from leaving the service."
Wold said the announcement's bigger impact is on gaming, including a planned pre-IPO by by-mail video game rental pioneer GameFly. The analyst said GameFly had 410,000 video game subscribers paying from $16 a month to rent games, a price point he said now sounds pricey given the probable comparison to Netflix/Qwikster's new disc/game platform.
"Without a doubt, the main casualty of this annoucement ... is likely to be ... GameFly," Wold wrote.
Netflix shares, which have lost nearly 50% of their value from an all-time high over the summer, rebounded slightly to $155 per share in mid-morning trading.

"We believe last night's blog could be an attempt to stem those losses and keep subs from leaving Netflix," Wold swrote in a Sept. 19 note. "We believe subs will continue to seek out a less-expensive option in general and especially within an economic environment where fixed costs are being cut by household budgets."

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