Netflix to divide DVD, streaming business

Netflix Inc. is moving to separate the DVD-by-mail plan it built its business on from the online streaming service it's betting will be future of entertainment consumption.

The mail order plan, which the company only operates in the United States, will be renamed "Qwikster."

In a few weeks, Netflix subscribers who want to get DVDs by mail will go to a separate website to access Qwikster. The streaming business will continue to be called Netflix.

No impact in Canada

The move appears to have no impact on Canadian Netflix subscribers who are estimated to number at about one million. In Canada, the company only offers online streaming services, and chose to skip the mail-order option entirely when it launched about a year ago.

Under the new plan, U.S. members who subscribe to both mail and streaming services will have two entries on their credit card statements. Instead of Netflix, the distinctive red envelopes will now say Qwikster.

It's a risky bet. The amount of streaming content the company offers is still far less than the number of DVDs in its catalogue. And competition, from Hulu, Amazon, Coinstar's Redbox kiosks and other services, is growing. Netflix could even alienate customers further by asking them to now deal with two separate websites and accounts instead of just one.

The changes come as the company faces increasing scrutiny from customers and shareholders over the decision announced in July to separate its mail order and Internet streaming services into two separate plans. The change raised the prices for users who want both services, by as much as 60 per cent for some.

"Our view is with this split of the businesses, we will be better at streaming, and we will be better at DVD by mail," wrote Netflix CEO Reed Hastings in a blog post late Sunday. The post, which was also emailed to Netflix subscribers, was part apology and part explanation of the changes.

Last week, Netflix lowered its U.S. subscriber forecast for the third quarter and the former stock market darling's shares took a beating as a result.

"Messed up"

Acknowledging that he "messed up," Hastings said he "slid into arrogance based upon past success" when he did not adequately explain the reasons behind the plan separation and effective price hike. He said the reason is that instant 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."

Explaining the reasons behind the plan change "wouldn't have changed the price increase, but it would have been the right thing to do," Hastings wrote.

Hastings said the DVD service will be the same as ever, "just a new name." But customers will see a video games upgrade option for game rentals on the Qwikster website. Andy Rendich, who has been working on Netflix's DVD service for 12 years, and leading it for the past four years, will be the CEO of Qwikster.

Hastings also said it will add "substantial" streaming content in the next few months, and reassured that there are no more pricing changes.