Netflix Is Killing Its DVD Business to Save the Company

Qwikster is bound to fail, which seems to be exactly what Netflix wants

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Netflix is dividing in order to conquer. Sunday night, the company's co-founder and CEO Reed Hastings announced in a blog post that they would be splitting up their DVD-by-mail and streaming services into separate businesses. Netflix will live on as a streaming-only service, and in a few weeks, the DVD service will become Qwikster, a name that Hastings says "refers to quick delivery" and that tweeting tech types are having a blast making fun of. It's unclear how long they'd planned this move, but as one commenter at Fred Wilson's AVC blog pointed out, the fact that the @qwikster Twitter account is this morning still in the possession of a bored kid who tweets about smoking pot suggests the move wasn't planned too far in advance.

Coming hot on the heels of customer outrage over the higher prices and a panic on Wall Street after a million of those customers unsubscribed, the announcement unsurprisingly reads primarily as an apology. But Hastings isn't apologizing for the new prices; he's apologizing for his "arrogance" in moving too fast and not explaining the company's changing direction well enough. The new direction--and the tacit explanation for the new prices--is pointed aggressively away from DVD's. As Dan Frommer quipped, "What, you think the bad name, 'Qwikster,' is an accident?"

"It is the right move" says Erick Schonfeld of TechCrunch:

With this move, Hastings is reaffirming his long-held belief that streaming is the future of Netflix and the future of entertainment, and Wall Street can judge its progress by how well the streaming business is doing on its own. Separating the businesses will also force customers to make a choice, and it is obvious which choice Hastings wants them to make (hint: it starts with an “N”). Earlier today, I wrote a post beseeching Hastings not to listen to Wall Street after his stock got hammered. You’ve got to give him credit for moving fast in the direction where he thinks the greatest opportunity lies.

The demise of the DVD is also inevitable points out Ryan Lawler at GigaOm, and as any savvy company would do, Netflix is paying attention to customer behavior:

All that said, separating the two could also hasten the demise of the DVD-by-mail business, if the company’s recent subscriber guidance is any indication of user's interest in a standalone DVD-by-mail service. After all, it was that part of the forecast that Netflix most badly misjudged. The company expected 3 million standalone DVD subscribers when it first gave guidance on its second-quarter earnings call, and revised that downward by 800,000 in its updated forecast.

Nevertheless, a number of indicators suggest that Hastings' move was rather hasty suggests Alexis Madrigal at The Atlantic. And @qwikster's tweets aren't the only ones:

Leaving aside whether it's wise to guide a company based on a hunch about history, there are a couple of indications that Netflix might be moving too fast. Number one is that they didn't secure the Twitter handle @Qwikster or the homophone domain Based on his tweets, @Qwikster is a young male who likes to smoke pot more than he likes to tweet. Quickster is owned by a domain name squatter advertising various types of flooring. 

I have to wonder if Hastings started to panic as Netflix stock nosedived last week. After peaking at over $300 during the summer, Netflix's share price is down to $155. It has lost almost a quarter of its value in just the past week of trading.

Short-term fumbles aside, Netflix didn't have many other options in the long-term argues Dan Frommer:

Netflix first has to convince Hollywood to stream its best movies, and it needs to train consumers to stream movies as a default behavior. That means making sure that the streaming business can stand on its own. And that means separating DVDs from the equation, and doing as much as possible to get everyone to stop using them, short of blatant sabotage. …

This is pretty bold move, and things could even get uglier and less certain for Netflix in the short-term. But ultimately, it’s the right decision, and Netflix investors should be happy they have a CEO who is actively building for the future, and not sitting around, waiting for someone else to take the lead.

There are pluses and minuses for customers explains Mike Isaac at Wired:

Hastings also announced that Qwikster will also offer video game rentals by mail to customers, a market previously uninhabited by Netflix. Games will be available for the Xbox 360, PS3 and the Nintendo Wii. This is a new market that could make many subscribers happy and breathe new life into the DVD side of the business by adding a new revenue stream.

However, it’s impossible to see how the split itself benefits customers. The price and plan changes that flustered many of them months ago remain in place, but the company now directs them to two web sites with two search indexes, two completely separate sets of recommendations, two entries on their credit card statements, and so forth.

Wall Street approves--sort of. Netflix stock was up very slightly in pre-market trading Monday morning.

This article is from the archive of our partner The Wire.