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Summary:

Netflix announced that its DVD-by-mail operations would soon be rebranded “Qwikster,” and that the service would be separated from the streaming service that it’s been pushing for the last several years. But doing so raises questions about the future viability of a standalone DVD-by-mail operation.

netflix envelope

Netflix announced in a blog post Sunday evening that its DVD-by-mail operations would soon be rebranded “Qwikster,” and that the service would be separated from the streaming service that the company has been pushing for the last several years. Doing so clearly grants some independence to the unit, and will help it to operate without dealing with fast-growing streaming business. But it also raises questions about the future viability of a standalone DVD-by-mail operation.

Netflix isn’t completely abandoning the new DVD business — at least, not yet. After all, Qwikster will have the same characteristic red envelope and the same legacy infrastructure and library supporting it. However, it seems clear that Netflix is creating a wall between the two businesses as a way to smartly manage its profits and losses, and to help Wall Street better value the separate operations.

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.

More importantly, creating a separate website and a separate billing relationship could cause even more DVD members to leave the service. As I wrote last week, there’s power in the bundle:

“By the end of the quarter, half of all Netflix subscribers in the U.S. will continue to subscribe to both streaming and DVD-by-mail services. That gives them the best of both worlds: Instant access to streaming content, with a much wider library of DVDs available if they’re willing to wait.”

But what happens when you create a separate website, with separate queue management and a separate billing mechanism? If you’re Netflix, you lose the power of the existing customer relationship and much of the goodwill that you’ve built up over the last several years. Regardless of the miscues in handling the price change and the separation of the DVD business, the Netflix brand still carries tremendous value to a number of existing and potential new subscribers.

You also lose the power of the bundle. One reason cable companies have been aggressively pushing triple-play packages over the last several years is that users who subscribe to two or more services are much less likely to quit. By separating DVD-by-mail and streaming businesses into separate billing relationships with subscribers, Netflix is exposing both to potentially higher churn.

Finally, while Netflix maintains that the change will allow the new DVD-by-mail brand to better manage a slowdown in its business, this is also a good way for the parent company to begin evaluating so-called “strategic alternatives” for the business. With a huge amount of shipping and order management infrastructure already built out, as well as a separate billing system, it would be easy enough for Netflix to eventually spin the unit out, or to sell it to a third-party with more patience for a dying business model.

Photo courtesy of Flickr user Ross Catrow

  1. yes good points.I do believe they should do more of a triple play model. Seperate but together.
    However, one big part you did not mention is they will now be doing game rental for a similar build as the upgrade to blu ray. Sites like gamefly are doing well and qwikster will gain a huge number of subscribers from the gaming community if their prices are lower than gamefly, who is the lowest right now(at least the lowest being large enough to handle their customers rental requests.)
    so I believe qwikster could turn out to be something big, not necessarily because of the movies, rather the game rental would be the success of this arm of netflix.

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  2. My initial impression is that this is a bad development for Netflix, its customers and its stockholders. Two of the big reasons folks went with Netflix were: ease of use and low prices. A few weeks ago, Netflix raised the prices, and now they’re making their product(s) harder to use.

    Currently a subscriber can easily move chosen titles between Instant and and DVD queues. Also past movie ratings can help predict what movies they’d like in the future. Now all of this has to be entered into two different systems with two different billings and likely two different user interfaces. Bad move!

    If Netflix wants to spin off the DVD unit, it seems they could have kept the service intact and as such maximize it’s value until spinoff time. Netflix has now shot themselves in both feet!

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  3. Neither the DVD or streaming services are very good on their own, but combined they worked in Netflix favor and kept my money going to them. When there aren’t many DVDs worth getting in my Netflix queue I used to just put my account on hold for a few months to let the DVDs I wanted to see build up. With the streaming service offering more old TV shows I never saw and wanted to watch, I was much less likely to put my DVD account on hold over the past year because I didn’t want to lose access to the streaming side of my account.

    I can now pay Netflix much less than half of what I used to for just the streaming service, forget about all those trips to the post office, and give Amazon the rest of that money to stream all the newer movies I used to get from Netflix DVDs. Renting from Amazon is what I prefer because there is no stupid “Very Long Wait” crap to put up with. I didn’t use Amazon as much because Netflix seemed cheaper and came bundled with the added value of streaming old movies and TV shows.

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  4. Netflix just renamed Qwikster to Trickster. Google it.

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    1. Stop trying to advertise your blog, it’s lame.

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  5. Jeffrey Hagedon Monday, September 19, 2011

    Are they intentionally trying to destroy their business? The split is the worst idea ever. No incentives for bundling both services for the customer? This is insane! Two separate bills?
    You are forcing everyone’s hand. Many will throw up there hands and walk away. Qwikster is a short lived death knell for mailed DVD’s.

    Their next move will be to sell off that business so they can focus on streaming only services. Actually, if there was more streamable content, they could have phased out the physical DVD’s gradually. In fact, they could only offer DVD’s where streaming is not an option. Eventually everyone will shift to streaming, but they would still satisfy every need until that becomes a reality. This is a misstep in my opinion.

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  6. Jeffrey Hagedon Monday, September 19, 2011

    Qwikflix would have been a more logical name choice if they insist on this misguided split.

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  7. Stupid move. When I think of movies — either disc or streaming, I think “Netflix.” No longer. Wow, what a misjudgement of consumer preference.

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  8. I’m not liking this latest Netflix move. It seems to be squeezing seniors out (who I”m guessing make up a large % of their DVD-only customers).

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  9. Two websites. They must be trying to slow down the number of customers leaving by making it take twice as along to cancel.

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  10. Told ya Ryan, “BANDWIDTH ECONOMICS.” Interesting timing as a few days after I pegged Netflix’s issue as BANDWIDTH ECONOMICS they announce a new service that is weeks away from Launch. I also Tweeted Bandwidth Econ to “Mad Money” Cramer.

    Cable Companies own the Pipes that is the reason there is the “Triple Play.” DirecTV & Dish Network own no pipes thus no Triple Play offerings.

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