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Summary:

Netflix CEO Reed Hastings thought separating his company’s DVD and streaming business would be straightforward. Turns out it was a lot like…

Qwikster Tease

Netflix CEO Reed Hastings thought separating his company’s DVD and streaming business would be straightforward. Turns out it was a lot like cracking an egg — hit it just right, you can produce a yolk and an egg white that work equally well apart; hit it wrong, you have scrambled eggs. Hastings got scrambled eggs with shell mixed in when he announced the split this summer.

Now he’s trying to fix it with a mea culpa and a message that some longtime subscribers are likely to find every bit as jarring, particularly those who just chose to stick with the DVD service: no more DVDs by mail from Netflix (NSDQ: NFLX).

Instead, they’ll be subscribers of Qwikster. Those who opted for DVD and streaming not only will have to pay for each as separate services at a 60 percent increase over the previous combo package; they literally will be subscribing to two different brands: Qwikster for DVDs; Netflix for streaming.

In the lengthy post that went live on the Netflix corporate blog late Sunday night, Hastings wrote:

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

Mind you, Hastings isn’t apologizing for the decision to split. He sees it as the only way to avoid the fate of AOL (NYSE: AOL) with its dwindling dial-up service, or bankrupt Borders. The inability to make that move from a DVD past to a streaming future has been Hastings’ “greatest fear” for five years.

But he regrets the way it was communicated or, more specifically, his failure to communicate it well:

“… I should have personally given a full justification to our members of why we are separating DVD and streaming, and charging for both. It wouldn’t have changed the price increase, but it would have been the right thing to do.”

What will change is the DVD brand and the ease of subscribing to both. In a few weeks, Netflix DVD will become Qwikster, chosen, Hastings explains, “because it refers to quick delivery.” The service and the site’s look — even the distinctive red envelopes — will be the same with new logos. One plus for some: subscribers will get an added upgrade option for video games.

As previously announced, Netflix vet Andy Rendich will head the DVD side; Hastings wrote Sunday night that he’ll be CEO of Qwikster. (A brief video featuring Hastings and Rendich is embedded below.)

Hastings insists that splitting the two will simplify matters: “Another advantage of separate websites is simplicity for our members. Each website will be focused on just one thing (DVDs or streaming) and will be even easier to use. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated. So if you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places. Similarly, if you rate or review a movie on Qwikster, it doesn’t show up on Netflix, and vice-versa.”

In the next paragraph, though, he has to admit that it won’t be that simple for people who want both.

It’s not likely to be that simple for Netflix either.

Netflix took a hit after the July 12 news that it would be splitting the subscriptions, effectively raising prices 60 percent for those who wanted to continue to get streaming and DVD, and another slam after Starz Entertainment said it would not renew a deal that included first-run movies from Sony (NYSE: SNE) (suspended currently) and Disney (NYSE: DIS). Last week, the company pulled back on its Q3 guidance for subscribers, shifting projections from late July down by 1 million (800,000 fewer domestic DVD and 200,000 fewer streaming subscribers than planned). The number of combo subs is on track to stay steady at 12 million and the financials haven’t changed but the stock plummeted nearly 20 percent on the news and continued to drop. By close Friday, it was down to $155.

  1. With all the self-inflicted damage Reed Hastings has done, it sounds like a smart competitor could resurrect Netflix’s old business model and make them as relevant as Blockbuster is today.

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