Blog Post

Netflix’s DVD business: Does Qwikster have a future?

Netflix (s NFLX) 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

20 Responses to “Netflix’s DVD business: Does Qwikster have a future?”

  1. The reason I joined Netflix in 2004 was because the vast variety of DVD’s that aren’t mainstream “popular” movies. Blockbuster didn’t even have that much DVD’s at that time. Now Netflix will lose something it had that was better than the rest.

  2. The elephant in the room is the content that Netflix will lose in six months when the Starz sublicensing contract expires. I’m not surprised that the bloggosphere keep championing the streaming model, since streaming is hip; but there’s nothing in it for the studios or the cable companies.

    In February, Netflix’ streaming subscribers will fire up their queue and find nothing but TV shows and straight-to-video indie films to choose from. Customers who thought they were smart for picking the streaming option instead of DVD delivery are in for a rude awakening. Without their current licensing arrangements, Netflix will literally have to wait eight years before it gets access to Big Content, with first, second and third dibs going to various cable companies. There’s no incentive for the studios to commoditize their content by licensing it to Netflix for subscription pricing, and there’s no incentive for cable companies to dish out exponentially more bandwidth without compensation.

    The question isn’t whether Qwikster has a future; it’s whether Netflix does. I think Reed sees the writing on the wall. Netflix will be a penny stock by next spring, and firewalling the DVD division will keep at least one profit center intact.

    • the other problem no one is talking about is the caps some ISP’s already do put in place or most will in the future. Now you are talking about a dubble price increase from netflix and from your ISP when you go past the cap. Streaming is not a good business model in the US where a price is put on bandwith

  3. franckhertz

    The main flaw in their original unbundling plan was to not give anyone signing up for both services some sort of discount. I mean, everyone bundles things at a discount, even Comcast. They would have gotten less flack if they had structured it in a way that made it at least appear people with both got a decent deal.

    If this is a reaction to the complaints, it’s a pretty strange one – they’re only agitating everyone more by making it as inconvenient as possible to use both.

    If this is a plan to spin off their DVD business -I don’t get it. Their only leverage in getting studios to give them streaming rights is that the studios are (weirdly) terrified of DVD sales being cannibalized by rentals. The Fox deal (I think) involved NF waiting 30 days to rent new movies, in exchange they got better streaming rights for other Fox content (X-Files for instance.) I’m all for that trade. But if they sell off Qwikster, they lose that one piece of leverage they have.

    Clearly streaming is the way of the future, but in it – Netflix is a middle man totally dependent on studios. Some, like Starz, will just say take a hike. The DVD business at least they controlled – studios couldn’t stop them from buying discs and renting.

    One thing we all know – the studios are clueless about content. They create these bizarre viewership windows (on demand, premium cable, broadcast tv) and are skittish about any sort of change or better system. They’re also pre-occupied with DVD sales (and Blu-Ray sales). So, I’m afraid this whole universe of simply watching a movie (or to some extent a show) is going to get worse and more fragmented before it gets better.

  4. Scott Jensen

    The only thing you have to know about the future of Qwikster is which company the “old” Netflix CEO is going with. Qwikster is “dead man walking.” I hope the “new” CEO of Qwikster has a great “falling-on-sword” golden parachute clause to his job contract.

    But Netflix is not out of trouble as long as the DVD-by-mail has a bigger library than the online plan. What is Netflix doing to pump up its online library???

  5. The article’s title is wrong. It should be:

    “Netflix’s streaming business: Does Netflix have a future?”

    Separating out the DVD business is a horrible blow to the streaming business, because the legalities of renting discs are fairly well understood. Given that almost all the studios are now up in arms about what they perceive as the very unfavorable licensing deals they’ve done with Netflix, it’s entirely possible Netflix’ legal distribution rights are about to be sharply curtailed. Look at the now-abandoned talks with Starz, the kerfluffle with Sony titles earlier this year, etc.

    This is not a tech problem. It’s a legal problem. Only Qwikster will now be unencumbered by it.

    • Not only will Qwikster be unencumbered, they will be the premiere media disk service in the US and enjoy all the benefits without the risks of Netflix’s streaming agenda.

      Besides, there is no way in hell we will see bluray quality streaming anytime soon and if it is a ploy to sell the streaming service to apple then Netflix will die a pretty quick death behind that walled garden! Either way, Reed and crew get an amazing exit or they change the game even more than they have and create something really unique!

      Count me in for the discs and game rental! Streaming I can wait and see!

  6. Jason T. Calhoun

    Wild conspiracy theory: Netflix is preparing to sell its streaming business to Apple. At present, Netflix is the only paid streaming service featured prominently on the latter company’s Apple TV devices that competes directly with Apple’s iTunes rental service. This latest move to so completely divide Netflix’s streaming from Qwikster’s DVD-by-mail service solves the question “Yes, Apple can afford to buy Netflix at a premium –primarily for its device integration and content relationships–, but what would Apple want with the physical media and infrastructure?” Now, coupled with the precipitous NFLX stock devaluation last week, Apple (or Google or Amazon) can pick out the Netflix streaming business for comparatively cheap and leave Qwikster to wither on the vine.

  7. Billy Polcha

    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.

  8. Jeffrey Hagedon

    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.

  9. 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.

  10. Bob Welsh

    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!

  11. 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.