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.