Netflix recently restructured its pricing model, splitting its DVD rental and Internet streaming services into separate plans. The controversial move, which effectively raised the monthly fee for Netflix subscribers who use both services, has not been well received by the company's customers. The price hike was apparently just the first step of a more sweeping overhaul. In a blog entry that was published on Sunday night, Netflix CEO Reed Hastings announced that the DVD rental service will be spun off into a separate unit, where it will operate independently under a new brand name: Qwikster.
According to Hastings, DVD mailing and Internet streaming require different approaches to business that are increasingly difficult for Netflix to reconcile. He believes that independence will make it easier to accommodate the unique requirements of each service. The split will ensure that DVD rentals are still available to consumers while the company focuses on moving forward its streaming business.
"We feel we need to focus on rapid improvement as streaming technology and the market evolve, without having to maintain compatibility with our DVD by mail service," he wrote. "So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently."
In the blog post, he explained that the recent alterations to the pricing model were intended to be part of this broader change in Netflix service segmentation. He also expressed regret for the lack of communication surrounding the price changes and apologized for failing to articulate the scope of the transition up front.
"When Netflix is evolving rapidly, however, I need to be extra-communicative. This is the key thing I got wrong. In hindsight, I slid into arrogance based upon past success," he wrote. "But now I see that given the huge changes we have been recently making, 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."
The rapid growth of the streaming service and its swift transition from value-add to core business obviously call for some restructuring at Netflix, but it's unclear if the company's new roadmap is the right way forward. Some of the technical changes that are going to occur as the company splits off the DVD mailing business don't look very appealing.
The Qwikster service will have its own independent website where users will have to go to manage their queues. After the transition, it will no longer be possible for users to manage their DVD and Instant queues through a unified interface. Although current Netflix subscriber data will reportedly be replicated over to Qwikster at launch, users will essentially have separate profiles at each website.
Hastings said that new customers will have to sign up and input their credit card information separately at Netflix and Qwikster. Movie ratings and reviews submitted by users will not propagate across both sites. When users search at Netflix for a movie that's not available for streaming, they won't be offered the DVD version. These baffling changes will erode much of the convenience and synergy that made Netflix appealing to the company's most loyal customers.
The one bit of silver lining in the bizarre Qwikster announcement is that the service will soon gain an upgrade option for video game rentals—a much-requested feature.
Although the move to split the services into separate businesses might make sense on some level, the decision to dismantle the long-standing integration between the services seems highly dubious. Consumers will have to tolerate a reduction in functionality on top of the unpopular price increase.
Amid these problems, Netflix continues to struggle with broadband caps and the challenges of negotiating content licenses. The company recently suffered a blow to its streaming content inventory because Starz decided not to renew its contract with Netflix.
Netflix predicts that it will lose approximately a million subscribers due to the changes—roughly four percent of the company's customer base. The lack of credible alternatives has worked in the company's favor.
