What on Earth Is Netflix Thinking?

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Much has been made today of the announcement from Netflix CEO Reed Hastings that the company will respond to outrage about its price increases — and subsequent stock drop — by dividing in two. While Netflix will now be just for streaming movies and television shows online, the dreadfully named Qwikster business will rent DVDs and video-game discs by mail. The split makes things way more inconvenient for customers who use both parts of the service (about 50 percent by Netflix's own count), but it could make a huge amount of business sense for the company, which would rather you forget about the red DVD envelopes that made them famous.

At his Above the Crowd blog, venture capitalist Bill Gurley makes an educated guess that the split is about licensing costs: When studios sell the right to stream movies or TV online, they could potentially charge Netflix more based on how many users have the option to watch their content online, regardless of how many actually choose to do so. By drawing a line between DVD customers and digital ones, Netflix can limit that number and potentially pay less for new movies and TV shows.

But as Henry Blodget notes, customers are used to having just about every movie and television show available to them via one subscription on one website — if it can't be played instantly, it can be mailed to you soon. The Netflix/Qwikster split means two different subscription bills and two queues if a customer wants access to the whole collection.

For Netflix, it also means two distinct brands with separate headquarters — the DVD business will be centered in San Jose while the corporate offices are in Los Gatos — and a different set of competitors, all of which could make things easier if the company decides to sell the DVD-by-mail part. Already the company is seeing the majority of new subscribers opting for stream-only packages and this move will accelerate that shift.

Meanwhile, the DVD business competes only with physical rental outlets like Redbox and the long-struggling Blockbuster, or gamer havens like Best Buy and Game Stop. Things could potentially get sticky for this side of the business should the U.S. Postal Service continue to have problems. And so, as noted by tech writer Dan Frommer, "Having a nondescript name that doesn't suggest 'mail' or 'movies' is probably a good thing, given [Qwikster's] unclear future."

10 things to remember about Netflix while scratching your head about Qwikster [SplatF]
Understanding Why Netflix Changed Pricing [Above the Crowd]
With All Due Respect To Reed Hastings, The Netflix-Qwikster Split Sucks For Customers [BI]
Netflix Continues To Flounder, Paving Way For Sale Of DVD Unit [Seeking Alpha]