• by Tanya Gazdik , September 19, 2011

Netflix is spinning off its DVD mail rental business into a new company called Qwikster, CEO Reed Hastings told subscribers in a Sept. 19 email. The on-demand streaming services the company offers will continue to be called Netflix.

The email from Hastings offered subscribers an apology for pricing changes on July 12 that angered customers and prompted boycotts and Facebook anti-Netflix groups to spring up.

"I messed up," Hastings wrote. "I owe you an explanation. 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."

The upside to the announcement is more content for both businesses. Qwikster will have an optional upgrade for video games, setting it up to compete with other services such as Redbox and the games-only rental service Gamefly. Qwikster will offer Wii, Xbox 360 and PS3 games.

One drawback to the split, scheduled to take effect in about two weeks, is that the two Web sites will not be integrated. Customers who subscribe to both services -- DVDs by mail and streaming -- will have to access the services separately. Searches will not work across both sites.

Hastings wrote to subscribers that he feared the company would not make the leap from success in DVDs to success in streaming. "Most companies that are great at something -- like AOL dialup or Borders bookstores -- do not become great at new things people want (streaming for us)," Hastings wrote. "So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn't have changed the price increase, but it would have been the right thing to do."

The company realized that streaming and DVD by mail are becoming two businesses, with very different cost structures "that need to be marketed differently, and we need to let each grow and operate independently," he said.

The name Qwikster was chosen because it refers to quick delivery. There are no new pricing changes. Some other things will not change, Hastings wrote.

"For me the Netflix red envelope has always been a source of joy," he wrote. "The new envelope is still that lovely red, but now it will have a Qwikster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be similar for many of you."

Hastings thanked customers who have stayed with the company through the changes. "I want to acknowledge and thank you for sticking with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly," he wrote. "Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions."