Netflix Goes Digital, Qwikster To Handle DVDs

Netflix-Red-DVD-Packages

After over a decade of delivering those red DVD-sized envelopes, Netflix -- the brand -- is going all digital.

As part of a larger strategy to separate its streaming and DVD-by-mail businesses, Netflix will soon rename its DVD-by-mail service "Qwikster."

"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," Reed Hastings, Netflix co-founder and CEO, explained in a blog post Sunday.

The move follows a recent decision by Netflix to raise prices on mail subscribers and a Facebook-grade user revolt. As a result, Netflix cutting third-quarter U.S. subscriber projections by 4% from 25 million to 24 million.

Specifically, Netflix said expected 9.8 million streaming-only customers for the quarter is down from the 10 million previously estimated. Plus, it now forecasts 2.2 million DVD-only customers, down from 3 million expected previously.

Qwikster, which will be run by company veteran Andy Rendich, will also include videogame rentals. Qwikster and Netflix will be run as two separate businesses with two different Web sites.

For Netflix, the move is be interpreted as a pre-emptive response to its failing DVD-by-mail business. "We see little reason to create a new brand unless Netflix was intending to ultimately spin-out the Qwikster business," Morgan Keegan analyst Justin Patterson wrote in a research note on Monday. "The inclusion of video games seems to create a 'kicker' to get subscribers excited as this was a commonly requested feature."

While Netflix said its financial outlook hadn't changed as a result of the lower subscriber growth projections, the company's stock has still taken a severe beating.

In response, Netflix stated last week: "We know our decision to split our services has upset many of our subscribers, which we don't take lightly, but we believe this split will help us make our services better for subscribers and shareholders for years to come."

Hastings admitted on Sunday that he could have better communicated the change to subscribers and investors. "I messed up," he wrote in his blog post. "I owe everyone an explanation," he added, explaining: "...many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes."

How will Netflix fare as an all digital brand? Well, it's ample competition. Given that fact, Barton Crockett, entertainment analyst at Lazard Capital Markets, suggested that the fates of Netflix and Hulu are now intertwined.

"The Hulu sale could prove a catalyst," Crockett suggested in a research note Monday. If Netflix doesn't take Hulu off the market itself, a key competitor will, and will be that much stronger because of it.

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