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Netflix apologizes, spins off DVD service

Netflix CEO Reed Hastings has two messages for all of you who feel jilted by the company's action this year to split its DVD and streaming video services. First: "It's not you, it's me." Second: "We're doubling down."

That's the essence of the email Hastings sent to Netflix's customers Monday morning--augmented by a similarly worded, but longer, blog post. The executive offered profuse apologies to customers offended when Netflix split its DVD and streaming video services, effectively raising prices on people who used both. Rather than reverse course, though, he announced the DVD portion is being spun off as an entirely separate service--now named Qwikster, with its own website. Netflix will remain the name of the video streaming service.

The upside? After years of demands and complaints, the new Qwikster will offer video game rentals in addition to DVDs. But even with that new service--and the shirt-tearing tone of Hastings' apology--a number of questions remain about the future of both Qwikster and Netflix.

In an interview with Macworld, Brett Harriss, an analyst for research-focused financial services company Gamco Investors, said the Qwikster spinoff was expected after Netflix split the DVD and streaming services this summer. "This is just sort of the next step," Harris said.

Hastings' apology-slash-Qwikster announcement came after a devastating weekend for Netflix. The company announced Saturday it had lost 1 million customers after splitting its DVD and streaming services, creating additional drag on a stock price that had been sliding precipitously ever since its July announcement of that action--aided by the company's loss of Starz content as part of its streaming video package.

Monday, Hastings attempted to do some damage control even as he pressed forward with the underlying strategy.

"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," he wrote. "It wouldn't have changed the price increase, but it would have been the right thing to do."

Qwikster, he made clear, will be an entirely separate service from Netflix: There will be no integration of the two sites. Customers who subscribe to both DVD and streaming video will see separate charges from each service on their credit card bills; a movie review or rating will stay on its site of origin, meaning that your love of Breaking Bad on Qwikster won't help Netflix recommend Mad Men to you. Andy Rendich, who has run Netflix's DVD service for four years, will be the Qwikster CEO. (Hastings and Rendich made a video describing the changes. Hastings is the smiling guy on the right; Rendich is the not-smiling guy on the left.)

The spin-off of Qwikster might be seen as an attempt by Netflix to ditch a business that it recognizes as having a limited future. But the new company seems determined to fight that impression by expanding its service--and addressing a longstanding critique--to include videogame rentals for the Wii, Playstation 3, and Xbox 360 gaming platforms.

That puts Qwikster into competition with the GameFly video rental service, as well as increased rivalry with Redbox kiosks that distribute both games and movies. Qwikster, which presumably takes over Netflix's much-lauded physical distribution system, would appear to have at least one significant advantage over GameFly as the two companies compete.

Hastings said the new videogame service will be akin to Netflix's current Blu-ray service, which costs customers an additional $2 a month for access to the high-quality movie discs. Among the questions left unanswered: How much the game service will cost, and how many titles will be available when Qwikster launches.

Another possible hitch: Netflix streaming is already available through the above-mentioned gaming consoles--which would seem a prime way to access the gaming audience and let them check their game queues. But Hastings emphasized Monday that Qwikster would have an entirely separate interface from Netflix--raising the possibility that Qwikster is sacrificing a key advantage as it launches its game-subscription service.

Netflix did not immediately respond to Macworld inquiries regarding the currently unanswered questions. Hastings promised that other upgrades are coming to both the Qwikster and Netflix services; a timeline for launching Qwikster has not been made public yet.

Hastings' announcement did produce a quick reaction on Twitter Monday morning, with both his name and the term "Netflix CEO" among Twitter's trending topics. Reaction seemed split among observers who thought the Qwikster spinoff was a forward-looking move; DVD subscribers angry at having to deal with two sites instead of one; and those who were bemused at the very public, very personal nature of Hastings' apology to customers--which that group likened to a bad breakup letter.

Gamco's Harriss, meanwhile, said the changes probably won't amount to much. "It's limited, but not that limited," he said of the future of physical media that Qwikster will be offering. "I think we'll still be using DVDs five years from now. I don't think the video games changes [Qwikster's outlook]. I was surprised the stock was up this morning, though it's down again."


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