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Netflix splits off DVD service

NEW YORK — Netflix is separating its DVD-by-mail business from the online movie streaming service it sees as the future of entertainment consumption.

In announcing the changes, chief executive officer Reed Hastings also apologized to subscribers for the way the company communicated its decision to split the two services, which raised prices for those who want both.

The mail order plan will be renamed Qwikster. In a few weeks, Netflix subscribers who want to get DVDs by mail will have to go to a separate website to access Qwikster. The streaming business will continue to be called Netflix.

Members who subscribe to both services will have two entries on their credit card statements. Instead of "Netflix," the distinctive red envelopes that end up in customers' mailboxes will now say "Qwikster."

It's a risky gamble. The amount of streaming content the company offers is still far below the number of DVDs in its catalog. And competition from Hulu, Amazon, Coinstar's Redbox kiosks and other services is growing. In addition, asking Netflix customers to deal with two separate websites and accounts instead of just one might alienate them further.

Hastings apologized for the way the company communicated the price changes, but not for the price increases themselves.

"I messed up," the CEO wrote in a blog post Sunday night that was also e-mailed to subscribers.

The changes come as the company faces increasing scrutiny from customers and shareholders over the decision announced in July to separate its mail order and Internet streaming services into two separate plans. That change raised the prices for users who want both services by as much as 60 percent for some.

"Our view is, with this split of the businesses, we will be better at streaming, and we will be better at DVD by mail," Hastings wrote.

Last week, Netflix lowered its U.S. subscriber forecast for the third quarter, and the former stock market darling's shares took a beating as a result. The company's stock has lost half of its value in the past two months, with shares tumbling 7.4 percent to close at $143.75 on Monday.

Hastings said he "slid into arrogance based upon past success" when he did not adequately explain the reason behind the plan separation and the resultant price increases. He said the reason is that instant 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."

Explaining the reason behind the plan changes "wouldn't have changed the price increase, but it would have been the right thing to do," Hastings wrote.

Hastings said the DVD service will be the same — "just a new name." But customers will see a video game upgrade option for game rentals on the Qwikster website.

Hastings also said Netflix will add "substantial" streaming content in the next few months, and said there are no more planned pricing changes.

Netflix splits off DVD service 09/19/11 [Last modified: Monday, September 19, 2011 9:59pm]
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