Netflix: Self-Inflicted Wound?

Netflix could lose millions of customers
over its decision to divorce its over-the-top video service
from the legacy DVDs-by-mail business — a move
prompting speculation that the company may try to sell
off one of those pieces.

Last week, Netflix seemed to swing into damage-control
mode over its previous announcement
to unbundle DVD and streaming
plans. CEO Reed Hastings told customers,
“I messed up” in how the company
communicated the rationale for the pricing
change.

But Netflix wasn’t feeling apologetic
enough to reverse course. In fact, Hastings
also said Netflix will completely
separate the DVD-by-mail service under
a new brand, Qwikster, which spurred
even more customer consternation.

Wall Street gave the strategy a gigantic thumbs-down.
Netflix lost more than $4.2 billion of market capitalization
in one week, with shares falling 38% between Sept. 15
— when the company said it expects to lose 600,000 U.S.
customers in the third quarter of 2011 because of the price
change — and Sept. 22.

In the next few weeks, Netflix will rechristen the DVD
service as Qwikster, operating as an independent subsidiary,
with Netflix remaining as the brand for the streaming-
only service. (Tech blogs gleefully pointed out that the
@Qwikster Twitter account belonged to some guy whose
profile pic was a pot-smoking Muppet.) Customers’ video
queues and billing functions will be separated, as well.

The Qwikster service will off er the same selection of
DVD titles, as well as an option to rent video games for an
additional fee, Hastings said. “Some members will likely
feel that we shouldn’t split the businesses, and that we
shouldn’t rename our DVD-by-mail service,” he wrote.
“Our view is with this split of the businesses, we will be
better at streaming, and we will be better at DVD by mail.”

Netflix could be positioning the video-streaming business
for a sale to Amazon.com, Wedbush Securities analyst
Michael Pachter speculated in a research note. He
upgraded Netflix from “underperform” to “outperform.”

But Netflix’s pricing-change fumble may be worse than
investors fear. Even before the Qwikster announcement,
16% of current customers said they were planning to drop
the company’s streaming or DVD plans, and another 14%
were seriously considering canceling, according to a survey
by Frank N. Magid Associates conducted the week of
Aug. 22.

Industry analysts compared the
Netflix gaffe to a self-inflicted marketing
wound on the order of the launch of
New Coke.

“The DVD business was a huge
differentiator for them relat ive to
other streaming services,” VideoNuze editor
and publisher Will Richmond said.
“They’ve chosen a very blunt-edged approach
to split off DVDs and are learning
the hard way that’s an incorrect approach.”

Hoping some positive news could help temper the backlash,
Netflix announced a two-year renewal with Discovery
Communications for several prior-season series and
specials from the nonfiction programmer’s portfolio.

Under the nonexclusive licensing agreement, Netflix’s
streaming-only members can watch older TV shows and
specials, including an expanded selection of additional
seasons of series from Discovery, TLC, Animal Planet, Investigation
Discovery, Science and Military Channel. New
shows under the pact are to include Discovery Channel’s
Man vs. Wild, TLC’s Say Yes to the Dress and Animal Planet’s
River Monsters.