Netflix Splitting into Two Companies, Adding Video Games to Mix

NetflixNetflix is splitting into two services and adding video game rental into its newer service, Qwikster. The reason for splitting is 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,” according to Reed Hastings, Co-Founder and CEO of Netflix.

Andy Rendich, head of the DVD service for the past four years, will be the CEO of Qwikster.

Those who wish to stream movies will continue to use Netflix. Those who wish to use both services will be charged separately for each service. There will be no price changes, but Hastings has promised substantial increases in streaming content on the Netflix side.

Additionally, Qwikster will offer the ability for users to add a video games upgrade option, similar to the already-existing upgrade option for Blu-ray, for those who want to rent Wii, PS3, and Xbox 360 games.

Analysis: I’m not a Netflix customer, but if I were, I’d be pissed off, I think. I can deal with price increases so long as they’re justified. But price increases and then taking away something I already had, only to charge me extra if I want it back? And to add extra costs if I want different kinds of rental? That’s bullshit.

It was roughly $10 a month for both DVD and streaming. It’s now roughly $8 a month to stream whatever movies they have, and they better increase the amount drastically if they want to keep whatever customers they have left happy. And the DVD service? Not likely to be $2 a month, especially if you want Blu-Ray or video games. Let’s not forget that people are going to have to deal with customer service for two companies now, get billed twice, and deal with twice as much crap as they did before.

Bill Gurley might be right, though, on why Netflix is doing this: first-sale doctrine doesn’t apply to streaming movies. If you buy a DVD, you can rent it to whoever you want. You can’t, however, stream it to whoever you want; you have to pay a licensing fee. His guess is that Hollywood wanted payment for everyone who had the ability to stream its movies, regardless of whether they actually did. If this is true, this would raise costs for Netflix by quite a bit, which may have forced them to split. It makes sense, and seems about par for the course.

I realize that the company wants to move forward and cut costs like any business, but screwing over its largest customer base is not the way to go. Half of Netflix’s users are people who both stream movies and rent DVDs. 12 million people. Only 2.2 million use the DVD-only service. This may be the death of Netflix’s DVD rental service, even with the ability to rent video games, as many companies are wanting to move toward streaming video games as a type of rental service. OnLive comes to mind.

Then again, for all we know, this is what they want to happen.


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