Netflix splitting into separate streaming, DVD businesses

In a remarkably honest blog post, Netflix CEO Reed Hastings admitted Sunday that he “messed up” in not being completely open about what was going on with his company, and announced that Netflix’s streaming and DVD operations will become separate operations.

The streaming service will remain Netflix, but the DVD-by-mail business will be renamed Qwikster.

While there won’t be another price increase – Hastings says, “We’re done with that!” – customers will have to set up separate accounts with the two companies if they’re currently subscribed to both streaming and DVD plans. Qwikster also will start renting out console game disks through the DVD plan for an additional fee.

Here are the details:

Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to qwikster.com to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option, similar to our upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games. Members have been asking for video games for many years, and now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. Another advantage of separate websites is simplicity for our members. Each website will be focused on just one thing (DVDs or streaming) and will be even easier to use. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated. So if you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places. Similarly, if you rate or review a movie on Qwikster, it doesn’t show up on Netflix, and vice-versa.

In his post, Hastings admits to having become arrogant in the wake of Netflx’s success, but has long feared the difficulty of managing a transition from DVD to streaming.

For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.

When Netflix is evolving rapidly, however, I need to be extra-communicative. This is the key thing I got wrong.

In hindsight, I slid into arrogance based upon past success. We have done very well for a long time by steadily improving our service, without doing much CEO communication. Inside Netflix I say, “Actions speak louder than words,” and we should just keep improving our service.

But now 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. It wouldn’t have changed the price increase, but it would have been the right thing to do.

In other words, Hastings all along planned to create two separate businesses, spinning off the legacy DVD-by-mail operation to focus on the growth in streaming. He concedes he should have been up front about this when Netflix broke its plans in two.

Will this digital confession stanch the bleeding? I doubt it. While the move makes sense – the DVD business is in decline, while streaming is on the rise – Netflix’s recent moves have turned a service based on convenience into one that’s become a hassle. Having customers set up separate accounts for Netflix and Qwikster won’t help.

And what’s up with that name, anyway? As Harry McCrackenpoints out, Netflix has a lot of equity in its brand . . . and there are a lot of companies with names similar to Qwikster.

This won’t be an easy transition.

Update: Hastings and the CEO-designate of Qwikster, Andy Rendich, talk in this video about the split.