Netflix to spin off DVD-by-mail biz

Responding to a chorus of complaints from subscribers and a plunge in its stock price, Netflix plans to break off its streaming and rental-by-mail businesses into separate divisions in the coming weeks.

Company hopes the new division, dubbed Qwikster, will help stabilize its subscriber base and revive its share prices. To help revive consumer interest, the company plans to add videogames to its rental options as well.

Also in the note, CEO and co-founder Reed Hastings acknowledged the overwhelming negative feedback to recent price changes at the company, saying, “I messed up. I owe everyone an explanation.”

The post was the most clear public acknowledgement by the company that it mishandled the recent decision to separate subscription fees for its streaming and DVD rental service, effectively raising the rates for people who subscribed to both by 60%.

Many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes,” Hastings said. “That was certainly not our intent, and I offer my sincere apology. When Netflix is evolving rapidly, I need to be extra-communicative. This is the key thing I got wrong. In hindsight, I slid into arrogance based upon past success.”

The decision to split the company, Hastings said, came after the realization that the divisions had different cost structures and marketing needs. It’s also meant to allow Netflix to improve its streaming service, the company’s big bet for the future, and one facing increased competition from Amazon and Walmart, among other companies.

Netflix shares fell 26% over two days last week after the company lowered its third-quarter subscriber estimates by 1 million. Shares are down 12% so far this year. On Monday, the stock dropped 7.4% to close at $143.75.

Customers will soon have to go to Qwikster.com to add DVDs to their queue. The relaunched service will also add videogames to its inventory, a move many analysts have been urging. The company plans to offer titles for the Xbox 360, PlayStation 3 and Wii.

Members have been asking for videogames for many years, and now that DVD by mail has its own team, we are finally getting it done,” Hastings said.

The Netflix and Qwikster sites will not be integrated, which will create new hurdles for customers. Changing credit card information, for example, will require users to log on to each site separately and make the changes. The sites will apparently also not share recommendation information for rentals made after the separation, which could dramatically affect suggested films.

Andy Rendich, who has led the DVD division for four years, will be Qwikster’s CEO.

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