Netflix Separates DVD Business as Qwikster, Adds Games

(Corrects share decline in third paragraph.)

Netflix Inc. (NFLX) plans to separate its mail-order DVD business from movie streaming, a move the company said will give both businesses a better chance to grow.

Netflix, based in Los Gatos, California, will create a wholly owned DVD-by-mail subsidiary called Qwikster “in coming weeks,” Chief Executive Officer Reed Hastings said in a blog post yesterday. The company doesn’t plan to spin off the DVD division, said Steve Swasey, a spokesman.

Customers will have to log in to separate websites for the two services and will be billed separately. The change may alienate users who were attracted to the convenience of a single site for both, according to James McQuivey, an analyst at Forrester Research. Netflix fell 31 percent over the past three trading sessions after cutting its subscriber forecast.

“It’s baffling to do this now,” McQuivey said. “The simple, single-user experience alone has been a large contributor to Netflix’s growth. That flexibility is now gone, and it doesn’t make sense from a digital customer perspective.”

Hastings called the separation necessary because the businesses have different growth trajectories. He also apologized to Netflix customers for the company’s handling of recent price changes, saying he “messed up.”

In July, Netflix announced separate pricing for the mail- order and streaming business, raising the cost by 60 percent to $15.98 a month for users who want both. Before the changes, customers paid $9.99 for unlimited streaming and one movie out at a time.

Shares Fall

Netflix fell $11.44, or 7.4 percent, to $143.75 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares slid last week after the company said it lost more customers than expected following the price changes and have now lost 18 percent this year.

“It is clear from the feedback over the past two months that 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.

Hastings didn’t address investor concerns that the streaming business faces challenges from rival services such as Amazon.com and Hulu LLC, said Shahid S. Kahn, chairman of MediaMorph Inc., an adviser that tracks how content performs on different platforms for media companies.

“Netflix is making yet another bad move by separating Qwikster,” Kahn said in an e-mail. “It’s giving up a predictable, albeit shrinking business, for an unpredictable, highly competitive business.”

Licensing Costs

Netflix faces rising costs and other headwinds in licensing streaming content. Starz, part John Malone’s Liberty Media Corp. empire, said this month it won’t renew a contract ending in February that gave Netflix rights to newer movies from Sony Corp. (6758) and Walt Disney Co.

Operating two websites will allow Netflix and Qwikster to innovate more rapidly, “which will be better for all members,” Swasey said in an e-mailed response to the criticism.

In addition to offering DVDs and Blu-ray discs, Qwikster will rent video games for Nintendo Co.’s Wii, Sony Corp.’s PlayStation 3 and Microsoft Corp. (MSFT)’s Xbox 360 consoles for an additional fee, Hastings said, adding other changes are coming.

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

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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