Bloomberg News

Netflix Retreats From Plan to Split DVDs From Web Streaming

October 10, 2011

(Updates with closing share price.)

Oct. 10 (Bloomberg) -- Netflix Inc., reacting to customer anger, retreated from a three-week-old decision to split its mail-order DVD and Internet-streaming services.

Customers will be able to access the two services from Netflix.com, with one account and password, the Los Gatos, California-based company said in a statement, scrapping a plan to create a separate DVD offering called Qwikster.

The reversal is an acknowledgment of users’ rejection of Netflix’s plans to raise prices and the subsequent Sept. 18 announcement detailing the separation of the services. It may also be a sign that an increasing number of customers dropped the service in the past weeks, as measured by the churn rate.

“Netflix wouldn’t have reversed course and suffered the stigma of walking away from Qwikster if they weren’t seeing a substantial uptick in their churn rate,” said Mike Olson, an analyst at Piper Jaffray in Minneapolis who rates the shares “overweight.”

Netflix declined $5.59, or 4.8 percent, to $111.62 at the close in New York. The shares have slumped 28 percent since Sept. 18.

“The real cause of the strategy shift could be higher- than-expected customer churn rates in late September and early October,” George Askew, an analyst with Stifel Nicolaus in Washington, wrote in a note today to investors. He recommends holding the shares.

‘Moving Too Fast’

“Consumers value the simplicity Netflix has always offered and we respect that,” co-founder and Chief Executive Officer Reed Hastings said today in an e-mailed statement. “There is a difference between moving quickly -- which Netflix has done very well for years -- and moving too fast, which is what we did in this case.”

On July 12, Netflix said people who want streaming and DVDs would have to pay $7.99 a month for each service, a 60 percent increase for people who previously got both. Today’s statement didn’t mention that price change.

“We’ve ruffled a lot of feathers,” Chief Financial Officer David Wells said on Sept. 21 at a Goldman Sachs Group Inc. conference. The company saw “a spike and then a steady response” of customer cancellations through the quarter and fewer than expected new subscribers, he said.

Subscriber Forecast

Netflix on Sept. 15 cut its projected subscriber numbers for the third quarter by 1 million, a reflection of customer reaction to the price increase. Of those, the company said 9.8 million streamed movies, 12 million received both services and 2.2 million ordered DVDs by mail only.

John Malone’s Starz LLC on Sept. 1 said it was ending talks to renew a streaming accord with Netflix. Starz supplies recent Walt Disney Co. and Sony Corp. movies to Netflix for online viewing under a contract that expires in February.

Netflix on Sept. 18 said people who wanted DVDs would have to sign up for Qwikster, requiring a separate account and billing. On that day, Hastings also apologized in a blog post for the company’s handling of of the July price change.

“I slid into arrogance based on past success,” Hastings wrote at the time.

Explaining the split, he said the DVD and streaming operations “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.”

Netflix posted the announcement of today’s change in its plans on the corporate blog and also sent e-mails to its subscribers, according to the statement.

--Editors: Cecile Daurat, John Lear

To contact the reporters on this story: Ronald Grover in Los Angeles at rgrover5@bloomberg.net; 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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