This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Does Netflix Qwikster Have a Future?


By Ryan Lawler, GigaOM

Netflix announced in a blog post Sunday evening that its DVD-by-mail operations would soon be rebranded “Qwikster,” and that the service would be separated from the streaming service that the company has been pushing for the last several years. Doing so clearly grants some independence to the unit, and will help it to operate without dealing with fast-growing streaming business. But it also raises questions about the future viability of a standalone DVD-by-mail operation.

Netflix isn’t completely abandoning the new DVD business — at least, not yet. After all, Qwikster will have the same characteristic red envelope and the same legacy infrastructure and library supporting it. However, it seems clear that Netflix is creating a wall between the two businesses as a way to smartly manage its profits and losses, and to help Wall Street better value the separate operations.

All that said, separating the two could also hasten the demise of the DVD-by-mail business, if the company’s recent subscriber guidance is any indication of user’s interest in a standalone DVD-by-mail service. After all, it was that part of the forecast that Netflix most badly misjudged. The company expected 3 million standalone DVD subscribers when it first gave guidance on its second-quarter earnings call, and revised that downward by 800,000 in its updated forecast.

More importantly, creating a separate website and a separate billing relationship could cause even more DVD members to leave the service. As I wrote last week, there’s power in the bundle:

“By the end of the quarter, half of all Netflix subscribers in the U.S. will continue to subscribe to both streaming and DVD-by-mail services. That gives them the best of both worlds: Instant access to streaming content, with a much wider library of DVDs available if they’re willing to wait.”

But what happens when you create a separate website, with separate queue management and a separate billing mechanism? If you’re Netflix, you lose the power of the existing customer relationship and much of the goodwill that you’ve built up over the last several years. Regardless of the miscues in handling the price change and the separation of the DVD business, the Netflix brand still carries tremendous value to a number of existing and potential new subscribers.

You also lose the power of the bundle. One reason cable companies have been aggressively pushing triple-play packages over the last several years is that users who subscribe to two or more services are much less likely to quit. By separating DVD-by-mail and streaming businesses into separate billing relationships with subscribers, Netflix is exposing both to potentially higher churn.

Finally, while Netflix maintains that the change will allow the new DVD-by-mail brand to better manage a slowdown in its business, this is also a good way for the parent company to begin evaluating so-called “strategic alternatives” for the business. With a huge amount of shipping and order management infrastructure already built out, as well as a separate billing system, it would be easy enough for Netflix to eventually spin the unit out, or to sell it to a third-party with more patience for a dying business model.

Photo courtesy of Flickr user Ross Catrow

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

http://gigaom.com/video/netflix-qwikster-future/

Stock quotes in this article: NFLX 
Get access to over 75 technology market experts! Understand market fundamentals with research reports and commentary from seasoned analysts. Try GigaOm Pro FREE today

Copyright 2011 GigaOM. All Rights Reserved.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 +2.54 0.14%
NASDAQ 4,095.5160 +9.2910 0.23%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs