This Day On The Street
Continue to site
ADVERTISEMENT
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

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/
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.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

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

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $121.30 0.00%
FB $94.01 0.00%
GOOG $625.61 0.00%
TSLA $266.15 0.00%
YHOO $36.67 0.00%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs