Netflix Split-Up: Final Straw for Subscribers?

Updated from 11:48 a.m. ET to add additional commentary.

NEW YORK ( TheStreet) -- Netflix ( NFLX) is making it a habit of alienating subscribers, but this time has it gone too far?

The movie-rental giant announced on Sunday that it is splitting the company in two -- creating a new DVD-by-mail company called "Qwikster" and leaving the streaming video service under the Netflix banner.

Chief Executive Reed Hastings, in a somewhat confusing note on the company's blog on Sunday, he offered a mea culpa for not explaining the recent price hike and made the announcement of the company's split. But will two services retain subscribers or simply annoy them?

From a business perspective, the idea makes sense. Hastings says the DVD-by-mail program and streaming services are becoming two diverse businesses with differing cost structures and benefits that need to be marketed differently. Ultimately, by removing the DVD business from streaming, Netflix will cut down costs, which could allow it to expand its streaming library, which has been severely lacking.

The separation of the two companies may also mean Netflix will disclose separate streaming and DVD financials.

But from the consumer standpoint, this is yet another bad decision.

For subscribers who want just one service or the other, splitting the services works in their favor, catering to their specific interests. But for hybrid users who want access to both physical DVDs and streaming content, things have become difficult.

Using Netflix's blog as a vehicle to spew their anger, users are saying not integrating the newly formed Qwikster and Netflix will be a severe disservice to users who opt to register for both.

>Click here to take our Netflix poll.

"The goal of a business is to keep things simple for their consumer," says Wedbush analyst Michael Pachter. "This creates an extra step for the consumer and is taking out yet another element of convenience."

Ultimately, the fear in separating the two services into two companies will make it more complicated for subscribers to manage their queues. Subscribers will need to click back and forth between the two sites to see which titles are available streaming and which are available by DVD in order to create their queues.

"This is problematic as streaming inventory is constantly in flux and many hybrid subscribers use DVD to access content that they cannot stream," Morgan Keegan analyst Justin Patterson wrote in a note.

Netflix currently boasts about 12 million of these hybrid users.

"Netflix is making things more complicated for 12 million people, that's a lot of business," Pachter said.

And while creating two separate lines on subscribers' credit card statements isn't typically a big deal, it will highlight to users exactly how much they are spending for each. "If they haven't rented a DVD that month, they may take more notice now that each service is broken down," Pachter said.

Another issue is brand image. "For over a decade consumers have associated Netflix with the red envelope," Patterson wrote. "Behavior takes time to change and we believe Netflix is taking a significant risk here."

This comes as subscribers have already been flocking to the exits after Netflix raised its most popular DVD-by-mail and unlimited streaming package by 60%. The new price, $7.99 for each per month, went into effect at the beginning of the month. This brings the combo plan to $15.98 from $9.99 per month.

As expected, the backlash from subscribers was intense, but it seems even more so than management anticipated. On top of this, Netflix also reached a stalemate with Liberty Starz Group ( LSTZA) to renew its streaming content deal, and will pull its content when the current partnership expires in February.

These factors led to Netflix being forced to slash its third-quarter domestic subscriber guidance last week. The company now expects 24 million U.S. subscribers in the July- September quarter, down from its prior guidance of 25 million. The stock plunged 25% following the news, closing on Friday at $155.19, its lowest level since October 2010.

And after initially getting a lift on the news, rising as high as $162.99 in Monday's session, Netflix shares were recently trading at $152.75, down another 1.6%.

Subscribers are being hit with a triple whammy -- higher prices, less content and now less convenience.

Is the Netflix split-up the last straw? Will you continue to remain loyal or stream for the exits? Take our poll and see what the other TheStreet users are saying.


With Netflix splitting into two companies --one for DVDs and the other for streaming -- will you cancel your subscription?

Yes -- I will cancel my Netflix subscription completely.
Yes -- I will cancel one of the two services.
No -- The split-up makes no difference.

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