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Netflix offers a mea culpa – and a defence

Netflix Inc. chief executive officer Reed Hastings meant to apologize to his irate customers, but he also demonstrated a stunning lack of irony: In an age of e-mail, instant messages and time-stamped tweets, he has given the name "Qwikster" to the division of his company that relies on the U.S. Postal Service.

In a blog post Sunday night, Mr. Hastings admitted that he "messed up" by raising Netflix prices for U.S. customers without explaining his reasons. In July, the company un-bundled the Internet streaming and DVD-by-mail sides of its business, forcing those who subscribed to both at a discount to pay separately, at the regular $7.99 (U.S.) price for each. In response, more than a million customers ditched the service altogether, and Netflix's stock was pummelled, falling 50 per cent from its peak two months ago.

In response, Mr. Hastings apologized for not better communicating with his subscribers, and also announced that Netflix will be hiving off its DVD business into a separate division of the company, called Qwikster. He did not change the new pricing structure, however.

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"Streaming and DVD by mail 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," he wrote.

(The move has no impact on Netflix subscribers in Canada or Latin America, where only the streaming service is available.)

If Netflix were spinning off its DVD-by-mail business entirely, it would certainly push a dinosaur business off the company's balance sheet. In Canada, the most recent quarterly survey by Solutions Research shows that 47 per cent of respondents rented one or more DVDs in the past six months, compared to 64 per cent in 2006. In the U.S., where streaming services such as Netflix have been available for several years, DVD rentals are declining even faster.

Since Qwikster will remain a wholly owned subsidiary, however, the announcement Sunday night is essentially a branding move (although some on social networking sites compared it to the "New Coke" branding fiasco of the '80s) as well as a minor management shuffle – the head of the DVD service, Andy Rendich, was named Qwikster's CEO.

And it could anger customers further: The roughly 12 million people in the U.S. who still subscribe to both services will now have to pay two bills, and visit two websites to manage their accounts and search for movies.

"The separation of the websites is a strategic error," said Michael Pachter, an analyst with Wedbush Morgan Securities. "The only rational explanation for the split-up is that Netflix ultimately intends to sell or spin off the Qwikster service, but it doesn't appear that such a move is imminent."

A Netflix spokesperson declined requests for an interview.

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Netflix has said it expects its DVD business will not recover, and it has good reason – DVD sales have been falling for years, and retail outlets that rent DVDs, such as the bankrupt Blockbuster chain, are quickly becoming relics.

The company also announced on Monday that it would add video game rentals to the mail service, which new-media analyst Kaan Yigit of Toronto-based Solutions Research Group believes will add value.

"This gives it a lot more staying power," he said. "One in six titles, the hard-core gamer would like to own, for sure. But really, the rest of it is, people want to play them a little bit and try them out. … It's not going to be gangbusters necessarily, but still there's a base of some 15 million people they have [using the DVD service] in the U.S. That's fine for them."


It's either a shameful failure of due diligence or a brilliant, twisted bit of viral marketing. Shortly after news spread on Monday that Netflix is separating its DVD-by-mail business into a new division named Qwikster, the more amusing news lit up social networking sites: The Twitter handle @Qwikster is helmed by a foul-mouthed man who identifies himself as Jason Castillo. The profile picture for the page is a cartoon of the Sesame Street character Elmo, illustrated to appear as though the fuzzy creature with the friendly high-pitched voice is smoking a joint.

Mr. Castillo's following on Twitter immediately shot up – despite only having written 19 tweets since the end of April, he now has more than 3,000 followers. The Twitter feed is dominated by Mr. Castillo's musings on pot and his progress on the iPhone game "Original Gangstaz."

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A typically pleasant and banal post from the @Netflix corporate account, by contrast, reads: "Summer has ended: What fall TV shows are you excited for?"

Late Monday afternoon, Mr. Castillo finally responded to his new-found fame with the exclamation, "Dayum". He tweeted that three people have asked to buy the @Qwikster handle from him "but idk [I don't know] who to trust".

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