Netflix (NAS: NFLX) is just full of surprises these days.
September has treated shareholders to punishing blows: Starz (NAS: LSTZA) refused to renew its streaming deal, confusion continued over streaming restrictions, and the company lowered its target on domestic subscribers.
Well, let's put another shrimp on the barbie.
In a shocking blog post last night, CEO Reed Hastings owned up to the mistakes behind its recent ill-received price hike. More importantly, Hastings revealed that Netflix will be splitting its operations into two distinct websites.
Netflix.com will continue to be the hub for the company's growing streaming catalog. However, its original disc-renting business will be bumped over to a new Qwikster.com domain.
The fallen tech darling's stock did open slightly higher this morning on the news, but this does seem to increase the risk profile of Netflix.
Sum of its parts
The decision to reposition its mail-order rentals under the whimsical Qwikster flag will inconvenience the 12 million subscribers who currently belong to both plans.
"A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated," Hastings concedes. "So if you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places. Similarly, if you rate or review a movie on Qwikster, it doesn't show up on Netflix, and vice-versa."
The lack of integration isn't just about tracking two different bills every month. Before, someone who added a flick into a queue knew whether it was available to stream or if it was accessible only through a physical disc rental. Now that video fan is going to have to monitor two entirely different websites.
Personal movie ratings -- the grease in Netflix's recommendation engine that serves up great rental suggestions -- will now be merely half as brilliant. Relying on rental histories, which already is a pretty convoluted data-mining trough as families share accounts, is going to become even more scattershot.
Killing the disc softly
Netflix has its reasons for sending DVD and Blu-ray buffs to a site that sounds more like a convenience store in The Simpsons than a movie service.
The good news is that it will finally be able to free itself from the "flix" in Netflix. Just as DISH Network's (NAS: DISH) Blockbuster and Coinstar's (NAS: CSTR) Redbox offer video games as well as movies on disc, Qwikster will allow accounts to "upgrade" in order to also receive console titles.
I've asked Hastings about the lack of games for years. Sure, they may cost more at first -- and have shorter shelf lives -- but for a physical distribution model that is bogged down by paying for roundtrip shipping on every rental, there's something to be said about games that are held longer because they can't be played in the span of a matinee screening.
"We're focused on being a movie and TV show company -- entertainment video," he told me two years ago. "That's what our brand is about. We're not focused on games either on the physical rental or on the electronic distribution."
Well, now Netflix will have the freedom to take on GameFly, Redbox, Blockbuster, and any other disc-based gaming service.
Addition by subtraction
There's only 2.2 million disc-only Netflix subscribers, so it's easy to see why Netflix may be separating the two services. The last thing that it wants to remind its 9.8 million streaming and 12 million streaming and disc subscribers is that its digital catalog lacks the new releases and valuable classics that studios are holding back from Netflix's digital buffet.
As crummy an inconvenience as this will be for the folks on dual plans, it will also help fortify the platform that Netflix sees as the future. Netflix won't tell you that it values its streaming subscribers over its mail-based couch potatoes, but it's true. Why else would streaming get to keep the established brand? Why send disc-loading dinosaurs to a domain name that sounds more like a dating site for one-night trysts?
Netflix isn't planting two flags. It's really hunkering down on the streaming turf. This is where the tech giants are going. Amazon.com's (NAS: AMZN) digital smorgasbord -- available at no additional cost to Prime subscribers -- is now up to 8,000 titles. If Apple (NAS: AAPL) does roll out actual televisions next year as many continue to speculate, it would simply be change on the table if it didn't launch a Netflix-like subscription service.
Right now, the split is easy to cast as yet another disaster in a month that Netflix would rather forget. However, doesn't that also make this the ideal time to peel off its mask to reveal its true identity? Churn is going to go through the roof anyway. Hastings dolls are already burning in effigy. Breaking up the old school from the new school into two different campuses is going to lead to a lot of headshaking now, but it's also the ticket for Netflix to begin moving to the head of the class in a year or two.
If you want to follow the plot twists in this saga as they occur, add Netflix to My Watchlist.
At the time this article was published The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, Netflix, and Amazon.com. Motley Fool newsletter services have recommended buying puts in Netflix. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz has been a Netflix shareholder and subscriber since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
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