Netflix introduces Qwikster, and its rapid decline

Netflix Chief Executive Officer Reed Hastings speaks during the launch of streaming internet subscription services for movies and television shows to televisions and computers in Canada, at a news conference in Toronto September 22, 2010Boy, am I sure glad I dropped my Netflix account earlier this month. Once Netflix announced its new pricing structure and plan options, their users understandably became disgruntled. So much, that the Netflix stock has dropped so rapidly that shareholders are wanting out, and fast!

You can see the Netflix stock dropping in real-time, right here! Google Finance – Netflix


Since then, Netflix has decided to split off into two separate companies — Netflix, which will handle the less demanding video streaming service, and Qwikster, which will handle the DVD portion. They have attempted to put out a fire of controversy over how its recent price changes by offering an apology and new name for its DVD-by-mail business. The wholly owned subsidiary Qwikster will add games to what it rents.

No more immediate price changes will result. The price changes announced over the summer effectively hiked subscribers who get both mail and streaming videos by 60 percent. Instead of one $9.99 charge, they now had two $7.99 charges. The company said this month that it lost 1 million customers since the price change, about 4 percent of its total. Netflix stock has plunged 19 percent since the subscriber loss was disclosed. The DVD unit chief Andy Rendich will be CEO of Qwikster.

The businesses will have separate websites and customers will be billed separately for each. “It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes,” Netflix chief executive Reed Hastings said in a note sent to customers. “So if you subscribe to both services, and if you need to change your credit card or e-mail address, you would need to do it in two places.” What a pain in the ass. 

Netflix is trying to compete with Gamefly and Redbox, both of which offer games in its library. Qwikster will do that in addition to the same beaten up DVD discs it has offered for ages.

The customer backlash against the higher rates, kicking in this month, has been much harsher than Netflix Inc. anticipated. That prompted management to predict last week that the company, the largest U.S. video subscription service, will end September with 600,000 fewer U.S. customers than it had in June. It will mark just the second time in 12 years that Netflix has lost subscribers from one quarter to the next. The last downturn occurred during 2007 when Netflix lost a mere 55,000 from March through June.

The current hemorrhaging exacerbated fears that Netflix is losing the magic touch that increased its stock 10-fold in the three years leading up to the company’s July 12th announcement about its higher prices. Since then, Netflix has turned into Wall Street’s equivalent of a box-office flop. Its shares plunged $39.46, or about 19 percent, to close at $169.25 on Thursday, leaving Netflix’s stock price more than 40 percent below where it stood before the company unveiled the higher prices. The cost to shareholders so far: more than $6 billion in paper losses. It could get uglier if the worst-case scenarios play out. Netflix suffered another setback earlier this month when Starz Entertainment ended talks to renew the licensing rights to a key part of Netflix’s video library for streaming over the Internet. The fallout from that decision will hit in March when Netflix will no longer be able to stream the popular mix of recently released movies and TV shows that it got from Starz, raising the specter of another onslaught of customer defections. “Netflix isn’t looking like it’s as good a deal because their prices are getting higher and their content isn’t getting any better,” said Wedbush Securities analyst Michael Pachter, who thinks the company’s shares could fall as low as $110. “It’s like they have taken the beef away from the buffet.”

The customer exodus still hasn’t convinced Netflix to reverse its course and lower its prices as it did in 2007 when it was engaged in a cut-throat battle with Blockbuster Inc. In announcing its lowered subscriber forecasts Thursday, Netflix emphasized it consider its new prices to be “the right long-term strategic choice.” The new pricing structure was driven by Netflix’s desire to build up its service that streams video over high-speed Internet connections, even at the risk of hurting the DVD-by-mail rentals that used to be its main business. Netflix management believes the convenience of Internet video is the main reason that it has added 17 million U.S. subscribers during the past three years, establishing the company as a major player in the entertainment industry.

As the streaming service took off, Hollywood studios and other video distributors such as Starz have demanded higher fees for the licensing rights to their content; a trend that caused Netflix to dig deeper into its subscribers’ wallets. Even with fewer subscribers, Netflix expects to bring in $10 million to $25 million more from its customers than during the July-September period than it did April-June. Netflix revenue won’t keep rising, though, if more subscribers flee. Pachter thinks that could still happen because some customers won’t be billed at the higher rates until the end of the month.

Author: Jason Zajdel

Learning as I go along. It's an awesome ride. =-)