STRONGBRANDS    Professor Tim Calkins, Kellogg School of Management

Netflix today announced that it was splitting the company into two business units operating under two different brand names. The internet video streaming business will retain the Netflix name. The traditional DVD business will now be called Qwikster.

You can read the email CEO Reed Hastings sent to current Netflix customers at the end of this post.

This is an unexpected and risky move.

The logic on the surface is reasonable enough. Streaming and DVD rentals are very different businesses, with distinct consumer benefits and competitive sets. With this in mind, having focused, differentiated brands in each space is the ideal approach, so each brand can own a particular point of difference.

In addition, with two different businesses and brand names, it is possible to sell or spin-off the different units. It might also be easier to negotiate deals for content.

I am a big believer in brand portfolios so this move should seem like a winner. But I am concerned.

The biggest problem is that the traditional DVD business may take a significant hit. Netflix customers are already dealing with a sharp price increase. Now many will be losing the Netflix brand.

This isn’t a small issue. The Netflix brand has enormous appeal; the company provides great service and has very loyal customers. Qwikster is a new, unknown brand. Many people won’t like moving from Netflix to Qwikster, even if the service doesn’t change at all. The brand matters.

It isn’t clear that Netflix will thrive in streaming, either, since the streaming selection is somewhat limited, at least for now.

Combined, Netflix had a strong offering; the DVD service had great selection but was slow, the streaming service was fast but had limited selection. Consumers could use both options, matching the service with the situation.

If Netflix isn’t able to expand streaming offerings quickly, the company may find itself with a struggling steaming service and a fading DVD business.

This is a risky time indeed.

 

 

Dear ,

I messed up. I owe you an explanation.

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. That was certainly not our intent, and I offer my sincere apology. Let me explain what we are doing.

For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn’t have changed the price increase, but it would have been the right thing to do.

So here is what we are doing and why.

Many members love our DVD service, as I do, because nearly every movie ever made is published on DVD. DVD is a great option for those who want the huge and comprehensive selection of movies.

I also love our streaming service because it is integrated into my TV, and I can watch anytime I want. The benefits of our streaming service are really quite different from the benefits of DVD by mail. We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service.

So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently.

It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming.

Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to qwikster.com to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option, similar to our upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games. Members have been asking for video games for many years, but now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated.

There are no pricing changes (we’re done with that!). If you subscribe to both services you will have two entries on your credit card statement, one for Qwikster and one for Netflix. The total will be the same as your current charges. We will let you know in a few weeks when the Qwikster.com website is up and ready.

For me the Netflix red envelope has always been a source of joy. The new envelope is still that lovely red, but now it will have a Qwikster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be similar for many of you.

I want to acknowledge and thank you for sticking with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly.

Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions.

Respectfully yours,

Reed Hastings, Co-Founder and CEO, Netflix

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