Netflix Backs Down on Qwikster (NFLX, AMZN, WMT, CSTR, DISH)

The management team at Netflix Inc. (NASDAQ: NFLX) apparently spent the weekend trying to come up with a way to back down from the company’s recent announcement that it would split its business into a streaming-only service and a DVD-by-mail service to be called Qwikster. Customer accounts, now unified under just the Netflix name, would be split so that if a customer had both the streaming and the DVD service, that unlucky soul would have to manage two accounts and pay two bills.

An announcement appeared on the Netflix blog this morning, in which CEO Reed Hastings says that “we are going to keep Netflix as one place to go for streaming and DVDs … in other words, no Qwikster.” He goes on to say, “While the July price change was necessary, we are now done with price changes.” In other words, what used to cost $10 now costs $16, so get over it.

With competition from the likes of (NASDAQ: AMZN), Wal-Mart Stores Inc. (NYSE: WMT), Redbox kiosks from Coinstar Inc. (NASDAQ: CSTR), and the re-constituted Blockbuster from Dish Network Corp. (NASDAQ: DISH), there are too many options available for Netflix to count on holding customers who believe they are being overcharged.

Netflix apparently believes that the fleeing customers will gripe about paying more for a subscription, but that rubbing salt into that wound by making customers pay two bills was simply bad public relations. Not exactly.

Netflix customers don’t want to pay more in October than they did in June for the same service. The company’s belief, when it announced the price hike in July, was that it would lose some customers. The company was prepared to accept some existing subscriber losses in exchange for a whole new flood of streaming-only customers.

Even before the ill-thought-out decision to split the business into two parts, more customers than Netflix expected voted with their feet. What existing customers knew — which might not have been known to new streaming-only subscribers — is that the number of streaming movies available on Netflix was a fraction of the number available on DVD. When the combined service cost $10/month, that was about right given the availability of streaming content; at $16/month, streaming content is overpriced as a function of the amount of that content. Most existing customers who walked away kept their DVD service and ditched the streaming service.

Today’s announcement won’t change any of that. Customers who thought Netflix’s new pricing was too expensive will still think that’s true. The company’s earlier apology for its decision to split the company’s business didn’t sit well with customers, and this latest step backward won’t go down any better. The main issue is availability and cost, and Netflix is going to hold the line on the price increase.

The company’s stock is up more than 10% in the pre-market this morning, at $127.58, in a 52-week range of $107.63-$304.79. That’s still pretty weak for a stock that closed above $200/share less than a month ago.

Paul Ausick

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