Netflix swung into full damage-control mode, with CEO Reed Hastings telling customers "I messed up" in communicating the company's decision to split off the DVD and streaming service -- while also announcing Netflix will completely separate the DVD-by-mail service under a new brand, Qwikster.
"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," Hastings wrote in a blog post Sunday and in an e-mail sent to customers.
Last week, Netflix said it expects to lose about 600,000 U.S. customers for the third quarter of 2011 -- which would be only its second-ever subscriber decline -- following a pricing-plan change that went into effect Sept. 1. That sent Netflix's stock plummeting 26% in two days.
On Monday, Netflix stock rose 5% in morning trading but closed down 7.4% to $143.75 per share amid a broader market decline.
In July, Netflix made many customers furious after eliminating the combined DVDs-by-mail and streaming plans. Netflix now offers U.S. customers the streaming-only plan for $7.99 per month, as well as DVD plans starting at $7.99 per month for one disc out at a time.
According to Hastings, 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) because they are afraid to hurt their initial business."
He continued, "In hindsight, I slid into arrogance based upon past success.... given the huge changes we have been recently making, I should have personally given a full justification to our members of why we are separating DVD and streaming, and charging for both."
Netflix "realized that 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," Hastings said.
As such, the company in the next few weeks will rename the DVD service Qwikster, operating as an independent subsidiary, with Netflix remaining as the brand for the streaming-only service. The Qwikster service will offer the same selection of DVD titles, as well as an option to rent video games for an additional fee, Hastings said.
Hastings acknowledged that, "A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated" -- so customers who subscribe to both services will have to maintain separate queues. User ratings on Qwikster and Netflix will similarly not be integrated.
Customers who subscribe to both services will have two entries on their credit card statements, one for Qwikster and one for Netflix. The total will be the same as the current charges.
"Some members will likely feel that we shouldn't split the businesses, and that we shouldn't rename our DVD by mail service," Hastings wrote. "Our view is with this split of the businesses, we will be better at streaming, and we will be better at DVD by mail."
Hastings said Andy Rendich, currently chief service and operations officer overseeing the DVD business, will become the CEO of Qwikster.