24 hours later, Netflix's recent announcement still makes little sense

At first I was pretty annoyed with Netflix's Reed Hastings for publishing his company-splintering blog post after I'd gone to bed Sunday night. It meant I really didn't have time to gather my thoughts and do a post about the changes yesterday morning. Then I decided if I had a day to research and ponder I could probably figure out exactly what is going on in his head. There has to be a method to his madness, right?

In case you were off the Internet yesterday, here's what basically happened. Netflix CEO Reed Hastings wrote up a blog post apologizing for not being more communicative about the recent changes to membership plans. Essentially the changes separated streaming memberships from disk-based memberships, meaning people who wanted both were going to have to pay more. The changes made a lot of people angry so it was understandable that Hastings might want to apologize.

But Hastings didn't stop with an apology. He then dropped another bombshell on his customers. Netflix is taking this separation plan even further. He's spinning off the DVD rental side of the operation into a separate company called Qwikster. Netflix will only offer streaming plans. For DVDs you'll have to go to Qwikster, and apparently over there you'll have a completely separate account, queue, rating system and so on. In a time when everyone is pulling services together and integrating, Hastings is splitting his company into two parts and severing all connections between the two.

It's bizarre and as far as I can tell, no one can figure out why they're going this route. In a video about the changes Hastings says it's so that they can market the DVD service separately:

That makes some sense, but there must be more to it than that. And why Qwikster? Hastings says it's because you get your disks so quickly. Huh? First of all, why not Quickster at the very least? That domain is parked...I'm sure Netflix could've purchased it from whomever owns it. Or as someone cleverer than me suggested, why not MailFlix? That describes the service perfectly and at least evokes Netflix.

But no, we have Qwikster: A Netflix Company

Honestly as I was reading the blog post my initial reaction was that someone had hacked the site and put up this post as a joke. Sadly I was wrong.

So what benefits will customers get from having two separate services? I can't think of a single one. The only good news for some customers (myself included) is that as part of this split, Netflix Qwikster is going to start renting video games. Having your account enabled for games will cost extra in the same way having it Blu-ray enabled does, but we don't have figures yet. Considering Gamefly (the more-or-less definitive 'game rentals by mail' company out there) charges $16/month, it'll be pretty easy for Qwikster to undercut them.

But adding games has nothing to do, as far as I can tell, with splitting the company and it won't impact most customers. So we're back to why is Netflix doing this and what's in it for me?

The most plausible explanation that I've heard so far, and it is based on guesswork alone, comes from Benchmark Capital VC Bill Gurley on his AboveTheCrowd blog. Gurley speculates that Netflix is paying for streaming content based on the number of potential viewers, which means (under the old system) all Netflix subscribers, even if many of them never stream content. By splitting their customer base like they've done, Netflix now has definite numbers for "People who stream content" when it comes time to negotiate a licensing contract. That means they're not paying licensing fees for people who're never going to stream anything.

Again, speculation on Gurley's part, but it's the most rational sounding explanation I've come across.

But let's get back to you and me. What are we getting out of this? Well potentially more streaming content down the line (assuming Netflix can now cut better deals), but a bird in the hand and all that. In the short term we're getting no benefits and a number of inconveniences.

I like Netflix and I'm really struggling to find a 'glass half-full' viewpoint for these changes, but I'm coming up completely empty. Turns out having an extra 24 hours didn't offer any more insight after all; Hasting's thought process remains opaque.

I will say that although I canceled the disk-half of my account in the wake of the membership plan changes (Netflix disks tend to sit at home for months these days) I might sign up for a Qwikster account for the gaming aspect, but I can't imagine I'm a typical consumer in that way.

Netflix support is so ubiquitous in TV-connected and mobile devices these days; is it possible the company could continue to nosedive and ultimately fail? We've seen a lot of bad news in recent weeks, with the company reducing projected subscribers numbers and their stock losing value like mad. Hastings blog post just seemed to fan the fires of customer anger if the comments on it are any indication.

I'm admittedly being an alarmist, but all the bad news has me imagining a world without Netflix. Would a single competitor replace it, or would we end up with dozens of channel-specific streaming services to content with? Or would we just retreat to the safe world of plastic disks?

Read more of Peter Smith's TechnoFile blog and follow the latest IT news at ITworld. Follow Peter on Twitter at @pasmith. For the latest IT news, analysis and how-tos, follow ITworld on Twitter and Facebook.

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