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Netflix spins off its DVD-by-mail service as Qwikster

Netflix CEO Reed Hastings sent a letter to subscribers on Monday, admitting he "messed up" and announcing that it would spin off its DVD and Blu-ray-based mailing business as a new service dubbed "Qwikster."

The company's changes come in response to a subscriber backlash that was spurred by higher prices for rentals of physical DVDs. Hastings said the pricing for combined streaming, via Netflix, and mailed rentals, from Qwikster, will remain the same as it is currently.

"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," he said.

The changes will leave Netflix as a streaming-only rental service, making it in even more direct competition with Apple's iTunes. But while Netflix is exclusively a rental service for streaming video, Apple's iTunes is largely focused on purchases.

Apple recently moved even more away from the rental business, when the company abandoned 99-cent TV show rentals, a service that originally launched in 2010 with the company's revamped $99 Apple TV. Apple revealed that iTunes customers "overwhelmingly" preferred buying TV shows over renting them.

The new Qwikster service will also allow the company to expand its mail services to include console video games. For an extra fee, in the same way users are charged for Blu-ray deliveries, Qwikster will rent Xbox 360, Playstation 3 and Wii games to customers by mail.

Netflix remains the dominant player in digital video delivery in America, as the NPD Group found in March of this year that Apple's iTunes represented just 4 percent of domestic streaming and downloadable video content. The Netflix Instant Watch streaming service was said to represent 61 percent of all paid digital video viewings.

But in terms of sales, where Netflix does not compete, Apple is the undisputed king, with a study released in February revealing that iTunes represented 64.5 percent of the market.

Apple has been rumored for years to be interested in offering TV subscriptions through iTunes, allowing users to pay a flat monthly rate to have access to their favorite shows. One plan pitched to television studios in 2009 would have allegedly cost $30 per month.

But those plans never materialized, and Apple instead turned its attention toward the ill-fated business of 99-cent TV show rentals. That offering, too, was met with resistance from content providers, who said they felt Apple's pricing was too cheap.

When 99-cent TV rentals debuted in 2010, Apple only had two of the "big four" U.S. networks onboard — ABC, which is owned by Disney, the company in which Apple co-founder Steve Jobs is the largest shareholder; and Fox, owned by News Corporation, which partnered with Apple to launch The Daily for iPad earlier this year.

The full letter from Hastings to Netflix subscribers is included below:

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 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 and 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 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