Netflix CEO Reed Hastings delivered the news via a blog post this morning, reversing a decision he announced via a blog post three weeks ago. Though the Web site for Qwikster, the would-be DVD-only service, said Sunday night that it was “launching soon,” it will never launch at all. The URL now directs visitors to the main Netflix site.

While Netflix had to use some strained logic to explain its decision last month, this one is straightforward: It’s not going to force customers to use two different services to rent DVDs and streaming video, because customers hated that idea.

Wall Street didn’t like it, either. After Netflix unveiled its Qwikster plans, its stock, which had been tumbling since July, fell another 25 percent — from $155 on Sept. 16 to $117 last Friday.

So presumably today’s announcement will appease at least some disgruntled customers and/or investors.

But not all of them: Netflix still hasn’t changed the pricing plans it announced this summer, which amount to a 60 percent price hike for about half of its customer base. And that price hike is what kicked off the company’s tumble from a peak of $300 a share.

Stock moves aside, the about-face — three weeks after an announcement that itself seemed rushed* — is a little hard to square with the aura that used to surround Netflix, and Hastings in particular: Super smart, able to see around corners, not afraid to run against the herd.

Because if Netflix really thought that “over time, both DVD and streaming will be much better, because they’re separate,” as Hastings put it in a much-unloved video message last month, why reverse the decision after some squawking?

Just a week ago, Ted Sarandos, Netflix’s man in Hollywood, told an industry conference that he was “very convinced” the split was “good for the long-term health of the business. And the long-term clarity of the brand.”

“But,” he added, “we also hear our customers, and we want to make sure we react to that,” promising that Netflix would have some news on the Qwikster front soon. (Thanks to Rich Greenfield for spotting; registration required at BTIG Research site.)

If you want to let your mind drift to dark thoughts, you could theorize that the reaction to the Qwikster announcement was so forceful that Netflix could see the results in its subscriber numbers.

If that’s the case, we might be able to see the effect in the Q3 subscriber numbers Netflix releases Oct. 24. Those numbers will include two weeks of operations post-Qwikster announcement, so the reaction would have to be quite severe to show up. But we’ll see.

Bear in mind that a few days before the Qwikster announcement, Netflix had already cut its Q3 guidance, citing reaction to the price hike.

The positive spin is that Hastings gets credit for recognizing a bad decision and fixing it before he caused more damage. You won’t be able to lump Qwikster in with New Coke and other bad-idea brands that never should have made it to market.

Again, here’s a reminder of how difficult it was for Hastings to pitch Qwikster last month:

*For the record, Jason Castillo, who owns the @Qwikster Twitter handle, wants the world to know that just because his avatar used to feature a pot-smoking Elmo, he’s not stoned himself. Left unanswered: Why couldn’t the Netflix guys find a brand name that someone hadn’t already claimed?

[Image credit: Konmesa/Shutterstock]

He is, however, renaming his DVD rental business: Anyone want to subscribe to “Qwikster”?

Hastings says that instead of backing down from his decision to split off the company’s DVD business and charge extra for it, he’s going to double down and make it even clearer that Netflix is getting out of the disc business: DVD rental customers will soon get their stuff from a separate Netflix unit, with a separate name. One small bit of news: The new/old disc service will begin to offer videogame rentals, as well.

In this video, Hastings and soon-to-be Qwikster head Andy Rendich try to explain their reasoning, and what it will mean for customers.

Hastings’ message to subscribers — and investors — is an interesting mix: On the one hand, he steps up and says he erred — by not communicating his reasoning behind a recent price hike for customers who want both streaming video and DVDs by mail.

On the other hand, he explains that he didn’t really make a mistake — he just didn’t speak clearly enough.

It’s a bit like like the apologies that certain celebrities and athletes make after a gaffe. “I’m sorry if I offended anyone” is quite different than “I’m sorry I screwed up.” (Note, though, that Hasting’s first sentence is indeed “I messed up.” He gets the difference, too — he just can’t say he’s sorry for something he’s truly not sorry about.)

As far as I can tell, Hastings’ argument/explanation about his reasoning hasn’t changed a bit from the messaging he’s previously sent out. It’s just that he’s saying it with a bit more force. That is:

• Netflix is getting out of the DVD business sooner than later; and
• Netflix says its streaming video business is going to become more attractive, not less. And that will also happen soon: “The additional streaming content we have coming in the next few months is substantial.”

Will that be enough to appease angry customers and disappointed investors? We’ll get an answer for the second group in a few hours, when NFLX shares, which once hit the $300 level, start trading again. Right now they’re at $155.

That disclosure sent the company’s stock tumbling nearly 10 percent after the market closed. But Reed Hastings and company don’t seem to be sweating.

The real surprise, they say, is that Netflix customers aren’t more upset.

“Believe it or not, the noise level was actually less than we expected, given a 60 percent price increase for some subscribers,” Hastings said on yesterday’s earnings call, answering a question about the outpouring of outrage on the Web. “We knew what we were getting into, we tried to be as straightforward as we could, and that has worked out very well for us.”

What Hastings isn’t saying out loud, but is saying via the financial guidance the company is offering: Chill out. Relax. We know what we’re doing.

Netflix told Wall Street that it expects to see as much as $829 million in revenue next quarter. But as Citigroup’s Mark Mahaney notes, the relatively modest subscriber projections Netflix is offering for the end of Q3 — 25 million in the U.S., 15 million of them still using DVDs — puts the company on track to do a $1 billion quarter. Which is what it suggests it will do in Q4, for the first time in its history.

Essentially, Hastings is betting that subscriber growth returns to normal levels in Q4 — whoever is really dissatisfied with the pricing will have already bailed, while new customers won’t notice the change. And then he’ll see a real benefit from the price hike, which will affect the majority of his customers — DVD use has peaked, the company says, but it’s not going away overnight.

It seems to me that the real risk for Hastings isn’t consumer reaction to his price increase, which he can probably forecast fairly effectively. Netflix prides itself on the deep data insights it can mine from its customers.

What he can’t predict is the way the Hollywood studios will behave as he attempts to license new content for his streaming service and renegotiate his Starz deal, which expires early next year. If those deals aren’t successful and Hastings can’t grow his catalog of movies and TV shows, then the price he’s offering won’t matter that much.

Some important metrics to pay attention to:
24.59 million U.S. subscribers, plus another 1 million in Canada. That’s in line with exepectations.
Projected subscribers in Q3: Up to 27 million, which is a little lighter than analysts were looking for.

Q3 revenue guidance: Up to $828 million, which will again disappoint Wall Street.
Q3 EPS guidance: From $0.72 to $1.07 per share, also lower than expectations.

Not surprisingly, shares are down initially, dropping more than 7 percent after hours.

Reed Hastings seems to indicate that some of the shortfall is because of its recent price hike, which is meant to push subscribers away from DVD rentals and toward streaming: “Because of the timing of the price change, revenues will only grow slightly on a sequential basis”.

Hastings does say that he won’t completely abandon DVDs, though, noting that he’ll start marketing the DVD-only service in the last three months of the year, “something we haven’t done for many quarters.” By the end of Q3, he says, Netflix will have 10 million streaming-only customers in the U.S., 3 million DVD-only customers, and another 12 million who will get both formats.

Netflix has pushed up the operating losses it expects to incur from international expansion this year from $70 million to $80 million; that’s the second time the company has bumped that number up.

Netflix also says it is not bidding on Hulu, but that’s no surprise.

As always, here’s Citigroup analyst Mark Mahaney’s “cheat sheet” so you can play along at home. Pay particular attention to subscription growth projections (click chart to enlarge).

The Netflix earnings call starts at 6pm eastern; I’ll be back then to listen in and will update if needed.

Reed Hastings’ company says it’s a cost issue. If people are going to use both his DVD-by-mail service and his Web video streaming service, he’ll need more money to support both businesses. That’s probably true.

Here’s what’s more true: Reed Hastings doesn’t want most of his customers to pay more. He wants them to pay less, and drop DVDs in favor of a streaming-only service.

To recap: Yesterday, Hastings kept the price of his streaming-only video service at $8 a month. But he raised the price of his companion DVD-by-mail service from $2 a month to $8 month, which will push many subscribers’ monthly fees from $10 a month to $16 a month.

Unless they stop using DVDs. Which seems to be what Netflix wants. Even though they haven’t said so out loud, to date.

Still, the message seems to have gotten through to Wall Street. The move is designed to “further drive streaming-only plans and adoption,” says Barclays’ Anthony DiClemente. Same sentiment, with more flourish, from BTIG’s Rich Greenfield: The price hike “is aimed at killing off the DVD business as fast as possible,” he says.

It is also resonating in Hollywood. A studio boss I talked to yesterday says Hastings instituted the price hike “because people aren’t moving to streaming fast enough. He’s trying to force them to go faster.”

The problem, as every disgruntled Netflix subscriber on the Web can tell you, is that Netflix streaming and Netflix DVD are two different beasts: Netflix on the Web gives you instant gratification, but has less than 20 percent of the content that Netflix DVD-by-mail options give you.

The reason Hastings can offer a much bigger DVD catalog is because he doesn’t have to get permission from Hollywood to rent out its discs — he just needs to buy them. But every movie he streams is licensed from the studios, at a cost that’s only going to get higher.

And while Hastings never has to worry about getting “The Social Network” on disc, streaming deals give Sony the ability to cut off his digital access completely. As has already happened, at least temporarily.

So doesn’t upping the number of streaming subscribers give the studios more leverage?

In the near-term, yes. But Hastings seems to be betting that the studios will continue to give him digital access, as long as he keeps writing them checks, no matter how much they posture.

And every digital deal — and every digital customer — he accumulates gives him that much more bargaining power.

Netflix has lots of potential competitors, but the only service that’s really offering something competitive at the moment is Hulu with its Hulu Plus subscription offering, and that’s on track to accumulate something like a million subscribers this year. Netflix was 24 million last quarter, and will likely report a couple million more during its earnings call this month.

Meanwhile, if Hastings really does convince subscribers to abandon DVDs altogether, he can drop his costs significantly. I’ve been paying for, but not using, his DVD service for the last year. But the fact that I might drop a disc in the mail and ask for another one means Hastings has to keep an expensive infrastructure up and running.

Of course, none of this means anything if Netflix subscribers stop using the service altogether.  Which is the impression you’ll get if you scan the wave of angry commentary on Twitter and the Web (I contributed some mild-mannered grousing myself).

Except that Twitter and the Web are pretty much designed for angry commentary. And measuring discontent via the number of Facebook complaints doesn’t really make a lot of sense, unless those complaints get up into really, really big numbers.

Remember that Netflix is already used to fairly high churn rates of about 4 percent, which means that about a million of its 24 million existing subscribers are going to go anyway. And bear in mind that Netflix takes enormous pride in the data it collects on its users’ behavior. I’d be very surprised if they haven’t modeled a scenario where thousands of people complain about the service change on the Web.

Postscript: Then again, maybe Netflix didn’t model quite as closely as they could have. The company, famed for its excellent customer service, seems unable to handle the volume of calls the price hike has generated. Here, via Greenfield, is the message you’re most likely to get when you call Netflix today.

Even though the majority of Netflix’s 24 million subscribers are still paying it to get DVDs by mail, Reed Hastings and company see themselves as Internet guys, not putting-discs-in-envelopes guys.

Now they’re making it even more clear, by raising the prices in a way that makes it much more expensive to get both Web streaming and DVDs from the service.

Technically, the company is continuing to sell streaming video subscriptions for $8 a month, and reducing the price of DVD-only subscriptions to $8 a month. But by eliminating an option where streaming video customers could also get discs for another $2 month, the company is effectively raising the price for its combined service by 60 percent, from $10 to $16 a month.

The changes go into effect immediately for new customers, and on September 1 for existing subscribers. Wall Street seems to think this is a good idea, and has pushed NFLX shares up since the news broke this afternoon.

(Congrats, by the way, to Engadget, for getting most of this early this morning. Journalism!)

This is a real turnaround from previous pricing plans, where Netflix sold itself as a DVD-by-mail service that gave you Web streaming for free.

Last year, the company introduced an $8-a-month, all-you-can-eat, streaming-only package, and people seem to like it, a lot.

Earlier this year, Netflix announced that a third of its new customers are choosing the Web-only option, even though doing so severely limits their choice of TV shows and movies. Netflix’s digital catalog runs around 20,000 titles, while its DVD catalog boasts more than 100,000.

But even if Netflix customers are embracing streaming, the majority of Netflix subscribers are still paying for discs, whether they use them or not. I recently discovered, for instance, that I’ve had a Netflix-owned “Battlestar Galactica” disc in my player. Which means I haven’t used it in more than a year, because Netflix started streaming the show almost exactly a year ago.

Netflix explains the rationale for the price hike in a blog post, but the short version is that it would like its DVD customers to move to the Web, or pay up. Doing so helps it cut down on discs costs and/or generate more money to help buy digital titles, which are only going to get more expensive.

I’m guessing I’ll dump the discs. I’m already inclined to start cutting back on the subscription services my family pays for, and certainly don’t want to add more. But I’ll be a little disappointed.

One of the reasons I really enjoyed Netflix was the notion that it provided instant gratification — I can stream anything they have with a click — but that it gave me the option to get even more, with a little bit of planning : Add a disc to your queue, then wait a day (or two, max), then boot up the DVD player.

I rarely took them up on the offer — see the Battlestar Galactica anecdote above. But it was nice to know it was there. And it made me feel like I was getting good value for my $10 a month. Now I’m a little less enthusiastic, and I bet I’m not the only subscriber in that boat.

*SPOILER ALERT: It turns out the Cylons are [REDACTED], or something. Frankly, I got a little confused and frustrated by the end of this thing. Still, great show!

The retailers say the ventures not only help them gain a foothold in the fast-growing digital entertainment business, but also give them an edge in selling Internet-connected televisions and movie players in their stores.

Many of the TVs that Best Buy sells now come with CinemaNow software, while many of Wal-Mart’s are loaded with Vudu. The retailers also use free or discounted digital entertainment to lure customers to their websites, much as they have long done by selling certain movie and music discs at a loss to attract shoppers to their stores.

Read the rest of this post on the original site

That’s my translation of comments from Turner Broadcasting’s Phil Kent today. The head of Time Warner’s cable network told the crowd at a Citigroup investment conference that his company had pulled out of bidding for reruns of “Modern Family” because the show was “a little too prevalent on the Internet.”

The sitcom runs on both ABC.com and Hulu, so I’m not clear if Kent was talking about one or the other, or both. Either way, those comments have to simultaneously please and dismay “Modern Family” creator Steve Levitan, who has complained that giving away streams of his show on Hulu doesn’t do him any good and probably does him harm.

Levitan isn’t the only one who thinks that way: There are plenty of TV people who worry that free streaming on the Web is hurting their business, either by sapping ratings or cutting down on the appetite for DVDs and syndication. In this case, the supposed value shrinkage hurts News Corp., which produces the show and owns the rerun rights, more than it does Disney’s ABC, which airs the initial run. (News Corp. also owns this Web site.)

That’s one of the fundamental tensions Hulu has to deal with, and the primary reason why taking the joint venture public remains such a long shot–until all of its owner/partners are willing to make long-term programming commitments to the site, it’s hard to see the long-term value in the company.

Still, it’s important to note that Kent didn’t abstain from bidding–he simply dropped out. The Los Angeles Times’ plugged-in Joe Flint estimates that Turner was willing to pay about $1 million per episode, which isn’t as much as the winning $1.4 million bid, but isn’t immaterial, either.

Oh. And the winner of the bid? GE’s NBC Universal–one of Hulu’s three owner/partners.

The movie-rental company has struck deals with makers of TVs and DVD players to put a one-click “Netflix” button on remotes starting this spring, Netflix said Tuesday. Such a button would make it easier for people to go straight to their Netflix account, rather than clicking through other menus, which take time and could potentially distract the viewer.

“We’ve always regarded ubiquity on devices as our strategy, and we want to be present there as simply and visibly as possible,” said Netflix spokesman Steve Swasey in an interview with Digits.

Read the rest of this post on the original site

Read the rest of this post on the original site

That’s the amount Netflix has committed to paying Hollywood studios for the rights to stream their movies and TV shows. And it’s up from $229 million three months ago, the company disclosed in an SEC filing yesterday.

Most of that leap comes from a five-year deal that Netflix previously announced with the Epix pay channel, which is thought to be in the $900 million to $1 billion range. But that number could jump again within the next year, when Netflix’s deal with the Starz pay channel expires.

The Starz deal gives Netflix access to Sony and Disney titles, so it’s crucial that Reed Hastings hangs on to it. And that will make a new Starz deal about as expensive as the Epix deal, says Barclays analyst Douglas Anmuth: He figures Netflix will have a total streaming commitment of $2 billion by the end of 2011.

The magic of the Netflix Web model, though, is that as people consume more on the Web, they cut back on discs –”You’re
replacing the postal cost with content cost,” in Hastings’s words.

For more details on Netlix’s streaming plans and costs, I highly recommend nerding out with this transcript from its Q3 earnings call (PDF). It’s a fascinating peek into a company on the leading edge of the digital transition.

Instead, the Library Express is a stack of metal lockers outside city hall. When patrons want a book or DVD, they order it online and pick it up from a digitally locked, glove-compartment- sized cubby a few days later. It’s a library as conceived by the Amazon.com generation.

Faced with layoffs and budget cuts, or simply looking for ways to expand their reach, libraries around the country are replacing traditional, full-service institutions with devices and approaches that may be redefining what it means to have a library.

Later this year Mesa, Ariz., plans to open a new “express” library in a strip-mall, open three days a week, with outdoor kiosks to dispense books and DVDs at all hours of the day. Palm Harbor, Fla., meanwhile, has offset the impact of reduced hours by installing glass-front vending machines that dispense DVDs and popular books.

The wave of innovation is aided by companies that have created new machines designed to help libraries save on labor. For instance, Evanced Solutions, an Indianapolis company that makes library software, this month is starting test trials of a new vending machine it plans to start selling early next year.

Read the rest of this post on the original site

Netflix (NFLX) wouldn’t release details about the pact, and hasn’t put out a press release announcing it, as it had with earlier deals with Time Warner’s (TWX) Warner Bros, GE’s (GE) Universal and News Corp.’s (NWS) 20th Century Fox.

But spokesman Steve Swasey confirmed that Netflix and Sony have reached another “28-day” arrangement, similar to the ones Netflix has reached with the other three studios.

Swasey wouldn’t release other details, but we can guess that the deal follows the pattern established with the precedent Netflix set in its January deal with Warner: Netflix agrees not to rent Sony’s (SNE) movies for the first 28 days after they go on sale. In return, it will pay the studio a reduced fee when it does rent the discs, and will get more movies to offer via its growing Web streaming service.

This seems like a win-win for the both sides: The studios get to wring every last penny out of their DVD business, and Netflix gets to build up the business it really cares about–delivering movies to your home via the Web.

But analyst Rich Greenfield, who wrote about the Sony deal in a note published Tuesday (registration required), says these deals have only been good for Netflix: Its costs have gone down, and its subscriber base has increased, but the studios have continued to see their DVD sales slip. “Clear victory for Netflix,” he writes.

His logic:

“* The studios have essentially played right into Netflix Founder and CEO Reed Hasting’s plan to reduce DVD costs to fund his company’s aggressive digital media rights acquisition plan.
* Netflix is rapidly bringing down its physical [cost of goods sold] by reaching delayed release window deals with studios and using fresher digital content to shift consumer behavior to streaming, reducing the number of DVDs utilized per customer per month (lowering its mailing costs).
* We suspect the Netflix window needed to be substantially longer than 28 days to justify the price reduction the studios have given Netflix – meaning a six month window might have impacted Netflix subscriber trends, whereas 28 days simply has not. Unfortunately studios were more focused on bolstering sell-through, which is largely complete within the first month of a DVD’s release, rather than damaging the long-term prospects of Netflix.
* Netflix continues to aggressively purchase digital movie rights having recently acquired rights to Relativity Media content and EPIX content, with Starz content increasingly important for Netflix to renew (at far higher costs) when their current agreement ends in 12 months.

As Business Week reports, first Target (TGT) and now Wal-Mart (WMT) have imposed strict limits on the number of DVDs any one customer can buy at one time. That’s going to make it harder for DVD kiosk rental service Redbox to get around the refusal of some studios–including Warner Home Video, Universal Studios Home Entertainment and 20th Century Fox–to sell new releases directly to the company, which rents movies for a dollar a day. Redbox is in litigation with all three studios over the issue.

Read the rest of this post on the original site

Second Rotation Inc.’s Gazelle.com site, which offers people a set price to take used gadgets like iPods and laptops off their hands, last month more than doubled the number of products, to 18,000, that it took in compared with a year earlier.

Glyde Corp. last month launched its own online marketplace that allows consumers to sell used books, DVDs and videogames in a system that automates posting a listing, figuring out how much to charge and even mailing it out.

Many of these companies are tapping a recession-friendly opportunity they dub “re-commerce,” which essentially means using the Internet to find a second life for used stuff that usually just gathers dust on bookshelves and in garages.

Simon Rothman, Glyde’s chief executive, says Americans have about $300 billion of used media at home, according to the Bureau of Economic Analysis.

Read the rest of this post on the original site

Walmart said it will discount the top 25 video games by 15-20 percent through December 24. The Nintendo gift card offer starts December 5 and runs through December 12.

A quick check of Amazon.com (AMZN) finds that the online retail giant–which over the last few weeks has been engaged in a price war that has included books and DVDs–has matched some of the cuts by Walmart, and in at least one case, has undercut Walmart.

Read the rest of this post on the original site

But amid that success Samsung also is trying to address another concern: matching Apple Inc.’s ability to sell content and software that run on cellphones and other devices.

Apple’s (AAPL) iPhone has led the way in demonstrating that consumers are becoming more interested in devices that can tap the Internet or run clever applications. The same phenomenon is spreading to TVs and DVD players, which increasingly will be connectable to the Internet in coming years.

Read the rest of this post on the original site

As part of a larger effort to clean up its aisles and appeal to higher-end shoppers, Wal-Mart Stores Inc. (WMT) is doing away with display cases to promote the latest hot movie titles.

The move comes as major film studios are reeling from declines in revenue from DVD sales as cash-strapped consumers turn to low-cost rental services and digital downloads for home movies.

Read the rest of this post on the original site

Most DVD viewers think that’s hypocrisy. A study of 1,000 consumers conducted by the National Consumers League found that 90 percent think that they should have ability to back up DVDs on their personal computers in the same way they are able to do with music from a CD.

Read the rest of this post on the original site

Tonight, Current, the Al Gore-founded cable station, will begin airing “The Rotten Tomatoes Show.” The half-hour episodes feature co-hosts Brett Ehrlich and Ellen Fox, who review film news and, in Web 2.0 style, draw from users for short (really short–DVD releases are reviewed in haiku form) reviews.

Jeff Plunkett, the show’s executive producer, says that Current approached the movie-review site with the idea of reinventing a genre that–all due respect to “Siskel & Ebert”–hasn’t drawn younger viewers in years.

Read the rest of this post

“Blockbuster’s major problem lies in its base of 6,000 stores,” writes Wolf. “The company’s challenge and opportunity is wrapped up in the relatively large fixed expenses entailed in operating its stores.” Blockbuster revenue barely covers the cost of running the stores, but even a modest tick up in same-store sales could “transform a basically break-even operation into a highly profitable one,” writes Wolf.

Read the rest of this post