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Netflix to Split DVD and Streaming Businesses

The company is betting heavily on the growth of online video delivery.

Netflix will spin off its foundational DVD-by-mail service, the company announced this morning, ceding its iconic red envelopes to a new site that will go by the name of Qwikster. Netflix says it intends to focus on the increasingly popular streaming-video model. Customers, already upset by an earlier decision to split DVD and streaming services and change the rates, are bemoaning this further split, which will increase costs and hassle for those who want the same service as before. All the same, the change could lead to some concrete technological improvements.

Netflix forever changed the movie rental market in 1999, when it began offering subscribers DVDs by mail for set rates. The company’s wide selection and distribution technology laid waste to competitors that operated physical retail stores. In 2007, Netflix scored another coup with the launch of “Watch Instantly,” a feature that allows customers to stream certain movies on demand over the Internet. In the years since, the service has grown in scope and popularity, owing in part to integration with televisions and game consoles.

But despite these successes, the company is still running scared. In an e-mail sent to customers early this morning, Netflix CEO Reed Hastings wrote, “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 Netflix has decided to take drastic action in the name of technological progress, moving the foundation of its business to a different brand name.

“Over time, we realized DVD and streaming were becoming more and more different and that we could do a better job for both services if we separated them,” Hastings said in a video about the split posted to YouTube. In a related blog post, he added, “We feel we need to focus on rapid improvement as streaming technology and the market evolve, without having to maintain compatibility with our DVD-by-mail service.”

Experts see strong technical justification for the move. “I really believe [DVD and streaming] are different businesses,” says Jay Cofield, an associate professor in the mass communication department at the University of Montevallo, in Alabama, who has studied streaming video. The DVD, he says, is a proven technology that is most appealing when delivered with special features and beautiful physical packaging. But streaming is a work in progress, and Cofield believes improvements are likely to come in forms that are incompatible with DVDs.

For example, Cofield believes Netflix could potentially implement powerful social features. Some companies that stream live events already allow viewers to chat while watching. Cofield suggests that Netflix could move toward streaming events such as moderated chats with actors and directors. “If Netflix added this as a pay-per-view feature, or went ad-supported, I would imagine that for certain movies, you could announce a showing starting at [a certain time], with tweet-like commentary by the director or whoever,” Cofield says. “Aspiring filmmakers would love it. And I reckon that Hollywood would lose track of the cash generated if the Twilight stars did something like this when the movie hit Netflix.”

Cofield adds that the importance of mobile devices can’t be overstated. Though it’s not clear whether people would watch feature-length films on small screens, he believes Netflix may want to focus on mobile support for streaming shorter content such as television shows.

Besides adding new features, Netflix may also have to solve some existing technical problems. “As people pay more money for premium content, consumers will expect more quality,” says Hui Zhang, cofounder and chief scientist of Conviva, a company that optimizes and personalizes live video streams. Today’s consumers are accustomed to smooth delivery of HD television content through cable networks, and Zhang says it’s difficult to provide the same level of service over the Internet. Though customers may forgive occasional hiccups, the coming increase in Netflix’s prices may make them less forgiving. Netflix and other streaming-video companies will have to deal with growing loads on the network and unpredictable network conditions, he says, adding, “Online video will be a very software-intensive business.”

Though consumers might well enjoy such improvements to streaming service, today they are criticizing Netflix for breaking something that was working well. In the online comments on Hastings’s post, customers complain particularly about being forced to maintain accounts on two different sites and about having to pay attention to how they want to watch a movie rather than simply deciding which movie they want to watch.

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