Table of Content Page
Introduction
Company Information 1 Paper Outline 1
Introduction of Qwikster – The Spinoff of Netflix 4 – 6
Implications 6 Commentary 7
Netflix’s Cancellation of Qwikster 7
Conclusion 8
References 9

INTRODUCTION
Company Information
Netflix Inc., established in 1997 and headquartered in Los Gatos, California offers internet subscription service, streaming television shows and movies. Subscribers of Netflix can watch unlimited television shows and movies streamed over the internet to their televisions, computers and mobile devices. Currently, Netflix offers DVD-by-mail (delivered directly to homes) only to its United States subscribers. The company obtains content from various studios and other content providers through fixed-fee licenses, revenue sharing agreements and direct purchases. Netflix markets its service through various channels, such as, online advertising, television and radio, as well as various partnerships. In 2010, Netflix began segmenting its streaming services internationally in Canada and has expanded to other countries such as, Latin America and announced its plan to expand into the European market, UK and Ireland in 2012.
Paper Outline
This paper seeks to outline Netflix’s decision to spinoff its DVD-by-mail segment into a separate website called “Qwikster”, the implication of its decision to spinoff, in addition to the company’s recent price increase, and how the company tries to mend the problem in an effort to win back its subscribers. This topic is of interest to the writer due to the nature of this company’s scenario, which resembles that of the classic story, Coca-Cola’s ‘New Coke’ catastrophe in 1985.

Introduction of Qwikster – The Spinoff of Netflix
Netflix Inc.’s decision on September 18, 2011 to formally separate its DVD-by-mail plan from its online streaming service by creating a separate website for DVD-by-mail (Qwikster) created a catastrophe for the company. In an attempt to do so, CEO Reed Hastings announced that, “The mail order plan will be renamed Qwikster”, and publicly justified the company’s decision to do so quoting that, “Our view is with this split of the businesses, we will be better at streaming, and we will be better at DVD mail.” (Barbara, 2011). Effective a few weeks after his announcement, Netflix subscribers who wanted to get DVD’s by mail would have to go to a separate website to access Qwikster, and subscribers who wanted online streaming would continue to access it on Netflix. Mr. Hasting said that,” Instant streaming and the 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.” (Barbara, 2011). Mr. Hastings’s (CEO and Co-founder of Netflix) decision to spinoff the DVD segment was a clear indication that he was forecasting a future that the DVD segment would eventually die out and the company had to make preparations for the ‘burial’ of that segment in the form of an accounting spinoff.
The question is what is a spinoff? According to investopedia.com, “A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business/division of a parent company.” For illustration purposes, Figure 1 shows an example of a Parent Company’s Balance Sheet and Figure 2 illustrates how a Parent Company would allocate some of its assets to its Subsidiary (Spinoff) Company.

Figure 1: Pro Forma of Parent Company’s Balance Sheet

Figure 2: Pro Forma of Subsidiary’s Balance Sheet.

Not only did the company communicate its decision to split both services, Netflix raised its prices. The DVD or online streamlining only-plan now cost $8 per month, and bundled together cost $16 per month versus $10 per month for both services. The raised in prices will be as much as a 60% increase for some subscribers of both services. Members who subscribed to both services would now be billed for two entries on their credit card statements and would have to create two separate accounts for two separate websites. Wall Street journalist, Holman Jenkins (2011) believes that the price increase was due to the fact that Netflix tried to get money out of disk users to acquire content for the now “blooming” streaming business.

Implications
Netflix’s abrupt decision angered and took many of its customers and shareholders by storm as many shared their views on various, subscription cancellations and decline in the company’s stock market. Jenkins (2011) reported that, “The company’s stock price is down by 70% since July, . . . and the company reported a shocking subscriber loss of 800,000 on Monday, and some of those who left are pure streaming customers who shouldn’t have cared about a price hike aimed at DVD users.” In addition, report from Financial Times showed that, “Netflix shares fell 35% trading to $77 after the company said in its earnings report that the pace of subscriber cancellations had been higher than expected.” (Garranhan, 2011). However, Jannarone (2011) wrote that Netflix stated, “It expects to lose money for a few quarters starting next year.” Netflix did expect some of its million subscribers to cancel their services after the announcement of the company’s decision, but the cancellation rate surpassed expectations.

Commentary
Analyst who commented on Mr.Hastings “fast” strategic thinking accused him of duplicating the “New Coke” or “Edsel” story. However, Jenkins (2011), believed that Mr.Hastings real failure was to explain too late and too little, and not to complain enough, especially about his customers”, and he also commented that, “After all, there is nothing wrong with hiking prices on customers who aren’t carrying their weight. Businesses do it all the time.” Other Wall Street commenter’s, such as Jannarone (2011) stated that, The trouble is that Netflix may not be able to invest as much as it would like in order to
Reinvigorate itself. The company needs to spend heavily on marketing and content to bring domestic subscriber growth back to life. The big hope is that Netflix is on the cusp of making significant profits from its streaming customers . . . still far less profitable than the aging DVD mail order business. The company says the profit margin from streaming is only about 8% now. But given the largely fixed costs, any subscriber growth would boost the margin.

Netflix’s Cancellation of Qwikster
Without a doubt, the CEO of Netflix, Mr.Hastings realized his mistake and wasted no time in correcting the issue. As of October, 2011 Netflix’s CEO made a public announcement to abandon its plan to rent DVDs on Qwikster. Mr.Hastings publicly admitted that, “There is a difference between moving quickly . . . which Netflix has done very well for years . . . and moving too fast, which is what we did in this case.” (“NewsRx,” 2011). It is evident that his greatest fear for the company was that it wouldn’t transition from the slowly fading DVD segment to the success online streaming in a timely manner. Moreover, he listened and understood that his subscribers preferred the ‘all in one simplicity’ that the company offered. In an attempt to reconnect with the company’s disgruntled customers ,he addresses the problem in a blog where he stated that, “It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVD’s. (Svensson, 2011). Despite Netflix’s decision to abandon Qwikster, the company apologized for the manner it implemented the price change but not the price change. According to Garrahan (2011), Reed Hastings believed that the company “Shot itself in the foot with the abruptness” with a price increase but said that the company would not change plans by cutting prices. In addition, Netflix went the extra mile to inform its domestic members via personal emails and a post on the Netflix Blog.

Conclusion
In conclusion, Netflix abandoned its plans to rent DVDs on Qwikster, and admitted that the company had moved too fast in its attempt to spinoff the dying DVD service in to the new brand. Under the new plan, the new price change will remain in effect, but the two services will continue to be available on one website –Netflix.

References
Garrahan, Matthew. (2011). Netflix defends strategy to raise prices despite subscriber exodus. Financial Times, 11. Retrieved from ABI/INFORM Complete, Proquest. Retrieved from http://search.proquest.com.

http://www.investopedia.com/terms/s/spinoff.asp#axzz1ctEnkJzK
Jenkins, Holman W. (2011). Netflix Isn’t Doomed; TV is not a winner-take-all business, That’s why, in the future, you’ll still have to settle for what’s on. Wall Street Journal. Retrieved from ABI/INFORM Complete, Proquest. Retrieved from http://search.proquest.com.

NewsRx. (2011). Music and Video Store Companies; DVDs Will Be Staying at Netflix.com.
Entertainment & Travel, 64. Retrieved from ABI/INFORM Complete, Proquest.
Retrieved from http://search.proquest.com.

Svensson, Peter. (2011). Netflix kills plan to split off DVD rentals. Spartanburg Herald-Journal. Retrieved from ABI/INFORM Complete, Proquest. Retrieved from http: //search.proquest.com.