After the uproar this summer over Netflix raising their prices, I wrote that I was optimistic about the company’s future.  However, Netflix surprised the world again by announcing it is dividing into two services, Netflix and Qwikster.  In a few weeks instead of one site with both online and mail content, Netflix will maintain the site for online-content only.  Meanwhile, all DVD mail content will be available for order on Qwikster.  It will basically be as if the two sites are unrelated – two queues, two sites, two bills.  It is unclear exactly when this will happen; the Qwikster website merely reads “Launching Soon.”

This makes some sense on a couple fronts.  The DVD mailing service is the much more expensive service; it is actually more expensive to keep up the DVDs than it is to pay for streaming rights.  Also, the worry that the DVD will go the way of the videocassette and the dodo is very likely in the back of the minds of the CEOs, meaning Netflix would have to replace their entire stock.  Some bloggers believe Netflix’s planned restructuring is a ploy to kill off the more expensive DVD service, which seems plausible.

As Netflix’s DVD service has become more expensive, streaming is becoming increasingly more popular.  As the company happily announced last May, Netflix is responsible for thirty percent of bandwidth usage in the United States — there’s even a Netflix iPhone app.  By cutting the more expensive section of its company off and keeping the more profitable one, Netflix can focus solely on developing and expanding its online customer-base, theoretically increasing its profits.  It may work – seventy-five percent of new Netflix customers sign up for the streaming-only plan.

However, Netflix is forgetting what makes them unique.  Many companies provide video streaming now, from Amazon to Facebook.  Netflix is one of the few and more prominent ones that provide a subscription service rather than pay-for-play; but that is changing.  Hulu, for instance runs a similar, if more limited, service.  Netflix’s red envelopes in the mail were popular and characteristic of the Netflix brand; it may be a mistake to get rid of them.

Netflix has also taken a huge hit to its online streaming service lately.  Netflix lost its contract with Starz, which was its source of newer programming.  Without these newer movies and television shows, Netflix can’t compete for customers who want to see things faster or stay on the premium cable channel’s schedule.

Finally, less than one-fourth of Netflix’s DVDs are available on streaming.  The biggest problem is that what is missing is a lot of their older movies.  By switching to an online-only format for Netflix and eliminating the dual service, Netflix may alienate some of their older audience, who may like that Netflix is the go-to source for old movies that are harder to find.  The CEO of Netflix apologized for the recent rate hike, while simultaneously making the Qwikster announcement that upset even more customers.  A study suggests that the dis-integration of streaming and DVD by mail services could cost Netflix thirty percent of its customers.

Although what Netflix is doing makes sense on a purely business level, it doesn’t make sense for their image or competition.  Other streaming sources may find it easier to compete with Netflix after its series of changes and PR nightmares.  For a company that was winning the piracy wars, Netflix may now be sinking its own ship.

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