Netflix spins off Qwikster DVD service, puts new pressure on carriers

Netflix issued (another) mea culpa this morning, explaining it had poorly communicated its big new change: the separation of its streaming video business, which will hang on to the Netflix name, from its red envelope, DVDs in the mail service, which will soon be called Qwikster.

With its future clearly in streaming, the company believes it will be easier to focus on this area if it's separated from the old-school DVDs.

"The benefits of our streaming service are really quite different from the benefits of DVD by mail," CEO Reed Hastings wrote in blog post yesterday. "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."

In a few weeks, Qwikster will have its own web site, billing and marketing, and throwing users a bone, it'll also offer games for Wii, PS3 and Xbox 360 — content that members have, according to Netflix, been asking for "for years."

A few months ago Netflix raised its pricing by as much as 60%, disenfranchising many users, and in a video accompanying the blog post Hastings explained that this change, too, isn't about Netflix's users but Netflix.

"Some members will likely feel that we shouldn’t split the businesses, and that we shouldn’t rename our DVD by mail service," Hasting wrote in his post. "Our view is with this split of the businesses, we will be better at streaming, and we will be better at DVD by mail."

In the video, seated beside a dour Andy Rendich, who has overseen Netflix's DVD service for 12 years and will be CEO of Qwikster, Hasting skimmed the increasing differences in the company's two models.

"Over the long term, DVD and streaming are going to get more different," said Hasting. "Streaming has incredible television shows, streaming is instant, streaming is fairly global — streaming has many things that make it different from DVD."

Streaming — unlike the DVD service, which depends on a financially stumbling postal service — also relies on the wireless networks, which are, to Netflix's advantage, gradually rolling out 4G networks. According to research firm Sandvine, as of March, Netflix streaming video became the largest source of peak downstream traffic on the Internet in the United States.

Netflix accounted for nearly 30% of bytes in North America, compared to 11% by YouTube, 3.3% by iTunes and 1.09% by Hulu.

According to Hasting, Netflix plans to boost its streaming offerings in the coming month with "substantial" new content.

Endpoint Technologies Analyst Roger Kay, in a Forbes blog post, likened Hastings to Brer Rabbit, making the same mistakes and tangling himself in a tar baby. The success of Netflix's big change, however, may rest less with Hastings or Reed than with what the carriers can offer them — and the rest of us.

"Streaming will be the real test for the carriers," Kay told Connected Planet. "They will have to accommodate it through investments in bandwidth, pricing or throttling."