Netflix saying goodbye to DVDs

Published: Monday, Sept. 19 2011 7:48 a.m. MDT

Netflix headquarters in Los Gatos, Calif.

Associated Press

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Netflix will soon stop mailing DVDs — the original bread-and-butter of an operation that now also offers video streaming to computers and mobile devices — so that a new company, Qwikster, can take over the DVD-by-mail business.

Company co-founder and CEO Reed Hastings sent an email late Sunday night to Netflix subscribers revealing that in a matter of weeks Qwikster will have its name on the iconic red envelopes in millions of mailboxes across the country, and the Netflix brand will become entirely dedicated to video streaming. In doing so, he also detailed the rationale behind Netflix's unpopular decision in July to effectively raise prices by beginning to charge separately for its video streaming and DVD mailing services.

"We realized," Hastings wrote, "that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently. It's hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best: In a few weeks, we will rename our DVD by mail service to 'Qwikster.' "

Fortune Magazine asserts the new Netflix strategy signals a shift by the company to pursue disruptive innovation, the business practice espoused by Harvard professor and Deseret News Editorial Advisory Board member Clayton Christensen.

"In his seminal book, 'The Innovator's Dilemma,' Clay Christensen talks about why industry leaders almost always fail to act when 'disruptive change' enters their business. He defines this as new products that are dramatically cheaper, lower quality, lower margin but larger markets. … To win the future (Hastings) needs to attack his core assets by building new ones. Very few companies ever do this."

The Qwikster news comes on the heels of an especially trying week for Netflix in which the company's stock plummeted 24 percent.

EMAIL: jaskar@desnews.com twitter: askargo

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