What's Netflix (NFLX) CEO Reed Hastings Really Saying?

What did Reed Hastings really say with the announcement that Netflix (Nasdaq: NFLX) is officially separating its DVD and streaming-only businesses? Let's take a look:

• "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)." Translation: "We're bad at streaming, and we might get better, or we could sink into oblivion."
  
  
• "...I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn't have changed the price increase, but it would have been the right thing to do." Translation: "We got way too many complaints, otherwise I'd still be quiet on the issue."
  
  
• "We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service." Translation: "We're bad at streaming, and we could sink into oblivion if we don't fix it."
  
  
• "So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures..." Translation: "DVDs are getting more expensive to ship out, and the USPS is going the way of the dodo so we're not sure what to do next."
  
  
• In a few weeks, we will rename our DVD by mail service to 'Qwikster." Translation: "Obviously streaming is the quickest method of getting our content to your eyes, and DVDs are expensive to maintain and getting old, so we're keeping the "Netflix" name with streaming. Which we're bad at."
  
  
• "One improvement we will make at launch is to add a video games upgrade option, similar to our upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games." Translation: "DVD volumes are down, so we are looking at other revenue streams. Which is why any connection to "movie," or "film" isn't in the title of the new DVD division."
  
  
• "A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated." Translation: "This is not actually a negative, but it's tough to convey emotion through type without the use of bold, italics, underline, or ALL CAPS."
  
  
• "The new envelope is still that lovely red, but now it will have a Qwikster logo." Translation: "We've already bought tons of red envelope pallets at a price."
  
  
• "...and to apologize again to those members, both current and former, who felt we treated them thoughtlessly." Translation: "Really, I'm good. I can't even read email from my wife because my inbox is filled with several thousand rants."

So, there are also comments at the blog (our initial favorite, without scouring all the posts, is "They'd better get Bill Cosby to be spokeman [sic]." Which they should totally do). Allegedly Hastings is replying to some Facebook comments, but there are about 8500 posts right now, so leave comments below if you spot one!

This entire order goes back to speculation when the pricing was announced that Netflix wants out of the DVD business as margins continue to get pressured. Introducing video games may only temporarily halt the exit; gamers that want to preview a game can generally download the first level or two from Microsoft or Sony.

Finally, AllThingsD points to the blog 'abovethecrowd.com" (modest title), who says the price hike wasn't a decision so much as a reality. He points out that a rule -- entitled "first sale doctrine" -- allowed Netflix (and you!) to buy any movie you want, turn around, and rent it out. That business model keeps costs fixed and relatively predicable. Streaming, on the other hand, doesn't enjoy the same leeway.

Netflix has to negotiate the price for each title it wants access to stream. So, obviously, more popular titles will garner a high fee than lower demand ones. Netflix then (supposedly...probably) tried to argue that active users should only be counted in fees to studios, while the studios finally argued that they want a cut for Netflix subs that have the "right" to connect...aka, any streaming subscriber.

So, Netflix has to divide and conquer. Looks like T2 Partners' Whitney Tilson, may have been on to something in shorting Netflix stock. Too bad he covered.

Netflix shares are 2.7 percent higher on the session.

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