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Netflix CEO Hastings ends Qwikster before it starts

A sign is shown at the headquarters of Netflix in Los Gatos
A sign is shown at the headquarters of Netflix in Los Gatos

By Lisa Richwine

(Reuters) - Netflix Inc Chief Executive Reed Hastings canceled plans to split his company's DVD rental business into a new website after subscriber outrage, but the company's shares still fell on investor concerns about price increases and content costs.

In a company statement issued Monday, Hastings said of the surprise about-face, "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."

"Consumers value the simplicity Netflix has always offered and we respect that," Hastings said.

Needham & Co. analyst Charlie Wolf put it more bluntly: "The subscribers voted and Netflix realized the whole thing was stupid. It was an act where you didn't raise prices but you lost subscribers."

Netflix shares rose more than 9 percent in early trading but gave back those gains, ending at $111.62, down 4.8 percent, on the Nasdaq. In July, Netflix shares traded at more than $300.

"When you step back and start analyzing some of the biggest questions surrounding Netflix, nothing has really changed," Cowen and Company analyst Jim Friedland said.

"You still have a 60 percent price increase in what is still a challenging economic environment" as well as growing competition, said Friedland, who has a "neutral" rating on Netflix shares.

Hastings announced the original plan on Netflix's blog last month, writing that the company was putting its DVD service on a different website and naming it Qwikster as a way to differentiate it from its growing online streaming offerings. The move would have forced customers of both streaming and DVD options to visit different websites and maintain different accounts for each subscription. Customers also would have received separate credit-card charges.

The announcement prompted confusion and outrage from customers who expressed bewilderment on the Netflix blog and Facebook page over the planned move to the Qwikster name for DVDs sent through the mail in the company's signature red envelopes.

The decision was one of several costly missteps in recent months that have helped drive shares of the one-time Wall Street darling down about 60 percent since July.

Hastings, the company's co-founder, had a 2.35 percent stake in the company's shares that was worth around $300 million as of September 2.

Michael Pachter, an analyst at Wedbush Securities, downgraded Netflix to "neutral" from "outperform" on the news to return to one unified website. Pachter had speculated the splitting of the DVD and streaming operations would help pave the way for Amazon.com Inc to buy the Netflix streaming business, but said that deal now appeared unlikely.

As part of its course reversal, Hastings said in a short blog post Monday that Netflix no longer planned to rename the DVD service. "This means no change: one website, one account, one password ... in other words, no Qwikster," he wrote.

Hastings is dealing with a customer backlash that began in July after Netflix announced it was raising prices by as much as 60 percent, or $6 a month, for some subscribers who wanted to keep DVD and streaming options.

With cancellations rolling in, Netflix last month cut its third-quarter forecast by 1 million subscribers. The company said it expected to have 24 million subscribers at the quarter's end.

Though Hastings later apologized for the handling of the price increase, he is sticking with that decision as the company works to build its online movie and television streaming service.

He also stopped short of an apology to customers for the confusion caused by the original Qwikster plan.

"It is clear that for many of our members two websites would make things more difficult," Hastings offered in lieu of an apology in a terse, 140-word blog post. "While the July price change was necessary, we are now done with price changes."

On the blog, reaction from customers was mixed. "Thank you for doing what makes sense for the consumer," one person said. But, in an indication the some subscribers are still frustrated, another countered, "Too late. Already canceled. Not coming back."

When the Qwikster plan was announced in September, Hastings had said Netflix DVD plans would come with an option to rent video games. But on Monday, Netflix spokesman Steve Swasey said the company was "still considering video games."

Netflix is under pressure from Hollywood studios and cable programmers to pay more for streaming content. Negotiations with Liberty Media's Starz were recently called off because the two sides could not reach an agreement on pricing. The company also faces competition from Amazon.com, Hulu and others.

(Reporting by Lisa Richwine in Los Angeles; Additional reporting by Yinka Adegoke in New York; Editing by Dave Zimmerman, Peter Lauria and Steve Orlofsky)

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