Top video rental company Netflix Inc will rename its DVD-by-mail business and split it off to a separate website, sparking a new round of customer complaints and concern by some analysts that customers might drop the service.
The company's shares fell more than 7 percent on Monday.
Negative comments piled up on the company website on Monday, a little more than two months after Netflix raised price, also bring negative customer reaction. Some analysts said more subscribers might drop the service.
Chief Executive Reed Hastings, in a blog post late on Sunday, said Netflix was changing the name of its DVD-by-mail business to Qwikster, the brand that will appear on the company's signature red envelopes, and also offer video games.
The company's online streaming service will retain the Netflix name.
Hastings said he was separating the units because they were evolving as very different businesses that needed different marketing, and we need to let each grow and operate independently.
The announcement came a week after the company said it was adding fewer subscribers than forecast because of a price increase as high as 60 percent, or $6 a month, for joint streaming and DVD rental service.
The uproar has pushed shares of the company down nearly 50 percent since it announced the price increase on July 12.
Some industry analysts said the company risked losing more subscribers as the Qwikster and Netflix websites would not integrate customer use or preferences data for streaming and DVDs, making it more difficult to use both services and possibly creating confusion.
I think Qwikster will quickly be known as Quit-ster, said Wedbush Securities analyst Michael Pachter, who has a sell rating on Netflix shares and a $110 price target.
Others said the negative customer response to the higher pricing for DVD services remained A major challenge, not the new name or separation of the units.
There's still a lot of backlash from the price increase before. At this point, consumers are still looking for a less expensive fixed-cost option such as Coinstar Inc's Redbox kiosk, said Merriman Capital analyst Eric Wold, who rates Netflix shares neutral and has a buy rating on Coinstar.
Netflix may be preparing to eventually sell the DVD business, some analysts said. Hastings has repeatedly stressed the company sees its future in streaming as customers increasingly turn to a variety of Internet-connected devices for entertainment.
Customers flooded the company's website with thousands of blog comments on Monday, many upset or confused by the splitting of streaming and DVD businesses.
This makes little sense to me. It will now require more work, one commenter wrote, adding sadly, this might be the last straw.
Another said she thought Netflix remained a great bargain, adding I love having both DVD delivery and streaming!
Hastings, in his blog post, said he had not adequately explained his reasoning for splitting the operations and raising prices for the DVD options when they were unveiled in July.
I messed up, Hastings wrote. In hindsight, I slid into arrogance based upon past success.
Hastings said there will be no pricing changes, and subscribers to both services will have two entries on their credit card statements, one for Qwikster and one for Netflix.
Netflix has been under pressure from Hollywood studios and cable programmers to pay much more for content. Analysts have said it would start to lose more shows for its streaming service after failing to reach a new agreement with Liberty Media's Starz.
But Hastings said new content would be coming soon.
The additional streaming content we have coming in the next few months is substantial, and we are always working to improve our service further, he said.
Even as it seeks out more content for its streaming service, Netflix faces increasing Web video competition from the likes of Amazon.com, Google Inc and Apple Inc.
Blockbuster, the once-dominant video store chain now owned by Dish Network, is expected to announce plans for a new streaming service on Friday.
Andy Rendich, who has worked at Netflix's DVD service for 12 years and has led it for the last four years, will become the CEO of Qwikster.
Unlike Netflix's current DVD plan, Qwikster will feature a videogame upgrade for customers who want to rent Wii, Playstation 3 and XBox 360 software.
Members have been asking for video games for many years, Hastings said, and now that DVD by mail has its own team, we are finally getting it done.
Netflix shares dropped 7.4 percent to end at $143.75 on the Nasdaq.
(Additional reporting by Sakthi Prasad in Bangalore; Editing by Jane Merriman, Lisa Von Ahn and Steve Orlofsky)