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Netflix scraps plans for Qwikster

By Rex Crum, MarketWatch SAN FRANCISCO (MarketWatch) — Netflix Inc. said Monday it would kill off a controversial plan to separate its video-streaming and DVD businesses that had earned the ire of customers — though the company is keeping its recent price hike in effect. Reuters Netflix CEO Reed Hastings said the company was abandoning its plan to separate its DVD business and rename it Qwikster. Shares of Netflix /quotes/zigman/87598/quotes/nls/nflx NFLX -6.26%  saw an early surge of almost 10% evaporate, however, after skeptical commentary from some analysts who follow the Los Gatos, Calif.-based company. The stock remains well below the $200 range where it stood before the plan was announced in mid-September. Indeed, Netflix shares have shed more than 58% of their market value over the last three months. Several analysts noted the turnaround Monday but sounded a skeptical note that the company could regain goodwill with its customers. Tony Wible, of Janney Montgomery Scott, said the company was in “desperation mode.” In a statement, Chief Executive Reed Hastings said the company wouldn’t rename its DVD-rental business Qwikster and separate it from Netflix’s current Web site after all. Netflix had announced plans for the separation on Sept. 18, which would have entailed customers getting two separate billing statements for their videos. That announcement last month also came three days after Netflix cut its subscriber forecast for the third quarter. Since then, Netflix’s stock has fallen by more than 40%. On Monday, Hastings couched an apology in a statement, saying: “Consumers value the simplicity Netflix has always offered and we respect that. 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.” The company had also enacted several price changes to its various plans in September, which amounted to a rate hike of as much as 60% for some plans. Monday’s announcement did not change the price increases. ‘Still a broken business model’ Wible said that customer departures and a falling stock price have caused Netflix to “pull out as many tricks as it can,” in an effort to try to regain some of the fandom it has lost in recent weeks. The analyst, who has a hold rating on Netflix’s stock, also said the he expects any share gains to provide little more than “false hope” about the company’s latest decision. “It shows they don’t understand the customer base,” Wible said. “They’re making hasty moves, and at the of the day, it’s still a broken business model.” Michael Pachter, of Wedbush Securities, said that Netflix’s decision to not separate its businesses puts an end to any speculation that the company was working on a deal to sell its streaming-video business to Inc. /quotes/zigman/63011/quotes/nls/amzn AMZN +2.05% . Pachter said he believes Amazon backed away from any potential deal because of negative reaction to Netflix’s plans, and the company couldn’t justify a purchase price that he said was likely to be above $200 a share. “There was no business reason for Netflix to split up, other than they were trying to sell to Amazon,” Pachter said. “All the other changes could have been done internally without doing anything to their subscribers.” Pachter also cut his rating on Netflix’s stock to neutral from outperform. Conversely, Barton Crockett, analyst with Lazard Capital Markets, said he doesn’t think separating the businesses “would make Netflix more of an acquisition target,” due to what would have been such a large premium necessary to complete any deal. Still, Crockett, who has a neutral rating on Netflix, called the decision to drop Qwikster “clearly, a good idea.” Rex Crum is a reporter for MarketWatch in San Francisco.

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