Netflix’s latest decision to amputate its physical DVD business from its streaming one is somewhat bold, but not at all surprising.  People who received the “humble” email from Netflix CEO Reed Hastings yesterday read the following:

For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. 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). So we moved quickly into streaming, but 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: working with tangible, physical media in a world that is moving to Internet-served media isn’t dead now, but we’re not going to wait until it is.  Cost increases caused by the inevitable rise in postal rates will be shouldered by the customers still using the mail, creating a firewall around the streaming customers who don’t.  And although the streaming and DVD businesses are owned and run by the same company, Netflix has stripped the iconic brand name from the latter.  Welcome to qwikster.com.  It’s a pretty goofy name, and one that doesn’t feel like it has staying power.  And that’s the point.

By tying its future fortunes and brand solely to the streaming business, Netflix is (desperately) hoping it can make deals with the studios to get better content served up digitally.  The Starz contract fallout will hit Netflix streaming next February, when Netflix stands to lose a LOT of content from Sony Pictures, Disney, and others that are wrapped up in the Starz deal.  Unless they can turn the tide, the entire company is toast.

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