Netflix separates streaming, renames DVD business Qwikster

— -- Netflix is preparing for the future by separating its popular DVD mail rental and video-streaming services.

But for the present, it is simply confounding — and confusing — customers.

"These guys did three things bad," says Wedbush Securities analyst Michael Pachter. "They raised prices. They offered lower-quality content, and they made it more complicated."

Netflix CEO Reed Hastings late Sunday issued a mea culpa to customers irate over a price increase for the service in recent weeks. "I messed up," he wrote on the company blog and in an e-mail to subscribers. "I owe everyone an explanation."

He acknowledged that Netflix didn't properly handle the changes that accompanied a price increase announced in July. That move resulted in Netflix ( NFLX) issuing fiscal third-quarter guidance last week that it would see a dip to 24 million subscribers from 25 million.

"It appears that the price change has led to higher churn (of customers leaving Netflix) at around 7% vs. our prior estimate of 5.8%," noted Credit Suisse analyst John Blackledge.

After his apology, Hastings said the company plans to separate the DVD-by-mail service from the streaming service. The DVD service will be called Qwikster, and the streaming service will keep the name Netflix. Pachter suspects Netflix will eventually spin off Qwikster — something Hastings did not announce — but questions the timing. "Why now in the middle of the price increase, when people are already kind of thinking about quitting?"

Hastings did not retreat on the price increases: "There are no pricing changes (we're done with that!)."

Before, customers paid $9.99 for DVD rentals and streaming. The new price is $7.99 for each. Investors have given Netflix shares a thumbs-down since the changes. Shares closed at $143.75 Monday, down $11.44, or 7.4%.

As news spread across the Internet, Netflix subscribers expressed dismay about the developments on the Netflix blog, Facebook and news sites. Their biggest concern? People who both rent and stream videos will have to log in to two different sites and get two different credit card charges.

"On top of inconveniencing your customers, you insult us by issuing an apology way too late after the price increase," wrote subscriber Debbie Townsend of Bellingham, Wash., on the Netflix blog. "Please reconsider your move to separate the services."