This falls into the Casablanca category as in the police captain being “shocked” to find gambling going on at Rick’s ... Netflix is closing its nascent Red Envelope Entertainment unit because it competes with the studios it relies on for its main business. Red Envelope invested in more than 100 films and had four employees who are leaving the company as a result of the closure, according to a spokesman, who said the original staff count published by Bloomberg and others was wrong. The departures include Liesl Copland, who joined as head of acquisitions in 2006.

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Steve Swasey, Netflix VP of communications, told me you can look in hindsight and see that acquiring original content for distribution meant competing with the studios. In reality, though, that became clear as Red Envelope went about its business and wound up in the same room going head to head against the studios—which were acquiring films that they eventually would distribute on Netflix (NSDQ: NFLX).

Swasey called the unit “very successful for acquiring great content.” Was it profitable? Swasey wasn’t talking numbers: “We don’t disclose any of the financial terms…it was not material.” As for the 100-plus film library, they will still be shown on Netflix but otherwise “we’re determining what we’re going to do with it.”

(Via the LA Times.)