Is Netflix Crazy to be Abandoning the DVD Business?

Eric Schonfeld at TechCrunch dug into the Netflix Q4 earnings, and noticed that Netflix only gets an 11% margin on streaming, while DVD margins are more than 50%.

Out of Netflix’s total $847 million in revenues last quarter, $476 million came from streaming and $370 million came from DVD rentals (the remainder came from international). The streaming business also twice as many subscribers: 21.7 million versus 11.2 million. But the DVD business contributed the vast majority of Netflix’s profit: $194 million versus $52 million.

If you break that down, each streaming subscriber is worth only $2.40 in profit each quarter to Netflix, compared to $17.32 for each DVD subscriber. The old business was very lucrative. The new business kind of sucks. The economics are very different. The DVD business had fixed costs, while Netflix is forced to negotiate streaming licenses on a case by case basis with each media company.

It's obvious that the streaming business is the future, but is Netflix working too hard to abandon the DVD business?

Comments

[Louis S]

I recently brought back the 1 DVD at a time plan back along with streaming, I use the DVD plan for the wider selection and new releases and Netflix can't be beat even with the price increase. I still stream A LOT but i found that I was still renting 4-6 new releases a month and it cost more, plus there's a handful of TV shows on there (Blue Bloods, It's Always Sunny in Philadelphia, HBO shows, etc) that will not be available on streaming anytime soon. Plus, even with the price increase, it's still the best deal around in comparison to the competition.

[moom]

As a DVD only customer, this is nice to read. Given that Netflix has done the hard work on building the support infrastructure (and a first-rate one, as far as I can see) to support disc distribution, I think it would be foolish to dismantle it too quickly. It sounds like there be be profits made with physical discs for many years to come.

[mjw]

I've recently had several of the DVDs I've had in my Saved Queue re-appear including an old Inspector Morse episode and a Danny Kaye movie that've been gone from their catalog for years. I suspect they may be starting to pay a bit more attention to DVDs for the very reason you mention. Also, there's no better way to keep their existing customers happy than to start fixing up some of the holes in their library.

[bobodod]

DVD's are essential to my subscription.

[Daniel L]

Why abandon DVD's at all though, if they can still make money on it? Sure, streaming is good, but no need to abandon something if it's still bringing in the big bucks for them.

The DVD's are good for movies that should be both viewed with the best possible quality and with the proper audio/subtitles. Streaming is good for watching season after season of older TV shows, and movies that aren't worth quite worth the investment of getting the DVD.

With 500 movies in my queue, I just don't feel as if I need to watch "Commando" on DVD. I'm fine streaming it. Winter Light on the other hand...needs to be top quality and with proper audio and subtitles. DVD's just sometimes can't be beat, except by Blurays.

[RJM]

I agree that they should keep DVDs and even give a discount to customers who do both DVDs and streaming.

But, DVDs by mail isnt high tech enough for the walstreet types I guess.

[Chris]

Didn't they just tell their investors that "profit contribution of a streaming customer is about double that of a DVD customer"? There seems to be a gulf between the accountants and the PR.

[rhoadarmer]

I believe NFLX is saying that each **additional** DVD subscriber brings in $X of profit, but each **additional** Streaming custom brings in $2X of profit -- implying that their cost for streaming is a fixed amount not based on subscriber count so each additonal streaming customer costs them $0 but DVD customers cost them $Y per customer -- so each person they can switch from DVD to Streaming actually makes them more money. Of course, I'd think they would make even more if customers kept both plans, so I'm still unsure on why they don't offer a slightly discounted combo plan -- unless it is all to make the content owners happier.
Note: I am long NFLX.

[John]

You're just looking at it in terms of product cost. DVDs also have the added cost of paying for employees to mail them out and log them back in. Streaming doesn't. Subtract out all those employee's salaries and streaming becomes a lot more profitable.

[Fred Talmadge]

I'm sure that Netflix knows there are thousands of us living in areas where streaming is not possible. At least I hope they do, cause I really do like Netflix.

[Judy_]

If NFLX had to pay for streaming rights to the better movies available in the DVD list there would be no profit.

[Bob]

At John: streaming has WAY more employees now than DVD, so your comment is inaccurate. The margins are the bottom line, and numbers don't lie.

As someone working on the "dying" side of Netflix, I can assure you we all feel they have lost their minds over the past year.

[Evil Monkey]

Since when are they abandoning the DVD business? Im still getting discs regularly, including new releases in a reasonable timeframe (not taking into account the studio-imposed delays).

Like they always have, Netflix is looking 5 to 10 years down the line. That's why Netflix is Netflix and Blockbuster is where it's at. Streaming is the future, physical media is dying, as well as the delivery mechanism (the post office with it's talk of eliminating Saturday delivery and delays in next day delivery, making my one day shipping from Netflix's distribution center two days).

[Nate]

Gotta agree with evil monkey. I don't see Netflix "abandoning" their DVD business, I do see them strategically moving to streaming in anticipation of the DVD side being gutted by USPS changes.

[Perkins Cobb]

Evil Monkey: For one thing, they're getting out of the DVD business because they're not acquiring a lot of new disc releases, and aren't replacing a lot of in-print disc titles that they run out of.

As I pointed out in the Q4 earnings thread, "[t]he profit contribution of a streaming customer is about double that of a DVD customer, so Netflix would prefer to add streaming customers" is just an absurd bit of spin.

I think I finally get it now: DVDs are a profitable business but not a "growth" business. Streaming is a "growth" business but not a profitable one (at least for Netflix). The execs know that Netflix can't make the transition into streaming, so they're just lying their asses off so the stock price will crash (for good) later rather than sooner.

[FearNo1]

@ Bob
Interesting. I did not expect the streaming side to have that many employees since some of the work is outsourced to amazon.

The problem that netflix sees (as others have stated) is that due to various reasons: post office fees and issues, kiosk competition, DVD costs, etc. DVD is a dying biz. Netflix is looking at this from a long term perspective as overall streaming costs (except for licensing) should continue to drop over time unlike DVD related costs.

[Don't Trust BB/DISH]

I'm with Evil Monkey. My DVD service hasn't changed at all in recent years and I've never once heard them say they were killing off the DVD service. They did say they were giving it it's own website, but they also said that was to give it a dedicated management team. As for not acquiring new titles I'm not really sure what they don't get that other services do. This is just people still bitter about a $6 (at the very most) increase to a bill that had barely increased the previous 5+ years, even though Netflix had added and drastically improved the streaming service. Get over it people, look at every other bill you pay and tell me how many are only $6 higher than they were 5 years ago?

[Tom in NY]

ROE can be broken down into the classic DuPont analysis:

Profit Margin x Turnover x Leverage

Turnover here refers to asset turnover, not merely turnover of inventory. Streaming may have a lower margin, but it's possible to more than make up for it by higher asset turnover through lower overhead and inventory. i.e., server farms instead of distribution warehouses and DVD inventory.

Still doesn't mean I'm going to switch from DVD to streaming as a customer anytime soon.

[Anon-e-mouse]

Was there this much whining when Blockbuster stopped stocking VHS?

I know the future is scary. If you can browse this website you're already half-way to streaming. Why not lobby for high-speed infrastructure in your area instead of whining about being tied to a dying physical media??

Streaming is where media is going. Period.

Respond negatively to this if you wish, but It's just the truth. Take it or leave it.

[Perkins Cobb]

@ Don't Trust BB/DISH:

It's been well-documented on this site and elsewhere that Netflix has cut its catalog title acquisition to the bone. For starters, see here for documentation that Netflix has added only a handful of the films released by Criterion (the most prominent DVD/Blu label for classics & foreign films) during the last six months:

http://www.criterionforum.org/forum/viewtopic.php?f=2&t=11381

You're right that most of Netflix's competitors don't stock these discs either ... which is why they're not afraid to ignore them, I guess. That's really it in a nutshell: Netflix has become a company that does the absolute minimum to ensure customer retention.

@ Anon-e-mouse:

Your VHS analogy is weak because DVD was in every way superior to tape; streaming, on the other hand, hasn't yet surpassed Blu-ray (or in some cases even DVD) in image quality. You're correct, though, about lobbying for high-speed infrastructure, because anyone without it is gonna be screwed as Netflix strong-arms us toward streaming.

[[email protected]]

After the price hike I dropped streaming as there was nothing left I cared to watch. I turned streaming back on and managed to find one thing worth watching then droped it again. If Netflix ever drops DVDs then I'll drop Netflix. Simple as that.

[MikeT]

@Perkins Cobb: A very interesting link, thanks for that!

On a more hopeful note, Netflix has just re-stocked six of the DVD titles from my 'Saved' queue (The Unfaithful Wife, Story of Women, Match Factory Girl, and three old British TV shows). That's the first movement in a year from my Saved queue, which now holds more than 100 titles, and it all happened in the last two weeks.

Maybe it's coincidence that this happened at the start of their new quarter, or maybe Netflix is starting to rethink its strategy of phasing out old DVD titles. There must be a lot of customers like me who have already adopted streaming but who don't want to be forced out of DVD rentals because the availability of titles for streaming is so poor.

[Daniel L]

@Bob

I'm surprised to see they have more streaming employees than for the DVD side of their business. I can't understand then why so many of their streaming titles are messed up. They upload titles with messed up frame rates, dubbed audio tracks, messed up subtitles or no subtitles, or other problems. Then the problems are usually never fixed. With that many employees, they really should be able to sort that stuff out.

DVD's are my fallback if streaming for a movie is messed up. If a movie won't stream right for me, I get it by DVD. If I can't get it by DVD, then I'll just fucking quit Netflix. Until they have almost all (90% or more) of their DVD titles properly available for streaming, then I don't want to see the DVD side of their business disappear. That would be ridiculous and a huge insult to me...a loyal customer who has been using Netflix to watch obscure movies for years.

@Don't Trust BB/DISH

I agree with you that the price increases were a long time coming and still have a ways to go. Like half of the bandwidth during US primetime is Netflix content being streamed over the internet...yeah, they are going to have to up the costs to be able to keep that up.

@Perkins Cobb

Very informative, but a sad link. I hope Netflix realizes that they need to continue to keep their die hard movie fan customers happy...

[ScottZ]

Netflix isn't abandoning their DVD business and it is crazy to assume they are doing so. Netflix is simply looking to where their revenue generating units will be coming from in the future.

[Roo]

Sure seemed to a lot of people that the DVD business was being gift-wrapped up to sell of to somebody else to run. Notice that Qwickster was going to offer video game rentals, but suddenly that isn't a mentionable? Guessing the BB sell-off put a crimp in those plans?

Streaming is "sexy" for the investors. DVDs are old school, not worthy of getting anything. But yet there is nothing on streaming I want to see, and I have a queue 350 deep of DVD only..

But I think that now that Netflix has shown the industry that streaming isn't a geek hobby thing not to even worth being negotiated two years ago to a major factor today; that the content licensing fees will continue to go through the roof as the sky is the limit for the content providers.

Streaming profit might actually turn negative until the content providers finally find the top that Netflix can actually pay for it.

[Jamie]

If streaming wasn't the future then you wouldn't have Amazon, Redbox and Walmart all looking to get into that business in it's infancy.

[rose]

You would think that the streaming service would profit more money for them, but I guess not having good content on their streaming service is probably the reason for that. I imagine more people want to see new releases and that is why they opt for the DVD option. That is why I went with the Blockbuster Movie Pass through DISH Network. I get unlimited streaming, mail-in DVD’s, and so much more. I pay only $10 a month for everything and my favorite part is that I get new releases 28 days before Netflix. That to me makes it worth every penny. I use the streaming all the time and a co-worker at DISH told me we could now use the streaming service on my iPad. That is going to be awesome for traveling. I like my option a lot better then what Netflix has to offer.

[Robert Emmerich]

It's simply all about growth going forward. nf has been around for about 10 years renting DVDs. DVD players have been around for that long. Anybody who ever wanted DVDs shipped by nf has already done so and therefore no new subscribers for DVD nf.
Streaming is still fairly new, and there are still a few people who don't own a tablet, handheld console, smartphone or "smart" tv. But many of them will, and then they'll get subscribe to streaming nf, b/c that is what people do when they get a new device. And even if the cable companies don't get broadband to every household, I've noticed the cell phone companies moving to 4G and wi-fi hotspots.
Streaming nf has greater growth potential than DVD, end of story.

[Jay]

For those that say they haven't seen an indication that Netflix is abandoning its DVD business,the following is an excerpt from a recent Wall Street Journal article"

"In a conference call with analysts, Mr. Hastings said Netflix has no plans to promote the DVD business. 'We expect DVD subscribers to decline steadily for every quarter forever.' "

[MikeyS]

@[email protected]

If Netflix ever drops DVDs then I'll drop Netflix. Simple as that.

Yep, they will lose me as well.

I'm also confused that they state they make more on a streaming customer when half the number of dvd customers gives them almost four times NET revenue. I mean, these ARE the numbers.

Feel free to tell me what I'm not seeing.

[chris]

I have noticed in the past week that about 10-15 titles previously in my Saved section of my queue have appeared in my regular queue now. Some of these have been saved for a year or more and are not new releases. They must have just invested some more money in their library DVD's or they found a secret stash of missing DVD's. Either way, I'm happy and it proves they are still investing in new DVD's and older library films. I'm hoping they keep adding more.

[ScottZ]

@rose
Streaming content needs to be renewed by contract, it isn't a buy in once medium like a DVD. This results in increased ongoing content acquisition costs.

Blockbuster does not offer a straight streaming all-you-can-eat ala-carte option like Netflix does. They offer a PPV option or a unlimited streaming option for an additional $10/mo tied to your Dish Network subscription. Most people end up paying over $80/mo to get this service from Dish/Blockbuster. Contrary to your sales pitch this is a far cry from the Netflix offering.

Furthermore, I tried the Blockbuster streaming during my last month of Dish service before I finally cut the cord. It was terrible! Their selection and quality certainly wasn't up to the Netflix standard, I also couldn't stream directly to my XBox360 or BoxeeBox. Blockbuster required I had a Windows PC running Windows Media Player 11 connected to my network in order to stream to my XBox360, no thanks!

It is nice to have options, and Blockbuster is an option, just not appealing to people like me who want to minimize their costs not increases them yet again. Blockbuster is not a bargain.

[ScottZ]

@Jay
DVD by mailing being a priority and being abandoned are two different things. As @Robert Emmerich mentioned most growth is going to be with streaming, not DVD by mail. Therefore, advertising dollars are better spend towards selling streaming services.

Now, if Netflix stops buying content on DVD, that would be a sign of abandoning their DVD by mail services. Until that happens, don't panic, enjoy Netflix.

Netflix is still largely labeled a DVD by mail company by the public. It can be difficult to change a perception like this. The whole Qwickster rebranding attempt could have been preparations to sell their DVD by mail service or it could have simply been an attempt to distinguish their DVD by mail services from their streaming services (Netflix). In either case, I don't think their is reason for concern if you are a DVD by mail customer, you are paying monthly and can quit at any time, just like always.

[ScottZ]

Netflix would be crazy to abandon the DVD business. They however would be smart to sell it for a truckload of cash so they could focus on streaming.

[Perkins Cobb]

@ ScottZ:

But Netflix IS stopping its buying of certain content -- just see above in this thread. You're right, perhaps, that this is more accurately described as a shift in priorities rather than a wholesale abandonment of that side of the business. But many of us suspect the latter is coming soon. And it is certainly accurate to describe a segment of Netflix's customer base -- those who've been loyal to NF for its deep catalog DVDs -- as "abandoned."

Of course I can quit any time -- but I don't have any better source than Netflix to rent all the DVDs they're no longer acquiring. All I can do is buy every one of them. So "their" is indeed a reason for concern, for customers like myself.

[Jamie]

Netflix on the DVD side used to by every obscure release that came out and they are getting away from the titles that don't move.

This is also why you see a lot of older stuff disappearing from the available list. They're simply doing it based on demand.

There's a big difference between not promoting the dvd service, and actively trying to get rid of it.

[ScottZ]

Qwickster, the separation of services, slowing of DVD content acquisition (if valid) all point towards Netflix selling off the DVD business.

I think all Netflix customers would agree this is a shame because the DVD and streaming services compliment each other so well, like peanut butter and chocolate.

[Anon-e-mouse]

Games are too expensive. There would be little profit to be made after the massive amount of investment it would cost to break into the game rental industry. Look at the cost of a Gamefly subscription.

Streaming will soon accomplish everything that DVD/Blu-ray currently does and this petty non-sensical arguement will turn towards why does my ISP cap my bandwidth or why doesn't my ISP think my area is viable or profitable for highspeed infrastructure.

The true videophiles will never appreciate streaming, but they also aren't who Netflix is expecting their revenue to come from in the long run.

[ScottZ]

Totally agree on the games. Games don't fit the rental model as well because 1) They Cost more 2) They have a shorter shelf life.

[Gary]

Plain and simple. Netflix abandons DVDs, I will abandon them. Streaming is a pain and isn't reliable. I will go to Blockbuster.