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Summary:

There’s been a lot of speculation that Netflix was seeking to kill the DVD-by-mail offering with its recent price hike. But to the contrary, Reed Hastings says that the decision was made in an effort to prolong the DVD business, which wasn’t getting enough attention.

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With a recent change to its pricing plans that separated streaming and DVD-by-mail subscriptions, there’s been a lot of speculation that Netflix was seeking to kill the DVD-by-mail offering. But on the company’s second-quarter-earnings call, Netflix CEO Reed Hastings said that the decision was made in an effort to prolong a side of the business that wasn’t getting enough attention.

Hastings said on Monday that he thinks the DVD-by-mail offering will be able to last a long time, by generating satisfaction for a number of users that aren’t as interested in its streaming service. The CEO gave the example of rural customers who don’t have the available bandwidth to take advantage of its streaming service, but were paying $2 more to get DVDs. By separating that plan out, the company will be able to target existing customers that fit that type of demographic.

“What we wanted to do is make clear that DVD has a longer and bigger life than some people think,” Hastings said.

The stated goal is to shrink the DVD business slowly as opposed to shrinking it rapidly — which is what would have happened if the company continued to spend most of its cash and resources on growing its streaming business. By breaking the DVD operations into a separate business unit, Netflix will be able to separate out profits and losses of the distinct businesses and invest in each appropriately.

By doing so, the company will also have a dedicated team that is focused on DVDs and improving the customer experience of DVD users. Of late, much of its investment has been focused on streaming, leaving heavy DVD users out in the cold. Take, for instance, a recent redesign that was built around making it faster and easier to stream movies through the service. With resources dedicated solely to DVD, Hastings said that the company is working on a number of initiatives it plans to launch in the fourth quarter aimed at improving the DVD service.

Furthermore, the company will get back to marketing DVDs, which have largely taken a backseat to its streaming offering. Over the past several years, Netflix has focused on courting new users with the promise of its $7.99 streaming-only plan, a strategy was largely working. In recent quarters, Netflix has aggressively grown its customer base, with about 75 percent of new subscribers in the second quarter signing up for the streaming-only plan. But interest in its DVD plans has largely gone stagnant as a result.

Most saw the price change as a way for Netflix to force subscribers to choose one plan or the other — with the expectation that most would pick streaming over DVD — but the company appears bullish on the DVD business remaining viable, at least for some time. At the end of the third quarter, Netflix expects to have 25 million subscribers in the U.S., with 15 million remaining DVD-by-mail customers. While DVD shipments have most likely peaked, Netflix still expects 60 percent of its customers to pay at least $7.99 for DVD rentals by the end of this quarter.

Hastings once said that he saw Netflix as a streaming company that also happened to offer DVDs by mail. If we take him at his word, the move to separate DVDs from streaming is a bit of a change in strategy for the company. As opposed to having its operating margins squeezed as a $2 add-on to the streaming offering, breaking out DVDs will effectively enable the company to maximize its investment in a business that already has a large user base and a bit of legacy infrastructure built out to support it.

Image courtesy of Flickr user Scott Feldstein

  1. There is still so much content, both new and old,that isn’t available via streaming. Some stuff goes in and out of being available over the web. It’s ironic that Netflix raised their prices after putting most Blockbuster and many locally owned video stores out of business.

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    1. It’s not ironic, it’s good business

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  2. Pissing off your customers doesn’t seem like good business to me. If I do decide to keep renting Dvd’s i’m switching to Blockbuster’s Dvd/ Bluray by mail service.

    Right now i’m taking advantage of the 30 day free trial after that $9.99thanks to a post here. A

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  3. Pissing off your customers doesn’t seem like good business to me. If I do decide to keep renting Dvd’s i’m switching to Blockbuster’s Dvd/ Bluray by mail service.

    Right now i’m taking advantage of the 30 day free trial after that $9.99 thanks to a deal that wa posted here.

    Yes I know it’s the same price as Netflix but I get Dvd’s a day earlier plus no 30 day delay for new releases. Thank you Netflix.

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  4. Netflix is just a corporate scam stock just like Enron. Why the SEC has not stepped in yet just shows you whats wrong with AMERICA!!!

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  5. I’ve been with Netflix since 2000. This is the first time I feel really motivated to look for an alternative. I reluctantly accepted paying more to move up to Blu-ray, but that increase now seems out of date for a 5-year old technology. Now being forced to pay $4 per month more for streaming seems really stupid. It’s inferior quality, with less selection. Exactly why charge more for this service?

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  6. I am not sure why everyone is g etting so upset about this. Sure, they are raising their prices and blockbuster is not, but that is because blockbuster is playing catch-up. They are okay taking in the hit in their overhead to get new customers, but as soon as everyone moves to blockbuster who is going to move, in order to make money, they will actually have to raise prices as well. You have to be able to pay for postage and stockers and all the employees, and with Obamacare going into effect, they will be paying a lot more for their employees, so the obvious result is that we now have to pay more. This is not Netflix’s fault, its our government. And its not a scam or Enron, and saying that just shows you know nothing about business or how an economy works.

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  7. I am not sure why everyone is getting so upset about this. Sure, they are raising their prices and blockbuster is not, but that is because blockbuster is playing catch-up. They are okay taking in the hit in their overhead to get new customers, but as soon as everyone moves to blockbuster who is going to move, in order to make money, they will actually have to raise prices as well. You have to be able to pay for postage and stockers and all the employees, and with Obamacare going into effect, they will be paying a lot more for their employees, so the obvious result is that we now have to pay more. This is not Netflix’s fault, its our government. And its not a scam or Enron, and saying that just shows you know nothing about business or how an economy works.

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  8. I think in the short run the streaming + 1 DVD subscribers are likely to downgrade to streaming only option while streaming + 2 DVD subscribers are likely to swallow the price hike. Some analysis here based on Netflix 2010 10K filing with SEC:
    http://mypurplefish.blogspot.com/2011/07/netflix-price-change-what-does-it-mean.html

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