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Summary:

It won’t happen as fast as you can say Qwikster, but Netflix (NSDQ: NFLX) plans to slowly edge its way out of the DVD rental business.

Reed Hastings, CEO, Netflix
photo: Robert Andrews

It won’t happen as fast as you can say Qwikster, but Netflix (NSDQ: NFLX) plans to slowly edge its way out of the DVD rental business.

Speaking to the investment community after Netflix gave its fourth quarter earnings data Wednesday, CEO Reed Hastings said he expects his company’s 11.2 million DVD-inclusive subscriptions to keep plummeting. And with Netflix keenly focused on growing its streaming business globally, and willing to sacrifice profitability in the near term, company officials say they have no plans to try to lure these lost disc subscribers back or to acquire new ones.

“We’re not planning any specific retention efforts, and we don’t plan to market the DVD service anymore,” Hastings said. “The plan is not to disturb it — to maintain it and keep it running very well.”

Hastings also shot down earlier Qwikster-era speculation that the company would get into renting video games.

Nearly 2.8 million subscribers dropped Netflix DVD rentals in the fourth quarter, with some of those migrating to just streaming, the company reported. DVD rentals still accounted for $370 million in revenue for the period and contributed $194 million in profit on a healthy 52.4 percent margin.

As one analyst noted during the call, Netflix signaled its intention to grow the DVD business last fall during its since-aborted attempt to spin off the disc rental side of its operation into a company called Qwikster.

But Hastings struck a different tone Wednesday, telling analysts, “We expect DVD subscriptions to decline steadily for every quarter forever.”

Hastings added that Netflix has no plans to shutter any of its disc warehouses and distribution centers in the near term.

He called analysts’ claims that DVD subscribers contribute about six times more than their streaming counterparts to the bottom line “well intentioned,” but said they’re missing the larger picture of marginal costs. “A DVD subscriber has a number of variable costs, postage among them … If they were only going to use one service, we’d much prefer them to use the streaming service.”

With Netflix evolving from its origin point as an online DVD service to a digital content company that wants to go head to head with pay cable giants like HBO, pulling faith out of the disc business will have its short-term consequences.

With renting DVDs still much more profitable than streaming movies and TV shows — profit margins on U.S. streaming operations were only around 11 percent compared to over 52 percent for discs — the company revealed Wednesday that it doesn’t expect to be profitable in any 2012 quarter.

Certainly, transformation doesn’t come inexpensively. To compete with the likes of HBO Go, Netflix is betting heavily on original series like Steve Van Zandt’s upcoming mystery drama Lilyhammer and Kevin Spacey’s politically-themed House of Cards.

There’s also heavy investment in foreign territories like Latin America — developing those streaming markets before competitors like, say, Amazon (NSDQ: AMZN) can get there vastly improves scalability, Hastings said. “That’s why we’re investing early and aggressively over there — we want to be first wherever we can.”

Foreign streaming subscribers grew about 27 percent to nearly 1.9 million in the fourth quarter, Netflix revealed, but international operations functioned at a net loss of $60 million.

  1. It looks like they’re going All-In on the streaming business. That could really back-fire for them in the next couple of years if their original content doesn’t pan out, and if international subscribers continue to be a loss. At that point, Reed would likely sell the company to someone.

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