Netflix: Price change not about killing DVDs

netflix-envelope-featured-e1285284546767

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

loading

Comments have been disabled for this post