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Netflix DVD profits will fund international expansion

Netflix (s NFLX) CEO Reed Hastings said on Monday’s earnings call that the company will rely on profits from its DVD business to fund expansion into new territories over the coming years.

The DVD-by-mail service may have taken a backseat to streaming, but it’s an incredibly profitable part of the business. In its fourth-quarter forecast, Netflix estimates domestic DVDs will produce $177 million to $192 million in contribution profit to Netflix, on revenues of $354 million to $368 million. Compare that to the company’s domestic streaming business, which is expected to contribute $30 million to $42 million in profit on $462 million to $477 million in revenue.

Those profits will be needed as Netflix bets on international expansion, both in Latin America over the next few quarters and — beginning early next year — in the U.K. and Ireland. In the fourth quarter, Netflix expects to lose between $60 million and $70 million in its new international markets, on $25 million to $30 million in revenue.

Netflix has seen a number of DVD subscribers leave through two waves of cancellations — one when the new pricing was first announced and another when it actually went into effect in September. But the company expects subscriber numbers to stabilize in the fourth quarter, as it’s already seen weekly cancellations slowing.

Once it reaches more of an equilibrium point, Netflix believes it can keep DVD-by-mail profitable and use its proceeds for other investments. In that sense, Hastings likened the DVD operations to AOL’s (s AOL) dialup business over the last decade: While it’s steadily declining, there are no real fixed costs associated with keeping it going.

On the call with analysts, Hastings also responded to some criticism about its decision to separate its DVD operations and introduce a new brand for the service. “In hindsight it’s hard to justify (the Qwikster decision),” Hastings told investors. But that doesn’t mean it couldn’t have worked, he maintained. “Having separate brands representing the different audiences can in theory make sense,” Hastings said on the call. However, “Qwikster became a symbol of Netflix not listening” to its subscribers. And as a result, rather than continue to fuel customer dissatisfaction, Netflix took a big step back.

That said, Hastings made clear that DVD won’t be a huge focus going forward, and that the bulk of its marketing spend and future investment will be on growing its streaming business, both in terms of the content available and the number of subscribers it hopes to attract. But having a profitable cash cow like DVD is a pretty favorable situation to be in.