Netflix streaming users now outnumber DVD subscribers 2:1

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Netflix may be getting out of the DVD business sooner that previously predicted, if Wednesday’s fourth quarter financial results are any indicator. The company now has close to twice as many streaming subscribers as DVD subscribers in the U.S., and it lost some 2.76 million DVD subscribers in the last quarter alone.

Netflix had 21.76 million subscribers at the end of the fourth quarter, which is 220,000 more than in the previous quarter. Internationally, it now has 1.86 million subscribers. The number of DVD subscribers shrunk to 11.17 million, down from 13.93 million in the third quarter. That means for the first time ever, streaming plans outperform DVD rentals by a ratio of close to 2:1.

The good news for Netflix is that even with its steep decline in DVD rentals, the overall number of customers is growing again. Netflix lost 810,000 U.S. subscribers in the third quarter as a result of its unsuccessful attempts to spin off the DVD business into a separate company, as well as a price hike earlier in 2011. In the fourth quarter, that combined subscriber number once again grew by 610,000.

Netflix executives have long said they see the company primarily as a streaming video provider, with DVDs being part of a legacy business that will decline over time. However, the accelerated rate of decline could spell trouble for Netflix’s bottom line: The company has been using the shrinking but very profitable DVD rentals to finance its international expansion, which it put on hold until international profitability returns¬†after launching in the U.K. and Ireland in January. With DVD customers canceling by the millions, that could now be further away than previously estimated.

Netflix CEO Reed Hastings wrote in a letter to shareholders (PDF) that he expects DVD subscription cancellations to level off this year, with an expected 1.5 million customers saying good-bye to the iconic red envelopes in Q1 of 2012. From the letter:

“While contribution profit from domestic streaming will grow sequentially, it will not be sufficient to offset the sequential decline in DVD profits (~$50 million), and the sequential increase in our international losses (~$50 million), as well as cover our global G&A and Technology & Development costs. As a result, we expect modest quarterly losses, as well as losses for the calendar year.”

In other words: Netflix won’t enter any other territories in 2012, and might have to work on making more money with streaming if it wants to keep expanding in the future, because DVDs may not be around for much longer.

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