Don't Do It, Netflix

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"As you know, our core business is delivering great movie rentals to you on DVD by mail and instantly to the computer and TV, so we've decided it makes sense for us to focus exclusively on that," the company posted in its official blog last night, explaining why it will discontinue the sale of used DVDs by the end of the month.

Netflix began selling its excess DVD inventory for as little as $5.99 a title two years ago. It seemed like a great move at the time. Even though subscriber growth was blazing -- at a healthy enough clip to possibly justify keeping copies of new releases around in its library as its membership base grew -- there were still apparently plenty of extra copies of the bad Kevin Smith movies to unload once film buffs moved on to the next batch of fresh releases.

Like most pre-viewed product, it isn't always ideal. Discs can arrive scratched after going through dozens of renters. Since Netflix didn't really toot its own horn about the used DVD resale business, it's safe to say that it was never really a material contributor to the company's bottom line.

Netflix also routinely scores small income-statement accounting gains on the disposal of DVDs, both to wholesalers who go on to resell the pre-viewed flicks, and to subscribers who buy directly.

In other words, selling used DVDs never moved the needle here, and there is money to be made if it can make more through wholesalers than their collective depreciated value.

So this is a good move by Netflix, right?  I don't think so.

Money for nothing and your flicks for free
If I'm arguing against a fiscally sound practice, I'd better come armed with several talking points. Here we go...

For starters, more than a few unhappy customers in the Netflix blog are now fretting about having to go back to Blockbuster (NYSE: BBI) to get their $5.99 used DVDs. Does Netflix really want customers trekking out to the local video store? As confident as Netflix may be of its superior model, why risk the potential for temptation? Why force them into the clearance bin at Best Buy (NYSE: BBY) or walk past more Redbox kiosks than they have to?

There is also the timing of the move. Why is it cutting off sales in November as we head into a holiday season where thriftiness will be huge? I'm not suggesting that everyone wants a used copy of Little Miss Sunshine or Casino Royale in their stockings, but it's a value proposition that makes sense. A Netflix gift certificate also becomes a more reasonable purchase when it can be exchanged for tangible flicks over simply buying months of service.

If Netflix wants to eventually begin selling its digital delivery service -- and it should, since it's just a loss leader at this point -- doesn't it make sense that it market the physical product (beyond the physical rental) too? The approach doesn't seem to be hurting Amazon.com (Nasdaq: AMZN).

The decelerating subscriber growth can also hurt, in different ways. First, slowing additions to the membership rolls will affect Netflix's ability to work its way through a fat stash of new releases. In addition, the first wave of Netflix users were rabid movie buffs, always looking out for missed classics, foreign films, and indie flicks. Now that Netflix is more mainstream, one would expect its more recent subscribers to be more focused on queuing up the hot releases that studios are marketing. This would lend itself perfectly into selling timely excess inventory instead of simply handing it over to a wholesaler, especially if the bargain-priced retail offering was better-marketed.

Reed 'em and weep
CEO Reed Hastings has backed away from site features in the past. Whether it's changing its mind on online advertising or allowing members to have separate family queues and profiles, Netflix is certainly not a stagnant company.

That's usually a good thing, but taking down a checkout-screen process doesn't make sense. Instead of pounding the buffet concept, the used DVDs gave Netflix a way to further establish itself as a source for filmed entertainment with its subscribers. Just as music subscription services like Best Buy's Napster and RealNetworks' (Nasdaq: RNWK) Rhapsody will sell piecemeal downloads to its "all you can stream" members, it doesn't make sense for Netflix to put all of its eggs in fewer baskets.

Delivering temporary flicks is a noble pursuit. Reaching out to couch potatoes through recent deals with home-theater gadgets from the likes of Roku, TiVo (Nasdaq: TIVO), and Microsoft (Nasdaq: MSFT) is brilliant. I just hate seeing even a small revenue stream dry up on purpose. It made sense. It expanded the brand. It kept competitors far away.

History shows us how great companies can fail this way. I'd offer you a second glimpse, but Netflix is apparently not selling pre-viewed product anymore.

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