Is Netflix Going Backwards?

Netflix (Nasdaq: NFLX  ) isn't burying the optical disc anytime soon.

The video specialist is now offering DVD-only unlimited plans, tech blog GigaOm unearths. Potential subscribers heading to the dvd.netflix.com subdomain are invited to sign up for a plan that will set couch potatoes back $7.99 a month to watch as many flicks as they want with a single disc out at any given time.

For those unfamiliar with Netflix's pricing, this is essentially the same plan that Netflix charges $9.99 a month for, without the ability to stream.

Yes, technophobes. Netflix is waking up to the fact that not everybody is aboard the S.S. Streamathon.

Dissing the disc
A year ago, Netflix's corporate-communications department contacted me after I described the company as a DVD-rental company. It preferred to be called a digital video service.

Netflix's media-center page is telling. Count how many times DVDs are mentioned in the media site's descriptive introduction.

With more than 23 million members in the United States and Canada, Netflix, Inc. [Nasdaq: NFLX] is the world's leading Internet subscription service for enjoying movies and TV shows. For $7.99 a month, Netflix members can instantly watch unlimited movies and TV episodes streamed over the Internet to PCs, Macs and TVs. Among the large and expanding base of devices streaming from Netflix are Microsoft's Xbox 360, Nintendo's Wii and Sony's PS3 consoles; an array of Blu-ray disc players, Internet-connected TVs, home theater systems, digital video recorders and Internet video players; Apple's iPhone, iPad and iPod touch, as well as Apple TV and Google TV. In all, more than 200 devices that stream from Netflix are available in the U.S. and a growing number are available in Canada.

In short, the corporate description is entirely about its streaming service, even though nearly a third of its users don't use it at all, and the vast majority of its catalog is available only through optical discs.

Last year's Canadian launch and the push into Latin America and the Caribbean later this year all feature disc-less services. There will be none of the signature red mailers shipped out in those countries.    

When Netflix raised its rates in January, its first rate increase in years was attributed to the growing costs of acquiring licensing rights for its digital library.

"Creating the best user experience that we can around watching instantly is how we're spending the vast majority of our time and resources," Netflix explained in the announcement. "Because of this, we are not creating any plans that are focused solely on DVDs by mail."

Well, a few months later, Netflix is having a change of heart.

Red mailers are so retro
Back in January, Netflix removed the ability of subscribers on streaming devices to add movies to their DVD queues. It was a jarring shift for a company where the majority of films that folks want to watch are available only on disc.

Netflix wasn't trying to force disc-exclusive subscribers into subsidizing the streamers. It was trying to dissuade the streamers from queuing up more traditional discs.

It's easy to see why Netflix wants to ditch the disc. Distribution centers are a hassle. Stocking discs and accounting for lost or scratched DVDs is an inventory headache. Mailing costs inch perpetually higher. Someone bent on streaming is going to consume far more content, but bandwidth is cheap, and licensing deals are typically a lump-sum payment instead of a per-view royalty hit.

If streaming is so great and optical discs are so terrible, why is Netflix now offering a stream-free plan?

I have a few theories. Feel free to mix and match the ones that work best for you.

  • Amazon.com (Nasdaq: AMZN  ) began offering select streams to its Prime members at no additional cost. Emphasizing its regional network of distribution centers for disc rentals is a real differentiator for Netflix over Amazon.
  • Coinstar's (Nasdaq: CSTR  ) Redbox should be coming through on its promise for a digital strategy sooner rather than later, and it will obviously emphasize streams and discs. DISH Network's (Nasdaq: DISH  ) recent rescue of Blockbuster out of bankruptcy may also create refreshed competition as a multi-platform rival.
  • Netflix hasn't given investors any reason to believe that those who don't stream are leaving at a greater rate than those who do, but if that is the case then this would be one way to keep them around, instead of having them resentful as a result of January's price increase.
  • Average revenue per user isn't keeping up with the price increase, and one of the culprits may be that the growing popularity of streaming is encouraging subscribers to trade down to cheaper plans with fewer discs out at any given time.
  • Apple (Nasdaq: AAPL  ) will never add physical delivery to its iTunes storefront, but the fact that it and Amazon offer piecemeal rentals for the fresher content that isn't available through Netflix streaming can become a sticking point if Netflix moves away from optical discs.

Are some -- if any -- of these theories correct? Netflix isn't usually the type to backtrack on its decisions, so there has to be a good reason for it to eat its words as it quietly tries to win back disc lovers.

Killing those red mailers is apparently easier said than done for Netflix.

Why do you think Netflix is back with a stream-free unlimited plan? Share your thoughts in the comments box below.

The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services have recommended buying shares of Coinstar, Google, Netflix, Amazon.com, and Apple, creating a bull call spread position in Apple, and buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 11, 2011, at 7:23 PM, blimey1 wrote:

    Netflix has seen success with its recent press releases - International expansion, discussions with Facebook, etc

    However, this one sounds more like 'we have run out of ideas and are returning to what we know best'

    The earnings release next week is eagerly awaited. The stock is ripe for a significant price correction.

  • Report this Comment On July 11, 2011, at 8:47 PM, MKArch wrote:

    Hastings mentioned recently that stream churn exceeds dvd churn even though they proposed the opposite would be true when selling the move to a streaming model. I see this as confirmation of what I've been posting in your various NFLX articles and elsewhere that subscription streaming is not a sustainable business.

    Hastings has already admitted dvd's are also not sustainable in trying to switch to a streaming only model but with it's superior content it's probably more sustainable than subscription streaming. IMO today's announcement is admission that it's all about content, content, content and that superior content on an inferior delivery system beats inferior content on a superior delivery system.

    In the end NFLX can't get the kind of streaming content in their subscription based model that will keep subs coming back. See Starz CEO recent announcement that if NFLX wants cheap content they'll just get less of it. Starz and Showtime both moving to cut content in their current contracts with NFLX an analyst note that Starz is telling NFLX in their negotiations right now that they have to start charging their subs what cable charges for Staz content, The loss of Sony content due to a sub cap and news today of a similar cap about to be reached on Disney content. TWC won't even deal with NFLX. It's like Hastings says, NFLX is the tv-rerun service. $15B for the tv re-run service. At least the streaming part anyway. How much is the dvd business worth?

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