Netflix Can't Kill the DVD

Everybody knows what Netflix (Nasdaq: NFLX  ) wants. In its Utopian view, tens of millions of couch potatoes will merrily pay a low flat price to stream unlimited movies and television shows -- and the optical disc will be as good as dead. But the budding video giant may not get its way.

Not all digital media is created equal
In his Media Maverick column yesterday, CNET's Greg Sandoval interviewed Eric Garland, CEO of digital-media consumption tracker Big Champagne. Garland feels that Netflix intended to kill the DVD with last week's price hike. He likens it to Apple's (Nasdaq: AAPL  ) move to nix floppy drives from its iMac several years ago.

"It was outrageous, until it wasn't," Garland said, suggesting that Steve Jobs was simply ahead of his time in killing a media platform that would eventually die anyway. 

If I can build off of Garland's argument, Apple has also hastened the CD's gradual demise. Note its MacBook Air, which made lightweight laptops even lighter by ditching their optical disc players. No CDs. No DVDs. Last year's refresh even killed off the operating system backups that had previously come on disc.

However, Apple's ultimate weapon of mass disc destruction has been iTunes. The sheer genius of offering piecemeal singles at $0.99 apiece made economical sense to folks who were pirating tunes before. They could no longer blame evil record companies for making folks pay $10-$15 for a bad CD with just one or two songs worth buying. Record companies fought back at first -- just as movie studios are rebelling against Netflix's streams for their more desirable content -- but eventually embraced the disruptive technology.

Netflix seems to be doing to the movie and television production industry what Apple has done to the prerecorded music labels over the past few years. Unfortunately for Netflix, the analogy's not a perfect match.

To DVD, or not to DVD
I'm all for disruptions. I won't deny that the DVD is on the way out. Disc duplicators and home theater component makers know that their days are numbered. However, I think Netflix is underestimating the length of the optical disc's tail.

More to the point, I think Netflix is underestimating where it will stand when DVD and Blu-ray ultimately kick the optical bucket.

I'm won't hit you with the argument that streaming lacks the nifty special features of bloopers, audio commentary, and "making of" vignettes that make DVDs superior in terms of content. As it grows more popular, streaming may grow to include many of these extras anyway.

Netflix isn't jumping the gun on trying to herd everyone into streaming. But it may have far more trouble trying to convince an entire industry to serve itself up on Netflix's low-priced buffet.

We're barreling toward a disc-free future, but there's no reason for studios to devalue their freshest releases through a $7.99-a-month free-for-all. When the DVD dies -- and it will -- the studios will still collect fat fees through Apple and Amazon.com (Nasdaq: AMZN  ) premium streams, plus on-demand screenings through cable and satellite televisions providers. Why would they undermine that revenue stream by letting Netflix practically give those same movies away?

From red mailers to Redbox
When Apple battled the record companies, it faced an easy fight. Music lovers who wanted cheap, convenient songs online had two options: iTunes or piracy. But when it comes to movies, cinephiles have too many options for new releases: discs, Netflix, a host of on-demand and pay-per-view options, and even low-end rental kiosks.

Coinstar's (Nasdaq: CSTR  ) Redbox is proof that the DVD won't die overnight. Redbox revenue soared 38% in Coinstar's latest quarter. The model's so successful that NCR (NYSE: NCR  ) continues to copy it with Blockbuster Express kiosks.

Compared to these kiosks' convenience and selection, Netflix's more limited online offerings just can't measure up. Picture the 100 most popular titles available through Netflix streaming, and stuff them into a Redbox kiosk. How successful do you think that business would be?

I've been a subscriber and shareholder for nearly a decade. I love Netflix. I think the company is simply biting off more than it can chew here.

I'm not alone, apparently. After initially popping higher on the news, shares of Netflix have fallen by more than 8% from last week's all-time intraday high. If Netflix thinks it can speed up the closing of its regional distribution centers -- which ensure that its subscribers have access to every flick or television series available on DVD -- it fired its shot too soon.

The DVD will die, but only when movie studios can make enough money from streaming to allow it to give up the ghost.

Is the DVD dead? Share your thoughts in the comment box below.

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

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.


Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

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 19, 2011, at 11:55 AM, TheeShawn wrote:

    Why hasn't Time Warner Cable/Comcast, etc. added on demand streaming to their cable options? They have a few "free" movies but nothing like you would think they could offer if they wanted to.

    Seems to me some very big competitors could squash Netflix quickly if they just made the effort to outbid on content and offer the same type thing within their platforms that many people already have.

    I did see that DirectTV now has DirectTV Cinema in their plans that offers 6,000 movies/shows on demand, so we'll see if Netflix can somehow beat them all. I have my doubts. Streaming is definitely the new future, but too many companies will be offering it for just one to dominate imo.

    The sad part is they way they did it wiped out years of goodwill and replaced it with bad for many of us. Even those who stayed and chose one (streaming only) or the other (DVD only) rather than both were left with a bad taste in their mouth.

  • Report this Comment On July 19, 2011, at 11:58 AM, REIN wrote:

    Maybe I'm the odd man out but I dropped the streaming video option in favor of a lower price. I just can't see paying 7.99 for the kind of media Netflix streams. My cable company has a much better on-demand streaming selection.

    Rein

  • Report this Comment On July 19, 2011, at 12:45 PM, shadyday wrote:

    Killing CDs, even though there is still a few breaths of life in them has accomplished a few other things that few wish to talk about:

    • It has destroyed the possibility of performing artists, other than the most popular to realize income from their recordings. We capitalists like to comfort ourselves with that old gem "let the market decide." But there are times when we take actions to force something out of the market so we can replace it with something cheaper that will bring in bigger profits (for a relatively few), it's not only cheating, but ultimately self-defeating.

    Hey, I realize that many - perhaps most - of us reading these posts salivate at the thought of higher profits from our holdings (some would call them investments), but, at the risk of being virtually stoned, we might consider that sometimes dividends are paid in other ways than $$$. Oy, heresy!

    • iTunes & other legit similar services, while making a tiny dent in on-line (& off line) pirating, hasn't had any effect in the mass copying that goes on constantly. Of course, along with that goes the attitude that it's OK to steal the work of others. I'm not only speaking about kids here, but adults too. I wonder how many parents would look the other way if they knew their kids were stealing from a store or picking someone's pocket. "Hey, burn me a CD of that willya" has been perfectly acceptable now for what, 10 or 15 years? Depending on how one crunches the numbers, that's getting pretty close to a "generation."

    With regard to the question of the death of the DVD: Perhaps when streaming becomes more reliable the DVD will have outlived its usefulness. But it's really nice, when you want to watch something, especially for the 2nd or 3rd time, to pull it off a shelf, stick it in the optical drive & hit play. It sure beats the hell out of wondering if my connection is slow because of heavy traffic, etc.

    Cheers

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