Netflix Should Kill DVDs

If I'm going to upset you -- and I will -- I may as well cut to the chase: Netflix (NASDAQ: NFLX  ) should just get rid of its DVD business.

This is going to be controversial, but I have a feeling you'll agree with me if you're patient enough to hear me out to the end.

Netflix doesn't need its DVD business, and at this point its bread-and-butter appendage is simply holding the company back from its true potential.

Stop shaking your head. Give me a chance to explain. Besides, I have one more point that will rattle you.

Netflix was right about Qwikster
Deep down inside, Netflix has always wanted to unload its mail-based DVD business. Qwikster is now a punch line. It's hard to write the word "Qwikster" without following it up with "fiasco." However, Netflix's plan to separate its streaming business from its original mail-order rentals operations would've been the right call.

Netflix was just early. Consumers were just stupid.

Oh, I just went from upsetting you to making you angry.

Well, let's assess the knocks on Qwikster. Members complained that they would be inconvenienced by having to maintain two separate accounts. The promise to add video games to Qwikster would've made it more competitive with DISH Network's (NASDAQ: DISH  ) Blockbuster and Coinstar's (NASDAQ: OUTR  ) Redbox that offer console title rentals, but subscribers outside of diehard gamers didn't seem to care. Folks were just starting to overcome Netflix's decision to stop offering streaming at no additional cost to unlimited disc-based plans, and now Qwikster was asking them to separate their streams from their discs.

Members complained. Netflix listened. How did subscribers repay Netflix?

Well, there were roughly 15 million disc-based subscribers at the time. Killing off Qwikster didn't stop the exodus.

Quarter

DVD Subs

Change

Q3 2011

13.93 million

 --

Q4 2011

11.17 million

(2.76 million)

Q1 2012

10.09 million

(1.08 million)

Q2 2012

9.24 million

(0.85 million)

Q3 2012

8.61 million

(0.63 million)

Q4 2012

8.22 million

(0.39 million)

Q1 2013

7.98 million

(0.24 million)

Source: Netflix.

Netflix has lost nearly half of its DVD subscribers over the past two years. Do you really think it would've lost more if it had gone through with the Qwikster move? I doubt it. If anything, a dedicated site would've helped build some brand equity. Now when folks hear "Netflix," they think "streaming." It's certainly not "discs."

Stream on
Since its inception, Netflix has delivered a total of 4 billion DVDs. That's a lot of discs over the span of more than a decade. Well, it happened to serve more than 4 billion hours of streams during the first three months of this year alone.

There are now 36.3 million streaming accounts worldwide, and that's more than 80% of Netflix's audience. Are we really going to worry about the feelings of the 8 million disc-based customers who may very well be just 4 million disc-spinning fans in two years? What if the DVDs are keeping streaming from improving?

A sound argument can be made that Netflix doesn't need to give up its DVDs. It's still a cash-cow business, and it wasn't until last year's final quarter that Netflix's domestic streaming business surpassed DVD rentals in contribution profit. However, that line item has been shrinking with every passing quarter at Netflix. Why wait until all the squeezing is done? Why not cash in by selling its mail-order business to Coinstar, which would combine the regional distribution centers with its thriving kiosk business or Blockbuster as it tries to offset store closures?

Netflix's DVD business is valuable, but it will become less and less worthy with every passing quarter.

Perhaps more importantly, studios need to know that Netflix is willing to work without a net. They will never give Netflix fresh content that studios know folks can get in Netflix's red signature mailers. It doesn't matter that more than 75% of them don't have a disc-based plan. The possibility is there. However, if you remove that access from the equation, it then becomes a question of whether the content creator wants to reach Netflix's 36.3 million-strong -- and growing -- user base.

I believe that studios would be more likely to crack open their digital catalogs for Netflix if that was the only way in. Yes, I'm going there. Netflix would have a more complete streaming catalog if it had unloaded Qwikster.

Keeping DVD plans around has slowed both Netflix's progress and its destiny.

If you still don't believe me, consider Apple (NASDAQ: AAPL  ) . Do you think it would have a nearly complete digital music library if it also sold CDs? You know the answer, even if you're in denial. The labels realized that digital was the only way into iTunes, so they didn't hold back on content. If Netflix wants to be the iTunes of video streaming, it may as well start acting that way.

Nothing but Netflix
Are you convinced? Have you at least had your beliefs challenged? Share your thoughts in the comment box below.

The tumultuous performance of Netflix shares since the summer of 2011 has caused headaches for many devoted shareholders. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why The Motley Fool has released a premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. The report includes a full year of updates to cover critical new developments, so make sure to click here and claim a copy today.

 


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  • Report this Comment On April 28, 2013, at 2:20 PM, phillipzx3 wrote:

    Rick,

    I think you are correct. I'm a "streaming only" customer. I'm not interested in DVD's (nor Blu-ray, at the moment.

    Once my 42" Sony (the model with the smeared blues because Sony didn't want to fix their crummy design, dies, I'll be more inclined to ask for a better, clearer picture). As it is, Netflix looks, and works wonderful streaming via my HTPC.

  • Report this Comment On April 28, 2013, at 4:38 PM, lkknapp wrote:

    You are right. We never order DVDs, only Blu-Ray.

  • Report this Comment On May 16, 2013, at 7:49 AM, laxquaz21 wrote:

    Once the streaming starts making money maybe you'd be correct but in the mean time the multi-hundred million dollar profit dvd side of things(per a quarter that is) with its measly 8 million subscribers supports the streaming side. Before you write something check your facts

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