I did something this summer I thought I would never do: I canceled my Netflix (NFLX +1.70%) DVD service. I had been a subscriber to the optical discs by mail platform since 2002, and it inspired me to be a shareholder over the past 18 years. I'll never forget how important Netflix has been to my portfolio in that time, but I just wasn't using the physical service anymore.
I realized that I had been holding on to my Netflix copy of Jackie for more than a month. I just didn't have the desire to fire up the DVD player that I rarely use now. I had forgotten why I even had the urge to see a Jackie O. biopic, and the only reason it had bubbled up to the top of my queue was because I had run out of stuff to put in there in recent years. Those red mailers used to matter to me. They used to matter to Netflix. Times have changed, and maybe it's time for Netflix to move on as well.
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Mailing it in
The U.S. Postal System is in the media spotlight these days, and that's not a good thing. Postal delays and equipment removals have politicized the USPS, and Netflix is apparently caught in the crossfire. A Marketwatch story earlier this week -- citing an unnamed person with knowledge of the inner workings at Netflix -- reported that original DVDs-by-mail rental business is experiencing isolated delivery delays given the recent upheaval at the USPS.
This would've been a big story for Netflix back in 2010 when its disc-based subscribers topped 20 million members and the company itself was substantially less valuable. It's just not a big deal anymore.
You probably aren't one of the roughly 2 million -- and shrinking -- subscribers to the legacy DVDs-by-mail business. Netflix is a business relying on its nearly 193 million paid streaming memberships worldwide to deliver market-thumping returns to investors. It's probably just a matter of time before it shreds its stash of red mailers, closes its distribution centers, and liquidates its thinning optical disc inventory.
The word DVD doesn't appear at all in last month's quarterly letter to shareholders. DVDs were mentioned -- once -- in Netflix's July earnings call, and even then it was a single passing reference by content chief and now co-CEO Ted Sarandos waxing nostalgic about the challenges that Netflix has faced in the past. You have to dive into its 10-Q filing with the SEC to learn that its legacy DVD segment generated just $61.6 million in revenue for the period, or 1% of its $6.1 billion in top-line results. DVD revenue has fallen 19% over the past year, and it will continue to fade the way it has every quarter since peaking a decade ago.
"We expect DVD subscribers to decline steadily, every quarter, forever," Co-CEO Reed Hastings said back in a 2012 earnings call, and that's exactly what we've seen happen.
Back to this week's USPS article: We may as well point out that as unfortunate as delays at the post office may be, it actually benefits Netflix on the bottom line. Slower turnarounds mean it has to ship out fewer discs, a big deal since Netflix covers the postage both ways. Consumers can't complain to Netflix because it's not its doing. However, now that it's a microscopic part of its business -- shrinking from 1.5% of its revenue last year to just 1% now -- is it really worth the bother?
I was never as profitable to Netflix as I was in my final month as a DVD subscriber. It didn't have to ship me a disc. It only had to foot the bill when I returned my final DVD after canceling the service.
Two summers ago, I argued that Netflix would never kill its mail rental business. I could never fathom letting it go since there would always be movies and TV shows not available digitally and much less through Netflix's streaming platform. I was one of 3 million members at that point. Netflix continues to turn an operating profit on the segment -- for now -- but it's less necessary with so much catalog content now making its way online. Even the argument that DVDs are vital in rural communities is starting to lose some steam as broadband connectivity improves from coast to coast.
DVDs and Blu-rays were cool, and Netflix wouldn't be where it is today without the business that put it on the map. However, DVDs are now a fading hobby at best and a distraction at worst for Netflix. This is a one of the market's best growth stocks since it disrupted its business model to take the lead in streaming video. It's time to go all in, and it may as well join its peers in offering premium rentals for the stuff it can't wedge into its digital buffet. Netflix will need to let go of the past so it can truly cash in on the future.
