Is Netflix Done With DVDs?


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Netflix doesn't seem to care about its aging DVD business anymore. Is it time to sell the DVD division to Redbox parent Outerwall?

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Is Netflix Done With DVDs?

  1. 1. Is Netflix Done With DVDs?
  2. 2. What’s going on? Netflix is not putting its back into the DVD service anymore. • No more Saturday DVD mailings. • Plunging marketing efforts for DVD products. • And of course, the division is shrinking – fast.
  3. 3. No more Saturday mailings. Netflix’s DVD users have worried for years about the USPS ending Saturday delivery, forcing Netflix to follow suit. Well, the company has been scaling back weekend mailings for months. The last Saturday mailer shipped in early June. …and nobody noticed for several weeks.
  4. 4. What’s in it for Netflix? Netflix was on track to pay $140 million in DVD postage this year, according to Janney Montgomery analyst Tony Wible. Removing Saturdays from the shipping schedule will slow down the flow of disc mailings to and fro. Wible expects about 10% lower shipping costs. Erasing 17% of Netflix’s shipping days leads to 10% lower costs? Sure – Saturdays were always kind of slow anyway.
  5. 5. How much is that, really? To put these savings in perspective, Netflix reported $163 million of net profits over the last 4 quarters. Cutting DVD costs by $14 million should boost annual earnings by about 8.6%. In other words, that’s $0.23 per share.
  6. 6. If it isn’t streaming, it doesn’t matter. Source: Netflix.
  7. 7. The incredible disappearing ad budget. Honestly, Netflix hasn’t cared to promote its DVD services since mailers and digital streams were first separated in 2011. I mean, not at all.
  8. 8. See the DVD marketing effort here? Data from Netflix earnings reports.
  9. 9. I’m sorry, let me zoom in… Data from Netflix earnings reports.
  10. 10. Yeah. Zero. Marketing costs for domestic streaming have grown 14% in two years, stopping at $80 million last quarter. International marketing budgets increased 9% to $57 million over the same period. Meanwhile, DVD marketing dropped from $140,000 to zero dollars.
  11. 11. This is the new Netflix. Source: Netflix.
  12. 12. That was then… Two years ago, DVD and Blu-ray mailers had 10 million active subscribers. That was 17% of the total subscriber count. It was Netflix’s most profitable division, delivering twice the operating profits of domestic streaming.
  13. 13. …and this is now. With minimal marketing support, DVD services have faded. Today, 6.5 million DVD subscribers make up just 11% of Netflix’s customer base. The tables turned in the spring of 2013, when domestic streaming passed the DVD segment in operating profits. Now, U.S. streaming delivers twice the DVD division’s profits.
  14. 14. So what’s next? DVD profits fell 34% in two years. Domestic streaming profits nearly tripled. With absolutely no marketing budget, DVD profits are unlikely to bounce back.
  15. 15. Time to take action! It might be time to kick DVD mailers to the curb. Profits are still there, but fading fast. The medium is growing obsolete anyway.
  16. 16. For example: Simply killing the DVD business would be a terrible idea. Current customers would loathe it. Far better, then, to unlock some value and sell DVD operations to the highest bidder. I can think of exactly one company that still cares enough about DVDs to find this deal interesting: Redbox parent Outerwall. Adding the only DVD mailer service that matters could help Redbox get by for a couple of years. Done right, DVD subscribers might not even notice the handover.
  17. 17. Cable is going away. How can you profit?