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Erik's Spin


Who Loves Ya, Disc? Not Netflix

21 Oct, 2013 By: Erik Gruenwedel

Netflix’s indifference towards its pioneering by-mail disc rental business turned another page Oct. 21 when it relegated mention of packaged media to just two sentences (67 words) in the third-quarter investor newsletter.

In the brief paragraph, CEO Reed Hastings and CFO David Wells spent half of it cautioning that the pending first class rate hike by the U.S. Postal Service would add upwards of $4 million in quarterly expenses, beginning in 2014.

Netflix has more than 7 million subscribers who rent discs (and also stream content), contributing an impressive $107 million in operating income on revenue of about $227 million to Netflix’s bottom line. Nonetheless, the segment was eliminated for the first time from the service’s summary fiscal results outlining domestic and international streaming. Disc rental was included in the overall totals with no breakdown of revenue or operating income.

Notably, disc rental's operating margin of more than 47% doubles domestic streaming's 23.7%.

Meanwhile, Netflix’s international segment, which continues to be heralded by management (as well as Hollywood) as the growth opportunity of today and tomorrow, again lost $74 million.

When questioned in the video webcast, Hastings reiterated his typical detached support for by-mail rental, which he said was operating largely as a stand alone business requiring little marketing.

“[The disc rental segment] is doing great work,” Hastings said, adding Netflix was “very excited” about the unit’s breadth of content selection, including availability of Showtime and HBO shows — content, it should be pointed out, is not available anytime soon on streaming.

Then, reality reared its ugly head. In reference to a question about British competitor LoveFilm Instant, the CEO revealed his true POV toward disc. Specifically, Hastings said Netflix clearly had the upper hand on LoveFilm Instant (and Redbox Instant) precisely due to its streaming-centric business model. Public perception of Redbox Instant and LoveFilm Instant, on the other hand, is confusing and bad for business, according to Hastings.

The culprit: discs. He said Netflix purposely does not market its disc rental business so as to minimize confusion among an increasingly streaming-educated consumer.

“The [streaming/disc] brand, fundamentally, is not correct because they can't deliver on that promise, as exciting as it sounds to consumers. So that's a big tension,” Hastings said.

In other words, Netflix’s lucrative disc and hybrid streaming cash cow — which is twice as profitable as domestic streaming — is actually a flaw in the digital world, according to the CEO. That it continues to drive earnings apparently is just an aberration.


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