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Netflix Creates Separate DVD Business Unit

25 Jul, 2011 By: Erik Gruenwedel

CEO Reed Hastings says disc rentals have a ‘longer and bigger’ life than most people think

Netflix has created an internal corporate division that will solely focus on operating and marketing DVD and Blu-ray Disc rentals going forward.

The division, which will employ an undisclosed number of employees and be led by Andy Rendich at a location in San Jose, Calif., was announced July 25 during a Q&A session with Netflix co-founder and CEO Reed Hastings and CFO David Wells. The unit is set to roll out a new marketing campaign in the fourth quarter in addition to updating the website going forward.

“DVD rentals will become less important to those people working on streaming and much more important to those people in the dedicated DVD group,” Hastings said, adding that the decline in packaged media sales might mirror that of music CDs starting in 2000.

“We are going maximize our efforts there,” he said, adding that the DVD team already has come up with some “pretty neat ideas” for the fourth quarter.

Indeed, beginning with the fourth quarter Netflix will separate physical rental and streaming results and related costs in its financial reporting.

The executive admitted that the churn rate among streaming subscribers is higher than for disc. Hastings said the commitment among subscribers to streaming is lower due to the fact the service can be started and stopped more easily than with disc rentals, which have to be ordered and returned by mail.

“DVD is an incredible U.S.-based plan that's very profitable,” Hastings said, adding that the $7.99 DVD-only plan targets consumers in rural areas with limited broadband access. He said physical rental could last a long time producing “lots” of profit and customer satisfaction if given a proper platform.

“We think it will be a smart investment in its growth ... or at least that it will shrink slowly as opposed to rapidly with a little bit of investment,” Hastings said. “[The] low-priced DVD plan ... was the right plan to carry forward.”

CFO Wells said that the prosperity Netflix realized focusing on streaming for the past three quarters underscores the potential it can do for packaged media rentals iof given a renewed emphasis. He said making it easier to rent discs online would be a priority going forward.

“This is a step in that direction,” Wells said.

Richard Greenfield, analyst with BTIG Research in New York, in a blog post before Netflix released its results, marveled at the challenges it took to create a disc rental membership with Netflix.

Indeed, to register for the $7.99 disc-only rental plan requires visiting a separate URL (DVD.Netflix.com), which Greenfield said isn’t listed on the Netflix home page or found when searching “DVD Netflix” on Google. Meanwhile, registering for the hybrid (and more expensive) streaming/disc rental plan is much easier.

“You simply have to ‘know’ the website,” Greenfield wrote. “While the website was mentioned in the Netflix corporate blog post on the price, we highly doubt anyone new to Netflix would know to read their corporate blog. [This is] not exactly making it ‘easy’ to find DVDs without streaming.”

Wells said the focus on the DVD business going forward would be toward operating profit and maintaining or growing that profit, if possible.

"Our goal is to keep DVD as healthy as possible for as many years as possible," Wells said in the shareholder letter.

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