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Netflix Maintains Disc Indifference

26 Jan, 2012 By: Erik Gruenwedel

Netflix has no plans to ratchet up marketing of DVD and Blu-ray Disc rentals in 2012 — despite lingering effects of last year’s poorly received rate hike of its lucrative hybrid disc and streaming plan, CEO Reed Hastings said.

During a Jan. 25 earnings call with analysts, Hastings and CFO David Wells reiterated Netflix’s pervasive strategy of maintaining “top of the queue fulfillment,” and one-day shipment turnarounds without focusing on any specific retention efforts of disc subscribers.

Wells said testing of new disc-rental plans and pricing in select markets coupled with increased marketing in 2011 produced limited feedback.

“There's not a large consumer adoption of those plans,” Wells said without elaborating.

At the same time, Netflix generated $194 million in contributory profit and $370 million in revenue from physical rentals in the fourth quarter (ended Dec. 31). The service ended the period with 8.4 million hybrid streaming and disc sub subscribers, which represented 40% of all domestic streaming subs, in addition to 2.8 million disc-only members.

It should be noted that a hybrid subscriber generates twice the revenue ($15.98) per month than a streaming-only sub at $7.99. Netflix also offers a DVD-only plan for $7.99 (one disc at a time), and charges an additional $2 monthly for Blu-ray Disc.

When asked if it was a wise strategy to push consumers toward streaming when it appeared a disc subscriber contributed $15 in profit compared to $2.50 for streaming sub, Wells said the analysis ignored the marginal costs associated with distributing the two formats. He said that when factoring in disc costs and postage, streaming actually was twice as profitable per subscriber than traditional packaged media.

“We’d like to have someone use both services because obviously that's both more revenue and more profit,” Wells said. “But if they were only going to use one, we'd much prefer them use the streaming service.”

Hastings said Netflix has no plans to reduce the number of disc distribution centers nationwide, calling the depreciated warehouse costs minimal compared with postage.

When asked whether the perceived decline in the DVD business would result in a drop of disc-only rentals versus hybrid disc-streaming subs, Hastings said the company doesn’t view the two sub groups independently.

“They’re just DVD subscription to DVD subscription,” he said. “We expect DVD subscribers to decline steadily every quarter forever.”

The CEO disputed another analyst’s contention that Netflix’s revised 56-day window for Warner Home Video titles opened the door to greater availability of Warner TV shows. Warner Bros. is one of the largest creators of primetime scripted programming.

Hastings said the new arrangement is mutually beneficial and precludes Netflix from acquiring discs at big box stores. He said Netflix is one of Warner’s largest revenue sources, which he said entitles it appropriate access to content.

“We don't do them favors, they don't do us favors, but there's trust and respect,” Hastings said. “And when there's an overlap, then we're able to do good business. Our primary goal is to keep [disc rentals] stable … keep it running very well.”

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