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Netflix By-Mail Disc Rental: 'A Completely Different Company'

27 Jul, 2015 By: Erik Gruenwedel

Lost in the euphoria surrounding Netflix’s burgeoning subscription streaming business is a legacy by-mail disc rental service that quietly generates about 50% of the company’s profit.

Netflix ended the most recent fiscal period with 5.3 million subscribers — down about 30% from a base of 7.5 million subs in 2013. The company once operated 50 disc distribution centers nationwide — a tally now around 33. The typical center employs about 75% fewer staff due to a mixture of declining disc demand and improved efficiencies on disc turnaround between renters.

Interestingly, a center now reportedly processes 3,400 discs per hour through automation — a process carried out previously by hand.

“If you cut back on [quality of] service, you are going to lose your subscriber base,” Hank Breeggemann, GM of Netflix’s disc business, told The New York Times. “Expect us to continue to ship DVDs for the foreseeable future. It’s a completely different company.”

While founders Reed Hastings and Marc Randolph launched Netflix in 1997 after successfully mailing a music CD in a reinforced envelope, Hastings' plan was always to use the fledgling Internet as a primary means of distribution, hence the Netflix name.

Indeed, at Hastings’ urging, the company stopped calling out disc rental milestones during financial calls. The CEO’s apparent indifference towards disc rentals reached its zenith in late summer of 2011 when a price hike to a popular hybrid streaming-disc rental plan and subsequent attempt to spin off the disc business backfired. Netflix shares plummeted 75%.

Months later Hastings admitted the price hike and scuttled spin-off resulted from an internal obsession with streaming and belief that the company didn’t want to “live and die with DVD.” He said that as management immersed itself with streaming, it all but ignored disc rentals — agreeing to let DVD become a “comfortable drift.”

Yet, just a few months later Netflix said it had no plans to ratchet up marketing of DVD and Blu-ray Disc rentals.

During a Jan. 25, 2012, earnings call, Hastings and CFO David Wells reiterated Netflix’s pervasive strategy of maintaining 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.

Fast-forward to the present and Netflix is firmly entrenched as an over-the-top video global phenomenon — much of it paid for by disc. And it hasn’t forgotten. When Amazon last year revealed plans to deliver products to consumers sometime in the future via drone technology, Netflix launched a YouTube video poking fun at the idea.

"Now we're getting back to our creative roots with our groundbreaking, same-day home-delivery subscription service, Drone2Home,” Breeggemann said in the video.

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