Netflix: Disc Rental Has 'Long Tail'

20 Jan, 2015 By: Erik Gruenwedel

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CEO Reed Hastings says by-mail disc rental’s title diversity trumps Redbox’s new-release-driven business model

Netflix generated more than $89 million in fourth-quarter (ended Dec. 31) operating profit from disc rentals — more than 50% of the company’s total operating income.

That statistic — while seldom lauded — isn’t lost on management, especially following the ouster of Redbox corporate parent CEO Scott Di Valerio resulting from projected underperformance among rental kiosks in the fourth quarter.

When asked in Netflix’s Jan. 20 fiscal interview about the health of the DVD rental market, CFO David Wells said subscriber attrition year-over-year is manageable (about 1 million) with margins remaining steady. He said there are no illusions about the physical market not declining, but added that for subscribers in rural areas as well as cinephiles, packaged media makes sense.

“I continue to believe the DVD business is going to have a long tail,” Wells said.

CEO Reed Hastings added that Redbox’s prevalence on stocking new-release movies makes its business model vulnerable to pay-per-view substitution, including transactional VOD and electronic sellthrough.

“Whereas a broad [title] selection renter like [us], on a stable business is much less sensitive to that,” Hastings said.

Netflix ended the fourth quarter with 5.9 million disc subscribers, compared with 6.9 million subs during the previous-year period.

 

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