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How Much of Neflix’s Green Is Blu?

2 Feb, 2010 By: Stephanie Prange

While most of the headlines about Netflix’s boffo fourth quarter emphasized the growth of streaming, a little-reported footnote is that the company held the line on revenue-per-subscriber via Blu-ray premiums.

The chain’s Blu-ray subscribers increased to 1.23 million in 2009 (There are 12.3 million overall), each of which paid a surcharge of $1 to $3 per month based on the number of Blu-ray Disc titles rented. The surcharge helped increase gross-profit-per-average-paying-customer to almost $5, the highest in two years, CEO Reed Hastings said.

Now, on the streaming front, quantifying profit is a little more elusive. There’s a feeling that Netflix customers like streaming. Hastings says it’s a draw that has helped the company add millions of subscribers (many at the low $9 a month price). He said he expects two-thirds of subscribers will be streaming at least 15 minutes per month in the next 18 months. But he can’t quantify the value of streaming.

“We don’t have a good control set of subscribers that don’t get streaming,” he said.

What does that even mean? What’s with the “at least 15 minutes” measure? That’s not even enough to watch a single TV episode. And speaking of TV episodes, I’d like to know how much of the streaming is TV episodes rather than movies. If Netflix is merely competing with linear episodic television, it’s like shooting fish in a barrel and really has no bearing on the movie or packaged media business.

Is most of the profit Netflix realizes because it offers packaged media rentals, too, especially Blu-ray? Or is streaming as important as the analysts make it seem? Is Blu-ray disc a kind of unheralded Cinderella that is doing all the work with no credit?

In Netflix’s next report, I’d really like to see how Blu-ray measures up against streaming — and whether subscribers would pay for streaming only. Then we’d know which is the real princess of profit and which is just the ugly stepsister wearing a shoe that doesn’t fit.

When Netflix offers a streaming-only option, we’ll know it’s true value — and whether Netflix can profit without packaged media. Without the crutch of packaged media, it’s hard to say whether Netflix’s streaming service can stand on its own.

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