Netflix CEO: DVD subscribers to decline now and forever

Reed Hastings cast a bright light all over the demise of the DVD. No, it isn't news that the film discs are in decline, but it is news that Hastings chose to call attention to it in such a public way.

Jeez, Reed, don't sugarcoat it. Tell us what you really think of the DVD's future.

A file photo of Netflix CEO Reed Hastings Michelle Meyers/CNET

Netflix CEO Reed Hastings, who has sent mixed signals for the past year about whether the company was committed to DVDs for the long term and whether he believed discs still had a long life left, sounded a very loud death knell today for the format.

During the company's earnings call to discuss fourth-quarter earnings, BTIG analyst Rich Greenfield pointed out that Hastings had sounded much more optimistic last year about DVDs and was now making comments that suggested the company was putting less emphasis on them. He asked the CEO if he thought the number of DVD subscribers would be down for 2012.

"Yes, Rich," Hastings said, "We expect DVD subscribers to decline steadily every quarter, forever."

Gadzooks.

Treating the DVD like it was as obsolete as the VHS tape was how Hastings got in trouble in September. That's when he almost set his DVD business adrift in the leaky boat called Qwikster. Last year, Netflix managers announced it would spin off a standalone company dedicated to discs but hastily scrapped the plan when pundits and customers heaped criticism on them.

Turned out Netflix underestimated the number of die-hard DVD users. A contrite Hastings later said the company moved too fast. This time around, Hastings sounded plenty confident to kick dirt over the DVD and didn't care who knew it.

That might have something to do with Netflix's strong performance in the fourth quarter. Earlier in the day, Netflix reported earnings that surpassed analyst expectations and the company's stock soared. In after-hours trading, Netflix shares climbed $15 or 15 percent to $110.

We'll have to wait to see if Hastings comments further alienate DVD fans but it's safe to say his statements won't be appreciated in Hollywood.

Managers at the studios will say in private that they know the end of the DVD era is approaching but they hate to see it in print and they hate to hear someone say that the curtain is coming down sooner rather than later. They hate for consumers to be reminded that renting movies on the Web is a cheaper alternative to buying DVDs.

Most importantly, they hate for all of this to occur at a time when they don't have an alternative format in place that can generate DVD-esque money. Remember, DVDs were gold for the studios. Revenue from their home-entertainment divisions dwarfed ticket sales and now, after years of decline, they're about equal.

To make matter worse, Hastings' comments to Greenfield weren't all he had to say about DVDs. He strongly disputed recent assertions from some analysts that DVD-only subscribers were more profitable to Netflix than streaming-video customers.

"The analysis is well intentioned I'm sure but it's not looking at the marginal cost, or the marginal increment, which is the important one," Hastings said during the earnings call. "A marginal-streaming subscriber is almost pure contribution margin. There's a little bit of credit card cost, customer service and [content delivery network] fee, but it's pretty modest. A marginal-DVD subscriber has a number of variable costs, the postage and DVD fees in particular. Actually...the profitability of a streaming subscriber is almost twice what it is of a DVD subscriber. We'd like to have someone use both services because obviously that's more profit, but if they're only going to use one, we'd much prefer for them to use the streaming service."

So there you have it. If you like DVDs, Netflix is happy to rent and send them to you, but the company is betting that most consumers will prefer on-demand streaming video (Read BigChampagne CEO Eric Garland's excellent analysis of Netflix and the DVD).

Some of the other notable comments from Hastings: Netflix has been mulling whether to rent video games since it considered launching Qwikster, but he said today there's no plans to go ahead with that. Hastings said again that the company is interested only in a subscription-rental business and has no interest in offering rentals on a pay-per-view basis.

Hastings and CFO David Wells also acknowledged that Netflix's overseas markets will take longer to reach profitability than the two-year timetable they set.

 

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