Netflix: DVDs sold separately

Deals You almost get the feeling that if Netflix thought someone would buy its DVD operation it would gladly sell it. Yesterday’s abrupt and dramatic pricing change was obviously designed to force Netflix subscribers to choose between streaming-only and DVD-only plans, neatly segmenting its users into two distinct groups. The company also created a separate management structure for the DVD business “solely focused on DVDs by mail,” according to a Netflix blog post announcing the moves, and headed up by an operations guy, chief services and operations office Andy Rendich, not a sales and marketing guy.

The moves are also feeding expectations (probably reasonable ones) that Netflix will begin soon breaking out its financial results into separate DVD and streaming segments. That’s getting pretty close to creating a separate P&L around what looks increasingly like a non-core asset — the easier to sell it.

As Netflix made clear in its blog post (albeit not in so many words) mailing DVDs to streaming users has become an expensive inconvenience, the costs of which are not covered by the $2 a month premium Netflix was charging them as part of its $9.99 a month, one DVD out and unlimited streaming package. “Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs,” is how marketing VP Jessie Becker actually put it.

By forcing streamers who also want DVDs to pay the full freight for DVD service Netflix is now putting the DVD business on firmer, self-sustaining financial footing, which also would tend to make it more attractive to a buyer.

The U.S. DVD operations are also likely to become ever-more the odd-man out in Netflix’s portfolio. As the company’s streaming-only international expansion goes forward the share of its global subscriber base still getting DVDs by mail can only decline, and with it the DVD operations’ contribution to cash flow.

So, would anyone ever buy Netflix’s DVD operation? Probably not. There probably isn’t enough upside left in the DVD business to justify the price Netflix would need to get for the business, given its current valuation. Moreover, the most valuable piece of Netflix’s DVD business at this point might well be its recommendation engine, which Netflix would be foolish to sell. Even if Netflix weren’t mailing out DVDs anymore, the IP and the business intelligence embodied in the recommendation engine can surely be leveraged for the streaming business. But without that piece, it would be hard to get a price for the DVD business.

Still, if I were running Coinstar, which owns Redbox, I might at least find an excuse to put in a call to Reed Hastings anyway, just to see if he drops any hints as to what he’s really thinking. Redbox might be able to improve the economics of Netflix’s DVD business somewhat by shifting some rentals to its near-ubiquitous kiosks, thus saving the costs of mailing DVDs back and forth without significantly increasing its own costs of servicing its kiosks, which it has to do anyway. It might also give Redbox enough market share to squeeze some better terms out of the studios, including perhaps reversing the 28-day window.

Charlie Ergen of Dish Network also might want to invite Hastings along to some charity golf game or something just for a little schmooze time. Dish recently bought Blockbuster for a song, but its strategy for the video rental chain is still unclear. Maybe combining Netflix’s DVD subscriber base with Blockbuster’s brick-and-mortar real estate would add up to something.

You never know.

Further reading:

Bet on Coinstar in Netflix Price Hike

7 Reasons Why Netflix’s Price Hike is a Boneheaded Move

Netflix Price Increase: 5 Reasons to Buy the Stock

Netflix to DVDs: Drop Dead

2 thoughts on “Netflix: DVDs sold separately”

  1. Paul, great insights as usual. Would be interested in your thoughts on the Blu-ray only part of the Netflix business. Thanks, Dick.

  2. Hmm, interesting question. I know at one point Netflix was charging a premium for Blu-ray but there was no mention of that in the new pricing schedule. I suppose we can assume that BD customers are the least likely to drop disc service in response to the price hike because their more clearly interested in HD quality, which is still tough to get over IP. I don’t know that it would be possible to separate the BD part of their disc operation from the regular DVD part, though, since people tend to use both, depending on BD availability.

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