The Death of DVDs Will Force Netflix Into Pay-Per-Stream

By Markets Fool.com

Screen capture of Crimson Peak DVD by author.

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I'm in the minority. I'm one of the few remaining Netflix subscribers that continue to pay to receive rental discs by mail. There are less than 5 million of us now, down from Netflix's peak of roughly 20 million back in 2010.

I have always wondered why Netflix's base of DVD and Blu-ray subscribers has diminished so quickly. This is the only way to get most of Hollywood's new releases through Netflix since most fresh flicks will not be on the streaming digital smorgasbord anytime soon.

I have also enjoyed the special features that are available on optical disc, but lately that's becoming more of a challenge. I rented Crimson Peak from Netflix last week, and it was yet another DVD made specifically for Netflix, Outerwall's Redbox, and other rental services.

It didn't pack any of the special features -- stuff including deleted scenes, bloopers, and even a feature commentary track from the director -- like traditional releases. Viewers were suggested the outright purchase of the disc to receive those features.

That's a bad move for the movie industry or anyone counting on DVDs and Blu-rays to have a future. No one that rented a DVD is going to buy it just to get the special features. That would make it more expensive than buying it the first time. By the same token, stripping features from rental discs will only push consumers to digital copies that offer the instant gratification of the same content. With no reason to buy a disc or rent one the platform's fate will be sealed.

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To DVD or not to DVD
The irony here is that Netflix is one of the few remaining proponents of the DVD. It happens to own DVD.com, the domain name that it's presently using to redirect subscribers to their DVD and Blu-ray rental queues.

DVD rentals are dying. It's been a slow death, but a fatal sentence nonetheless. It may have started when Netflix itself championed streaming video as a delivery platform, but the turning point has to be when Netflix and Outerwall's Redbox agreed to delay the availability of many studio releases by at least 28 days after hitting the retail market. Folks retrieving Netflix's signature red mailers for entertainment become second-class citizens that day, and now things have gotten even worse with these bare-boned rental discs.

Blockbuster and other human-manned rental shops have gone Obit City, but this doesn't mean that the traffic has flocked to Netflix and Outerwall. Netflix has seen its DVD-based subscriber base shrink by 16% to 4.9 million over the past year. Redbox rented 24% fewer discs during the holiday quarter than it did a year earlier.

Folks aren't buying DVDs anymore, and they're not renting their stripped-down counterparts anymore. By the time that optical discs go the way of VHS -- something that will happen sooner rather than later in connected markets given consumption trends and the industry's self-sabotaging ways -- how will Netflix subscribers get the hot movies that lit up the local multiplex a few years earlier? They will stream it, of course.

Most of the leading streaming video services outside of Netflix offer pay-per-stream options. Even Outerwall is going this route with the rumored Redbox Digital launch. Netflix is the lone holdout, and it's odd for the company that so brilliantly disrupted the way that we enjoy video is about to be on the outside looking in because it won't be able to match the competition when it comes to fresh content.

No one has the scale to invest as much as Netflix does on existing or original programming. It had $10.9 billion in streaming content obligations when the year began. However, studios won't sell most new releases to a digital smorgasbord when the flicks can be rented for roughtly $5 or a pop, and if Netflix doesn't cave in and offer pay-per-stream in addition to its current offering it will miss out on easy money. Netflix has the audience, a tally that should top 80 million streaming subscribers worldwide by the time the current quarter ends later this week. Can you imagine what will happen to Netflix's financial performance when more than 80 million people are paying Netflix for new releases in addition to their monthly subscription fees?

Netflix didn't kill the DVD by itself, but its fingerprints are all over the murder weapon. By the time that pay-per-stream replaces physical media Netflix will have to be on the right side of that evolutionary step. It has done so before, and it will do so again.

The article The Death of DVDs Will Force Netflix Into Pay-Per-Stream originally appeared on Fool.com.

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.