If you're still receiving Netflix's (NASDAQ: NFLX) signature disc-stuffed red envelopes in the mail you're a rare bird. The dot-com darling closed out the second quarter with 2.999 million domestic DVD subscribers. It doesn't offer its mail-based platform internationally.
Netflix dipping below 3 million is a significant milestone. You have to go all the way back to the first quarter of 2005 -- more than 13 years ago -- to find the last time that Netflix was servicing fewer disc-based accounts. The defections when it comes to physical media will continue, but there's no reason for Netflix to eliminate the service as long as it remains profitable and scratches an itch that its streaming service can't reach.
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Panic at the disc, oh
Netflix's audience of DVD-spinning customers peaked near 20 million in 2010. By the end of 2011, Netflix was sending out DVD and Blu-ray discs to just 11.2 million homes. CEO Reed Hastings was asked in early 2012 if disc-based subscribers would bounce back in 2012, and his response was blunt.
"We expect DVD subscribers to decline steadily, every quarter, forever," CEO Reed Hastings said in an early 2012 earnings call.
He was right. Netflix has gone on to experience a sequential dip in mail-based memberships every single quarter, but it doesn't matter. Netflix stock has been one of the market's hottest stocks since then, nabbing the crown as the S&P 500's top performer in two of the past five years.
Streaming is Netflix's future, and everybody knows that. Netflix now has more than 130 million streaming accounts on its rolls, and more than half of those are international where a DVD-based service would be a hard lift in terms of logistics.
Just 2% of its subscribers are now receiving discs, so why doesn't Netflix just kill the service? Well, for starters, it remains profitable. Netflix's disc-mailing operations came through with a contribution profit of nearly $53 million in the second quarter. The profit is shrinking with every passing quarter, but until it turns negative, the business remains incremental to Netflix's bottom line.
Even if mailing DVDs was a loss leader -- as it may become in a few years if not sooner -- it's something that Netflix may still want to keep around. There's a lot of film and television content that studios don't have available on Netflix's digital catalog. Until Netflix decides to sell or rent content that isn't part of its eye candy buffet, like its smaller rivals do, you would think Netflix would benefit from having it around in some form. There's also some fun history to the business. Netflix has been mailing out DVDs for 20 years, and over the past few months, it has been promoting the milestone.
Several years ago, Netflix thought that viewers would confuse its DVD service from its then-fledgling digital platform. Qwikster was born -- and quickly nixed -- as a way for Netflix to separate its businesses, but that's not necessary anymore. No one confuses Netflix.com with Netflix's disc service that it now runs out of DVD.com. When someone says they're going to Netflix, it always means binge-viewing the streaming hub.
Keep enjoying those red mailers if you're still receiving them. I'm one of the 3 million and shrinking, too, I'll confess. Netflix's streaming success makes mailing out DVDs possible, and that's been a model for success on Wall Street in the aftermath of the Qwikster fiasco.
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