Update: Netflix Winding Down DVD Business

| About: Netflix, Inc. (NFLX)

Summary

Yesterday, Netflix announced that it will be ending DVD shipments on Saturdays.

This furthers the thesis that subscriber declines are accelerating in the segment and it will have a higher reliance on the acutely competitive streaming segment.

My previous article discussed the precipitously declining DVD segment users and subsequently profits from that segment.

On Wednesday, Netflix (NASDAQ:NFLX) announced that it will be ending Saturday shipments to customers of its DVD service. The aim is to curb shipping costs and staunch declining profits from the segment. Subscribers have been fleeing the service and this change may further that trend.

Subscribers to the DVD segment declined roughly 25% from Q1 of 2012 to Q4 of 2013. This decline resulted in an 16% reduction in revenue, which decreased its profit contribution by 14%. With the international streaming market still contributing a loss each quarter, as of Q1 of 2014, its DVD segment represented 67% of overall profit. Although the domestic streaming revenue contributed more profit than the DVD segment, the overall streaming segment was much less profitable than the DVD segment.

The company is clearly seeing an exodus from the service and in an attempt to boost margins, it is capitulating. In the next quarterly filing, I am expecting to see an accelerating decline in the number of customers in the DVD segment. If the segment was stabilizing and retaining a critical mass of users, Netflix would not be taking this action. With more competitors entering the streaming market, and much lower margins than the DVD segment, Netflix faces many headwinds ahead. You can find more information on the declining DVD segment and its implications for the company overall in my previous article.

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