If Netflix (NFLX) were a book, it would definitely be in the "mystery" section. Just when you think you have the company figured out, they pull a 180, and do something completely unexpected. Last Thursday, they did it again with their DVD business. Let's examine what they have done and are doing with the segment, it might change things, this time, for the good.
DVD Business History:
Netflix's DVD business was a key part of the company for several years, and has continued to be the more profitable segment of the business. But things changed in 2011, and have continued into 2012. Here's a list of what happened to this segment in the past year, prior to Thursday's announcement. Note, these aren't in perfect time order, but you get the idea of what they've done.
- Netflix changes their price structure, and separates its streaming only and DVD plans into their own price structures.
- Netflix announces they plan to spin off DVD business into its own entity, Qwikster.
- Netflix cancels Qwikster spinoff move.
- Netflix was going to set up head of DVD business, but in later quarterly report, says DVD business will "just do what it does".
- Netflix kills DVD only plan.
- Netflix says in 4th quarter conference call that they will not be marketing DVD business and expects to lose subscribers going forward for the indefinite future.
Last Thursday, Netflix posted an announcement to its company blog that their audience can now sign up for a DVD only plan. Yes, they brought back the DVD plan that was killed some time back. The plan costs $7.99 per month, is unlimited, and like every other Netflix plan, has a 1 month free trial.
So why the "sort of" in my article title? Well, Netflix didn't really market this plan, which is what they said in the quarterly report. There is no mention of this plan on the company website. If you sign up for the streaming plan, Netflix gives you the option to add the DVD plan for an additional fee, but there is no mention of the DVD only plan.
Unless you read Netflix's blog, you really wouldn't know about the DVD plan. Which begs the question, why bring back DVD's like this. For your information, if you go to the blog, they provide a link to the site where you can sign up for the DVD only plan, but I haven't found that on their main site yet.
Why Did They Do This?
If you are asking me to figure out something that Netflix did unexpectedly, good luck. Does anything that this company do make sense? Most people would say no.
So what's my best guess? Well, I have two thoughts. First, Netflix has been getting crushed in the court of public opinion, especially on this site, for killing off the DVD business, which appears to be the more profitable segment. The contribution margin of the DVD business is a lot more than the streaming segment, and it has appeared Netflix is aiming at a lower margin future.
What's the second thought? Competition. Netflix is the lead dog in this industry, but the competition is getting out there. Netflix recently launched its streaming service in the UK and Ireland, and media company BSkyB is aiming to launch a streaming service there later this year. There is already competition from Amazon's (AMZN) subsidiary Love Films, which operates a Netflix-like DVD plan in the UK. If BSkyB is successful in its launch, it will significantly impact Netflix's business model in that region.
Second is the competition in the US. Coinstar (CSTR) just announced a great quarter, thanks to their RedBox DVD unit doing extremely well. Hmm. Does anyone notice a pattern here? Netflix kills off its DVD business, then Coinstar reports RedBox is doing extremely well. On top of that, Coinstar announced right before earnings that it was partnering with Verizon (VZ) to launch a streaming service, again, later this year. While they won't have the content mountain that Netflix does, any competition is bad for Netflix.
Also, Amazon is trying to expand its reach with its Prime business. They recently announced a licensing agreement with Viacom (VIAB) that will increase the amount of content Prime can offer to its subscribers. While it appeared that Amazon's Prime unit does not have as many users as was suspected, Amazon is trying to expand this segment, and Netflix is feeling the pinch.
While we have not seen any changes in analysts' earnings expectations for Netflix, there may be some increases going forward. I believe that although the DVD only plan isn't being marketed, it will help to cushion some of the losses of DVD subscribers for Netflix.
Netflix ended the 4th quarter with 11.17 million DVD subscribers, and guided to a 1st quarter ending of 9.4 million to 10.0 million, with approximately 100,000 of those being free trial subscribers. Even though Netflix isn't marketing the DVD only plan, I think you have to take up the ending range for DVD subscribers. If Netflix can save some of its DVD customers, it will significantly improve the business model over the long term, something that many have questioned recently.
Conclusion - A Slight Positive:
I'm still a long term bear on the name, as I don't think their move to a primarily streaming business will work as well as they think it will. Netflix has a ton of contractual obligations going forward, and I'm not sure how they are going to pay for everything. Add in the increased competition, and I think Netflix is dying a slow death.
However, Thursday's announcement may have extended the life of Netflix, if even only for a little while. I stand by my statement that Netflix will disappoint at some point this year, but Thursday's announcement changed my opinion slightly. It was enough of a move to get Netflix off of my "5 Stocks That Could Collapse in 2012" article that is coming out this week. Well, it avoids being in part one anyway. It still is projected to be in the 2nd part of that series, which will come in the next few weeks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.