Netflix shifting focus away from DVDs to streaming

Netflix's CEO likens DVD by-mail rentals now to what AOL dial-up Internet was in the early 2000s.
Written by Rachel King, Contributor

It's no secret to anyone familiar with what Netflix has endured in the last few months that the online rental business is on the defense.

Netflix's current damage control strategy is all about focusing on digital streaming subscriptions and backing off from pushing by-mail DVD rentals. We're still a long ways off from Netflix giving up on DVDs entirely, but it might not be that long until DVDs fall into the shadows -- at least from a marketing perspective.

See also: Netflix's debacle continues: Fourth quarter outlook horrid

"The future is brightest by focusing on streaming," asserted CEO Reed Hastings during a Q&A conference call with investors on Monday. When asked about discounting hybrid DVD-streaming subscriptions, Hastings acknowledged that Netflix could do that, but there isn't as much interest in subsidizing DVDs in comparison to discounting streaming.

Hastings went so far as to compare DVD by-mail rentals now to what AOL dial-up Internet subscriptions became in the late 2000s: a long-term residual market with variable costs that is steadily declining every year.

CFO David Wells added that the long-term margin for streaming will be driven by how many competitors Netflix has, but he anticipates that the growth of streaming subscribers to outpace content addition over the next year.

"Netflix is not the only service that our subscribers use to source their entertainment," Wells acknowledged, confirming that many subscribers that also use other rental services such as Redbox to supplement content.

Hastings also responded about the competition, posting that the digital streaming industry will clamor around promoting exclusive deals more and more

"Relative to paid television, it’s not a zero-sum game," Hastings said. "Many people, including me, subscribe to HBO because it’s got incredible content, in addition to Netflix."

However, Netflix executives replied that they had not seen any impact from new products from competitors -- specifically Dish's Blockbuster Movie Pass or Amazon Instant Video.

Reflecting the loss of 800,000 customers during the third quarter that stemmed from price hikes and the Qwikster debacle, Hastings admitted that when budgets are tight, consumers figure out a hierarchy of the ones they want to keep most.

The goal for Netflix, Hastings posited, is to win those customers, touting Netflix's "pure on-demand experience" with personalized features that make it easier to discover content one might not have known exists.

"The focus for us is building back our reputation and brand strength," Hastings concluded. "But that’s not through grand gestures."


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