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4 Reasons Netflix, Inc. (NFLX) Shouldn’t Kill DVD Rentals

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Netflix, Inc. (NASDAQ:NFLX) is quietly tiptoeing past an important milestone. The leading video service has sent out 4 billion DVDs since rolling out its original mail-based rental platform in 1999.

That’s a lot of optical discs, but Netflix, Inc. (NASDAQ:NFLX) isn’t shouting the milestone from the rooftops. There was no press release. There was no blog post. There was no questionable Facebook Inc (NASDAQ:FB) posting by CEO Reed Hastings.

Earlier this month, Netflix, Inc. (NASDAQ:NFLX) merely alerted what are now just 8.2 million disc-based subscribers of the milestone by slapping the achievement on its DVD mailers.

Netflix, Inc. (NASDAQ:NFLX)The small print reads: “We ship emotions … 4 BILLION DVDS and counting. Thanks for helping us reach this milestone. Your love of TV shows & movies made it possible!”

To DVD or not to DVD
Netflix, Inc. (NASDAQ:NFLX) is mailing out fewer DVDs with every passing quarter, so the path from here to 5 billion will be longer than the one it took from 3 billion to get here. Since peaking two years ago, Netflix’s pool of DVD renters has been shrinking sequentially at an alarming pace.

Quarter DVD Subs
Q3 2011 13.93 million
Q4 2011 11.17 million
Q1 2012 10.09 million
Q2 2012 9.24 million
Q3 2012 8.61 million
Q4 2012 8.22 million

Source: Netflix.

It’s not just Netflix, Inc. (NASDAQ:NFLX) that’s seeing waning interest in DVDs and Blu-ray discs. Studios have been suffering declining retail sales. DISH Network Corp. (NASDAQ:DISH) is closing far more Blockbuster video rental stores than it thought it would be shuttering since acquiring the chain out of bankruptcy two years ago, and it recently pulled out of the kiosk business when Coinstar, Inc. (NASDAQ:CSTR)‘s Redbox took over the Blockbuster Express.

Redbox is the only name growing in DVD rentals, but that growth is padded by a late 2011 rate increase and the 2012 takeover of the Blockbuster Express machines. Analysts see revenue growth at Coinstar slowing to just 4% next year, when results will be more organic.

All of these moves seem to validate Netflix’s shift away from optical discs. The bulk of its marketing is steering video buffs to its streaming smorgasbord, where Netflix, Inc. (NASDAQ:NFLX) doesn’t have to worry about making subscribers wait for content or foot the bill for round-trip mail shipments.

The move has paid off. Over the past year, Netflix has seen its global streaming accounts climb from 23.5 million to 33.3 million as its disc-based subscribers have contracted by 3 million.

However, that doesn’t mean Netflix should turn its back on the service that put the company on the map. Even in its shrinking state, DVDs remain a competitive strength at Netflix.

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