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

Let’s go postal
Doing business by mail has never been ideal. DVDs get lost or damaged in transit. It takes subscribers at least two days to get a new rental after mailing one out. There are also some current developments that will make the process slower and more expensive — namely, the move to eliminate Saturday deliveries and a recent move to increase first-class postage rates.

Shouldn’t Netflix just shut down its disc-rental business? Maybe the move to spin that off as a standalone Qwikster service wasn’t so crazy after all.

No! There are still plenty of good reasons for Netflix to keep its original DVD service going. If anything, Netflix should be more active in promoting the service.

For starters, nearly 7 million of Netflix’s 8.2 million DVD accounts also subscribe to the streaming service. Put another way, a quarter of Netflix’s growing domestic streaming business relies on Netflix for DVDs. Even if streaming is the future, Netflix doesn’t want to upset those 7 million double-dippers who are Netflix’s largest customers.

Streaming will also always be limited in selection. Even as Netflix, Inc. (NASDAQ:NFLX) spends 10 figures a year on digital content, there is a lot of content it will never get. Redbox just entered the digital market, and it makes fresh content available through its kiosks. Four nightly DVD credits are included in its monthly rate. Netflix’s fiercest rival in streaming smorgasbords is Amazon.com, Inc. (NASDAQ:AMZN) , and Amazon offers new releases as digital rentals a la carte. Netflix has stubbornly refused to go that route, so it needs to keep discs as a way for video buffs to get the hottest current content.

DVDs are also a more profitable business for Netflix, and not just because the company is losing money overseas. The contribution profit from its 8.2 million DVD accounts was greater than the profit generated by its 27.2 million domestic streaming accounts this past quarter. That trend will shift this quarter, but as a scalable model, Netflix should be promoting its DVD business to keep its highest-margin business steady.

Finally, we can’t forget the ton of data that Netflix has amassed through DVD rental patterns. Netflix gets smarter with every billion DVDs it sends out, and not just in the way it can serve up more efficient recommendations. Keeping DVDs alive helps Netflix gauge the content that its streaming customers would want to access digitally. That helps Netflix prioritize licensing negotiations.

It will take Netflix a long time to get to 5 billion DVDs mailed out, but when it does, let’s hope that this time it does shout from the rooftops.

The article 4 Reasons Netflix Shouldn’t Kill DVD Rentals originally appeared on Fool.com and is written by Rick Munarriz.

Longtime Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends and owns shares of Amazon.com and Netflix.

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