Netflix Says Its DVD Rentals by Mail Are Still Growing

“While it’s clear that instantly-streaming movies and TV episodes to subscribers’ laptops and TVs is energizing our growth, what is also happening is that our subscribers are renting more DVD and Blu-ray movies than ever,” Netflix CEO Reed Hastings said. “In fact, not only did our DVD shipments grow on a year-over-year basis but our year-over-year disc shipments grew more in Q1 than the prior year Q1. We believe Netflix DVD and Blu-ray rental will continue to grow for many years as video stores close, and as consumers get increasingly comfortable with e-commerce and the Netflix unlimited rental offering.”

Netflix instant streaming is popular among long-time subscribers by mail because the content offerings are different, the company said. Rentals by mail mostly are for newly released titles on DVD and Blu-ray, and the library available for streaming is mostly catalog titles and TV series, it said. Hastings ruled out a fee-based service for online-only streaming any time soon.

“Streaming-only is something that we look at from time to time,” he said. “It’s not on the short list of things. When we talk to subscribers, they're very focused on the hybrid aspect of what we do, offering both DVD and streaming. That’s because streaming-only has the older content. It doesn’t have the new releases. So, the beauty to our subscriber is being able to rent the new releases on DVD and Blu-ray and then there’s that selection of catalog on streaming. It’s our view that if we launch the streaming- only product, it would be an interesting sweetener but a relatively small percentage of the total subscriber base.”

Netflix raised Blu-ray rental prices in Q1, partly because of higher demand, but also to pass along the higher prices that studios charge the company for Blu-ray titles than for DVD. “With the strong growth in Blu-ray we felt Q1 was the right time to put in place more realistic Blu-ray pricing,” Hastings said. “We landed on the 20 percent to 25 percent premium for high-definition Blu-ray, which is in line with the high-definition premium consumers pay in other channels but is less, unfortunately, than the price premium we currently pay to some studios for Blu-ray relative to DVD.”

If Netflix can get “our Blu-ray cost premium more in line with what consumers are willing to bear relative to DVD, then we can be much more aggressive in promoting Blu-ray adoption to our 10 million plus subscriber base,” Hastings said. “This is the critical time period for Blu-ray, and we hope to be able to make more progress this year and play an even larger role in the success of Blu-ray. We're hoping to be able to resolve those issues so that it’s not substantially less profitable for us than standard def, and then we have an incentive to promote it. So the whole industry, I think, is in the middle of working out what will be the pricing.”

The rise of kiosk $1 new release rentals “has been notable” in creating competition, Hastings said. “In exit surveys of canceling Netflix subscribers, kiosk is more and more frequently named as where they will go now for movies. And by the end of the year kiosks will likely be our Number One competitor as video stores fall inversely. There are already more kiosks in America than video stores. If kiosks companies are able to further refine their systems to be able to profitability support lower-traffic locations, then over the next three years we may see a kiosk in every 7-Eleven, every Starbucks and every airline gate.”

The “long-term effects of ubiquitous $1 new release DVD rentals are not positive for us or the industry as a whole” Hastings said. I"n particular, the economic engine of the film industry is new release DVD and Blu-ray sales,” Hastings said.

Consumers’ embrace of online video is growing rapidly, Hastings said. “Between Netflix, MLB.com, Hulu, YouTube, Amazon, Apple and others, consumers are watching more and more online video and the quality of that video is improving,” he said. “It’s not hard to believe that online video will grow substantially every year for a very long time in the same way that cellphone minutes and browser usage have grown steadily over long periods of time. Laptops are getting cheaper and faster and smaller. Streaming to TV screens is also growing, as we and others are getting simple software clients built into a wide range of consumer electronic devices.”

Adoption of Netflix’s streaming service is growing among CE makers, Hastings said. “There’s a tremendous amount of partnerships in the pipeline. We're working with everyone you would be expecting us to work with, and we're very happy with the way that’s coming together,” he said, declining to name forthcoming licensees. The Netflix service already is available through several stand-alone set-tops and videogame consoles, like the Xbox 360.

In 2009’s Q1 ended March 31, Netflix’s income rose 68 percent to $22.4 million. Revenue rose 21 percent to $394.1 million. Netflix ended 2009 Q1 with 10.3 million subscribers, up 25 percent from the 2008 quarter, up 10 percent from year-end fiscal 2008. Churn was negligible, as in several past quarters. About 98 percent of subs are paid, the rest being on introductory programs and about the same as past years, Netflix said.