Despite reporting lower profits and higher expenses during its fourth-quarter 2011 earnings call, Netflix (NASDAQ:NFLX) gave investors something to smile about when it said it added subscribers during the period. The video rental service said it netted 610,000 subscribers, to end the quarter with a total of 24.4 million in the U.S. The news helped send the company’s stock 13% higher on the day.
The subscriber rebound was welcome given the backlash Netflix faced after its announcement last summer that it was ending its DVD-plus-streaming plan, priced at $10 a month, and would instead split itself in two, offering DVD rentals by mail on one plan for $8 a month and its streaming service on another for $8. About 800,000 subscribers fled by the end of September. The company eventually retreated from its plan to separate the services and, even though the price increase for the combined services is still in place, it managed to attract subscribers.
But will plans by Warner Bros., a subsidiary of Time Warner (NYSE:TWX), to delay beginning Feb. 1 the release of its movies to the DVD rental market prompt Netflix subscribers to head for the hills again?
Instead of 28 days, Netflix customers will have to wait 56 days before a new Warner Bros. movie placed in their queue for shipping will be mailed out. Warner Bros. hopes that by delaying how soon its movies can be rented, more movie enthusiasts will be tempted to buy instead, shoring up its lagging DVD business. HBO also has stopped providing DVDs of its original programming to Netflix’s rental service at a discount, although some HBO content can be purchased elsewhere.
The decision to delay the release of DVDs to the rental market could boost sales for Warner Bros., but the move isn’t without risks. You know that old saying about out of sight, out of mind? Many consumers have come to see a DVD purchase, especially at the prices charged for Blu-ray discs, as an extravagance and as a far less-convenient option than renting. Also, the delay might make Netflix and other movie rental services less likely to promote Warner Bros. movies as vigorously if they can offer new releases from Paramount Pictures or other movie studios sooner.
And don’t forget that Netflix is becoming less dependent on DVD subscribers. Netflix ended Q4 2011 with 11.2 million DVD subscribers, down 2.8 million from the third quarter, while 22 million of its 24.4 million U.S. subscribers take in the streaming video service.
That doesn’t mean Netflix isn’t in danger of slower growth and more losses, especially if other Hollywood movie companies follow Time Warner’s lead. The profits Netflix enjoys from its DVD movie rentals are higher than the profits from its streaming service. And although the DVD business is slowing down, profits from that business still can help fund Netflix’s growing streaming service, which Netflix is taking international. Netflix also will be burning through cash as it tries to develop its own content, even as Amazon enters the market with a video-streaming service that will undermine Netflix’s subscription prices.
Neither Netflix, nor investors, may view DVD rentals as the key to Netflix’s future success, but DVD rentals still are a substantial part of its business. Any unexpected changes that upset its performance during this critical period of Netflix’s growth could have a ripple effect.
As of this writing, Cynthia Wilson did not hold a position in any of the aforementioned stocks.
