Why Is Netflix’s DVD Subscription Business Dying And Why Isn’t It A Concern?

Netflix‘s (NASDAQ:NFLX) DVD subscription business has been on a down-slide for a while now due to a broader change in digital video industry dynamics and Netflix’s decision to separate its DVD and streaming plans. The company’s DVD subscription revenues have declined by more than 75% over the past five years with hybrid subscribers migrating to subscription-only plans. It is unlikely that these subscribers will gravitate back to the DVD side given the general shift to subscription, triggered by the availability and wide variety of content over different devices and improving broadband speeds.

We expect Netflix to continue to lose its DVD subscribers, which, in turn, will translate into a significant decline in its DVD revenues. However, this isn’t alarming for the company given that it is losing a bulk of its DVD subscribers to its own streaming services. Though average fee per subscriber is slightly lower for streaming as compared to DVD, it must be noted that the growth in streaming revenues has been, and will be, much higher than the decline in DVD revenues. Looking ahead, while we expect DVD subscribers to decline by 1.5 million over the next four years, we estimate an increment of 8 million users for the domestic streaming business, which will more than make up for the lost revenues.

While it can be argued that bundling the two services together may arrest the decline in the DVD subscriber base and keep the streaming subscription running, it is highly likely that some users may shy away from Netflix altogether as the bundled services would be costly. Overall, we expect Netflix’s DVD business to lose $208 million in revenues over the next four years, and its domestic subscription business to gain $2 billion.

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