Here’s Why Netflix Released An App For Its DVD and Blu-Ray Rental Customers

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Netflix (NASDAQ:NFLX) still seems to be focused on a business which accounts for less than 5% of its valuation (according to our estimates). The company recently launched an app for its DVD rental customers who are likely to decline from around 4 million in 2017 to nearly 2.3 million by the end of our forecast period. This is a very insignificant number compared to its more than 50 million streaming subscribers in the U.S.

Netflix’s decision in 2010 to launch streaming-only services encouraged hybrid subscribers to shift to the streaming-only option, leading to a decline in the number of its DVD subscribers. The company separated streaming and DVD services plans in 2011, which led to a good number of subscribers opting for the streaming-only option. While we believe that the number of DVD subscribers will continue to decline, it appears that Netflix is now looking at ways to retain and grow this user base. The imminent launch of Ultra HD Blu Ray discs, which have a 4K streaming quality, can revive this market. Ultra HD Blu Ray is likely to offer significantly better picture and sound quality that cannot be matched by any other format, a level of quality that has not been seen before. A small cohort of consumers is likely to opt for this format due to its superior quality. However, Netflix is ensuring that it lures these viewers to its DVD rental business by offering technological conveniences. Although small, the DVD rental business is profitable for Netflix.  We expect the DVD rental contribution margin for Netflix to fall from around 52% in 2017 to nearly 45% by the end of our forecast period.

The shrinking DVD business is likely to put pressure on the margins leading to the estimated decline. However, if the company is able to revive this business after the launch of Ultra HD Blu Ray discs, there can be an improvement in margins through operating leverage. Experts suggest that to view the 4K quality on a streaming media, a 25 Mbps internet connection might be required and it will consume higher broadband data. With dozens of 4K movies already available on Netflix and more titles likely to be added in 2017, demand for these DVDs should increase. While this option will appeal to viewers who are keen on high quality irrespective of the costs, Netflix can find a niche market in this segment.

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We believe that, while the DVD rental business of Netflix is shrinking, the 4K revolution might revive it until streaming media is able to provide the same quality at lower bandwidths. Netflix’s efforts to provide conveniences for this segment will ensure that the company is able to capture a larger market share for this segment.

 

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