Tech by VICE

Netflix Isn't Giving Up on DVDs Any Time Soon

Does anyone actually still remember that Netflix started out as a DVD-by-mail service?

by Jacqueline Ronson
May 20 2015, 9:00am

Hand-sorting DVDs in 2003. Image: AP

Does anyone actually still remember that Netflix started out as a DVD-by-mail service? Way, way back in 1997, Netflix figured out how to use the internet to send people physical copies of movies, with a mission to take on the neighborhood movie store. (Blockbuster passed up an opportunity to buy the company for $50 million in 2000, and closed its last storefronts in 2013.) For most of us, that mail service was a relatively short-lived bridge to the future of on-demand streaming. But some folks never got the message.

As it turns out, Netflix still sends DVDs in the mail to 5.5 million Americans, and it's making money doing it. Netflix made $85 million in profit on its DVD and Blu-ray service in the first quarter of 2015 alone, according to the most recent financial filings.

Netflix spent $22.9 million in the same period beefing up its physical content library, which boasts more than 93,000 movies and TV shows today. The rental service runs out of a giant warehouse in Fremont, California, where a computerized system keeps track of the discs and workers make sure they are cleaned and ready for shipping. All told, the company has copies of "nearly every movie ever made," according to its 2013 Q4 financial report.

The DVD rental business may still be making Netflix a buck, but the company realizes it can't hold on forever. The service accounted for just 11 per cent of the company's revenue this past quarter. "We've always said that the DVD business is a declining business," Cliff Edwards, the company's director of corporate communications, told Motherboard. "That team works hard to make sure that it's not a precipitous decline. Lots of people still obviously want to watch DVDs over streaming."

Netflix's first quarter 2015 earning report was still bullish on DVDs. Delightful! Image: Netflix

"There's no plan at all to shut this service down," Edwards said. "Like I was saying, it's really been a gradual decline. We see the service running for another 10 years or more."

Still, DVDs are a small fraction of Netflix's overall business. As of the end of March, Netflix had 40 million paying US streaming customers, plus 19 million internationally. The DVD service lost about 1.2 million customers, almost 20 per cent, over the past year.

Netflix has treated the DVD business separately from the streaming business since 2011. Before that, subscribers could access both services for a single price. The company doesn't keep track of what the demographics are for subscribers to each service, or how many people are clients of both, said Edwards.

On the whole, though, DVD subscribers have access to more new release DVDs and older movies, while online subscribers get exclusive access to Netflix originals like House of Cards and Unbreakable Kimmy Schmidt, he said. It could be "years and years and years" before Netflix pulls the plug on the DVD business entirely, said Edwards. It may depend on when and if studios decide to stop pressing DVDs and Blu-rays for new films, he said.

"Our focus is 100 per cent on growing the streaming business," Edwards said. And the strategy, which involves pumping billions of dollars into exclusive content, seems to be working. The company's stock continues to soar to new heights, maxing out just below $620 as of the time of writing, an increase of nearly 70 percent over a year ago.

There are 20-year-olds alive today who've never know a world before DVD technology. How will they consume consume video when they're 40? It's hard to say, but surely there are plenty of entrepreneurs out there vying to be the ones to figure it out.