Netflix, Inc. (NFLX) Shouldn’t Scale Down DVD

One of the company’s strongest rivals, Amazon.com, Inc. (NASDAQ:AMZN) competes with Netflix for not only subscription offerings, but also for selling DVDs and also for video on demand. Amazon has more than 150,000 titles to purchase or rent, a large number of which are very recent and even includes day after TV. Amazon is a major online retailer of digital media content selection with over 23 million movies, TV shows, songs, books etc. In 2012, Amazon’s media sales made up 33% of its total revenues of $61 billion. As a result, Amazon’s media sales have been surging in part due to the success of its Kindle line of devices.

Netflix, Inc. (NASDAQ:NFLX) will end up losing a large number of DVD customers to the likes of Redbox, Amazon and even, other online entertainment stores like iTunes. And these customers will be very unhappy, as they will end up paying a lot more than the $8 a month they spend for the DVD subscription.

4. Paying for International Expansion and Originals

As Netflix has been laying out the foundation for its International Operations, the company’s income statement has been feeling the heat. Losses from International have been rather heavy as Netflix racked up contribution losses of close to $500 million in the last 2 years. However, subscriber additions from International markets have been gaining momentum, and the operations are expected to lower their losses substantially in 2013.

And also, Netflix has been investing very heavily in making original shows, which have been rather pricey. All the contribution profits from the DVD operations, has acted as the cash-cow for building out original content, as well as going into overseas markets. And in order to continue doing that, Netflix needs to retains its DVD subscribers.

The Takeaway

While there is little argument that customer video consumption has shifted online from traditional outlets, Netflix, Inc. (NASDAQ:NFLX) needs to maintain its DVD business. There might be additional headwinds for the DVD business due to the Postal service. The postal service recently raised postage rates, as well as the decision to remove Saturday deliveries. However, Netflix needs to retain its dual-service customers by offering them a great DVD service, while it focuses on adding streaming subscribers across the world.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix.