The third quarter technology earnings season begins with a bang, thanks to Netflix (NASDAQ: NFLX) with better-than-expected financial results after the close on Tuesday. Revenues, profits and subscriber numbers far outstripped Wall Street and Netflix's public outlook, causing stocks to beat higher on Wednesday's otherwise gloomy trading day.
Netflix is now the undisputed champion in premium streaming video. but it was not always like that. Just a decade ago, this was a company that relied on the physical rental of DVDs by mail. This backseat business is still alive at Netflix, and as the number of accounts continues to shrink ̵
Netflix is clearly a digital video conjugator today, and that's why the stock has been the top performer on the S & P 500 since 2013. We can however, ignore no more than 2.8 million people who receive DVDs and Blu-ray discs in the post. The original model lives on, though the business has declined to a point where it now accounts for just over 2% of its total revenue and customer base.
CEO Reed Hastings saw this, shortly after the number of customers in his DVD-per-email plan in 2010 had been just under 20 million.
"We expect DVD subscribers to decline steadily, quarterly, and forever," he said in a winning call in early 2012, in response to a question as to whether the DVD presentation would return this year.
Hastings was right. DVD awards have come back this year or not a year ago. There has never been a sequential uptrend. This is a dying business in most cases, but it's also an important part of Netflix's evolving history.
Netflix is unlikely to get rid of its DVD service soon. There are still houses that do not have enough connectivity to effectively stream digital content, and the platform also has a lot of movies and shows that will never be available to the other 98% who use the growing digital catalog of the service.
There is no reason to shoot down a service that is ridiculously profitable. Despite the fact that this is a retroactive collapse, Netflix's mail-order business accounted for 4.5% of the total. The streaming business may scale these days, but its contribution margin of 39% in the US and 17% internationally will probably never reach the 58% it achieves with its physical rents.
At first glance, Netflix's mail order business seems to be a bad tattoo, but there is art in this permanent ink. Netflix would have shipped its disc rental customers from its eponymous domain to its DVD.com hub years ago, but this is a platform that could be useful in the future if it ever cracked a large enough foreign market where the streaming infrastructure is located I am firmly in place. It's also a great place to point to its growing subscribers in the US if they want access to a hot TV show or an Oscar-winning movie that's not available on Netflix.com. The tune could change the moment that the disc rental base drops below profitability, but for now, the two-percents at Netflix will continue to matter.