Net Profits

23 11 2010

Only 13 years have passed since the introduction of the DVD in the US, and already industry wags are preparing for its death. And to slightly paraphrase (and twist) a quote for which Mark Twain is often credited, its impending death is not at all exaggerated.

Case in point: Netflix announced new pricing plans yesterday for its streaming and rental services. For the first time, Netflix is offering a streaming-only price ($8/month), while rental service levels will all increase between $1 and $3 per month. The cost increase reflects Netflix’ need to recoup more postage costs, while the lower streaming price indicates their desire for all of us to simply do away with rentals entirely.

Netflix expects its DVD rental business to peak in 2012, and start a precipitous decline. Some analysts predict DVDs to linger another 20 years, but admit the final years will be very lean (much like the few VHS tapes still being sold and used). What we are enduring now is yet another format transition, as we leave once and for all our tangible products behind, and adopt the digital format.

The profit potential for Netflix is huge, even with a lower price for streaming-only customers. There’s not a whole lot of overhead with that business model. It is really no different from music listening services like Rhapsody. Royalties apply, and whatever the cost of managing the servers and bandwidth. That’s it.

In the mean time, I’m wondering what is going to become of all the DVDs (and CDs) that people like me still own. We may have “gone digital,” but we have left a lot of tangible evidence behind. Those discs were made to last a long time. While my household has gone beyond its peak consumption of DVDs and CDs, Netflix only has 16 million customers. That may sound like a lot, but there are about 110 million USAmerican households. This means that only about 15% are actually, and not all of these are purely digital.

Still, it’s not too early to start digging the grave. Just don’t toss my DVDs in yet. I haven’t had a chance to watch them all.

Dr “I Could Use A Long Weekend” Gerlich



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