Netflix: DVDs Could Face a Quick Death


Netflix (NFLX) has released a controversial presentation that charts the quick death of the physical DVD rental industry. If the presentation bears out, then the next few years could be the most tumultuous on record for the content distribution and entertainment businesses.

The gloomy forecast comes from a company that, under the leadership of CEO Reid Hastings, is known for being open, transparent and somewhat radical in its views and management style. Witness the company's vacation policy: "Take as much time as you want." Netflix has also been on the cutting edge of technology, sponsoring contests for brainiac teams to improve its video-matching algorithm with a whopping payoff of $1 million.

Gone by 2030

But the company's outlook for the DVD industry casts a wider net. According to this presentation, Netflix forecasts that the physical DVD business (sales, rentals via mail, store and kiosk) will peak in the next three years and begin a steep decline. The entire segment will disappear completely by 2030. At the same time, video-streaming use and revenues will soar as multiple on-demand and online content delivery platforms flourish.

In Hastings' world, Apple (AAPL) iTunes, big cable companies and Netflix will all co-exist rather peacefully. This could entirely come to pass due to the relative affordability of Netflix monthly subscriptions and the pay-per-use model of Apple and other similar offerings. Meanwhile, spending on cable content by customers continues to rise.

The scenario, however, could prove far less rosy for a host of other entities that derive big bucks from DVD sales. Clearly, DVD rental giant Blockbuster (BBI) saw this handwriting on the wall as it has essentially gone all-in on building out a streaming network. However, big-box stores such as WalMart (WWT) and Costco (COST) also rely on video sales as a small but not insignificant portion of their revenue.

Does GameStop Face a Dire End?

The cluster of fast-growing $1-per-night supermarket and drugstore-based video rental kiosk companies, such as Red Box, if viewed through this prism, look like shooting stars catching the tail end of a bright ride. Taken to a further extreme, Netflix's prediction would also seem to point to a dire end for GameStop (GME), the video-game sales and rental giant that still makes big bucks selling DVDs loaded with new and used video games.

Curiously, Netflix sees most of the costs that went to printing DVDs, shipping, and infrastructure going into the pockets of the content creators and entertainment firms. So maybe the future, in fact, is quite glossy for Hollywood and other visual content providers if they can only wait until the world flips to streams and tosses its plastic platters.