The Plot Thickens: Netflix Users Angered By Latest Digital Twist

Netflix drew fire this week when it announced it would stop allowing users to order DVDs via streaming devices.
Netflix drew fire this week when it announced it would stop allowing users to order DVDs via streaming devices.

Here's a plot twist that didn't go over well with the critics: Netflix (NFLX) this week said it would stop allowing subscribers to use videostreaming consoles and mobile devices to order DVDs by mail.

On its blog Monday, the largest mail-order-DVD-rental company said it would remove the "Add to DVD Queue" option from streaming devices because the function "ties up resources that are better used to improve the overall streaming functionality." "We're doing this so we can concentrate on offering you the titles that are available to watch instantly," Jamie Odell, director of product management at Netflix, wrote in the post.

The move, intended to move the company a step further into digital delivery, has incurred the wrath of many Netflix users. By Wednesday, almost 4,000 people had responded to the post: Most criticized the company for taking out the option; many threatened to take their business to competitors, such as Redbox and Blockbuster; and many also accused the company of being greedy by eliminating the option.

"You should have given your customers an option -- it is getting to the point where people are going to just drop their subscriptions," an anonymous writer wrote in one of the milder blog posts Wednesday afternoon. "Not everybody has streaming capabilities."

Did Netflix Miscalculate?

The decision appears to mark a rare misstep for the 14-year-old company. Netflix's sales and earnings have surged as home-video watchers have migrated away from in-store rentals -- and late fees -- and toward Netflix's monthly subscription packages. In October, Netflix said its third-quarter profit jumped 26% from a year earlier as revenue grew 31% to $553.2 million.

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Over the past couple of years, the move toward digital streaming also has appeared to be paying off. Netflix has more than 20,000 titles in the so-called "Watch Now" videostreaming form, and its third-quarter subscribers grew 52% -- year over year -- to 17 million.

Meanwhile, in October, Netflix said that about two-thirds of its almost 17 million subscribers were using its streaming service, up from 41% the previous year. That growth could help boost the company's profit, considering that it only costs Netflix about a nickel to stream a movie to a subscriber, far less than the cost of DVD packaging and shipping.

Netflix hopes to take advantage of the growing number of network-enabled televisions and the rise in viewers who watch movies on their laptops. The Consumer Electronics Association forecasts that some 18% of the approximately 30 million high-definition TVs shipped to U.S. dealers this year will have Web connectivity, up from just 4% in 2009.

More Viewers Stream

Digitally delivered rented movies are still the exception rather than the rule, but the number of streamed movies has been on the upswing as demand for DVDs has fallen, according to the Los Angeles-based Digital Entertainment Group (DEG). Americans spent $2.5 billion renting digitally delivered movies last year, compared to less than $1 billion in 2005. Over the same time period, rentals of packaged media, such as DVDs and Blu-ray disks, fell to about $16 billion from $19 billion, the group said this month.

Still, all the irate comments indicate that Netflix may be moving a little too fast for some customers who still want to get DVDs, or who want to watch movies not yet available for instant viewing.

"I think it's a mistake, and I think subscribers to the hybrid plan should have the option to stream or get a physical DVD, but we'll see if it hurts them," says Wedbush analyst Michael Pachter, who has a "sell" rating on the company. "They don't make many bad moves without thinking about the consequences first."

Netflix shares fell $2.81, or 1.5%, to close at $190.87 on Nasdaq trading Wednesday.