4 Reasons Netflix DVD Rental Isn't Going Away

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There's a lot of streaming going on at Netflix (NFLX) these days. It's serving up roughly 4 billion hours of content a month to its video-hungry audience that now stands at 65.5 million subscribers worldwide.

The same can't be said about its original mail-order business. Sending DVD and Blu-ray discs in signature red envelope mailers peaked when Netflix was servicing roughly 20 million accounts five years ago, but it's been slipping ever since. Netflix disc plans are down now to just 5.3 million subscribers, just 8 percent of its streaming base.

This doesn't mean that Netflix will stop mailing out discs anytime soon. Let's go over a few reasons that the leading premium streaming video platform will keep mailing out DVDs and Blu-rays to its thinning audience.

1. DVDs by mail remain very profitable. Netflix may have seen demand for discs decline -- its subscriber base has fallen to 5.3 million from 6.3 million during the past year alone -- but its DVD-by-mail business was still good for a contribution profit of $77.9 million in its latest quarter. That may be a lot less than the $340 million contribution profit it generated during the same three months from its domestic streaming platform, but it's still higher than streaming on a per-subscriber basis.

It may be a shrinking base, but it's not broken. It's still making money, and there's no reason to close that down.

2. Discs are a gateway drug. A lot of people are still renting physical media. Outerwall's (OUTR) Redbox lets TV buffs rent out 146 million discs during the second quarter. As pervasive as Netflix may be, just a third of the homes in the U.S. are currently subscribers.

As for the rest of the country, some have tried it and moved on. Some just don't have the broadband capacity to stream effectively. However, for those still relying on their DVD players for entertainment, offering this platform is a good way to attract homes that will eventually migrate to the larger streaming service.

3. There are still plenty of voids in streaming. As massive as Netflix's digital catalog gets -- and it grows along with its subscriber base -- it will never have every single DVD release on its streaming service. Studios want too much for newer releases, and rival services have exclusive streaming rights on other magnetic content.

That's where DVDs come in. Until Netflix decides to follow the lead of smaller rivals by offering newer releases on a pay-per-stream basis -- and the company appears to have no interest in doing exactly that -- there will continue to be holes in its programming. Netflix can always point to its DVD library for content it doesn't have available to stream.

4. Netflix has made big investments in its fulfillment centers. Netflix isn't actively promoting its DVD offering, but it did make a big investment to make its mail-order business more sustainable. Cutting down on the number of distribution centers -- to 33 from a peak of 50 -- has helped cut costs, but the real investment came in automation.

Netflix originally had people slicing open returned envelopes, checking the discs, and repackaging them for their next journey. Now a machine is able to process five times the volume. This is an investment in innovation and technology that will continue to keep the business profitable even as more customers let it go.

Motley Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. Check out The Motley Fool's one great stock to buy for 2015 and beyond.
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