Early Wednesday morning, Benzinga wrote about the challenges
that Netflix (NASDAQ:
) will face now that the U.S. Postal Service plans to
end its Saturday deliver service
. This decision could force Netflix -- which uses the Postal
Service to mail DVDs to subscribers -- to seek out other, more
expensive shipping services, such as FedEx (NYSE:
) or UPS (NYSE:
For better or worse, Netflix might need to endure the added
expense just to keep the firm going. While the company is likely
to experience significant gains when the streaming deals with
) and Disney (NYSE:
) go into effect, Netflix cannot afford to abandon its DVD
business right now.
DVDs Margins Trump Streaming Margins
Netflix's margins on DVDs are
than the margins for streaming video.
DVDs Are Less Expensive Than Streaming
DVDs are also less expensive than streaming. The company's
full-year cash flow statement
shows that the firm spent $2.5 billion on "additions to streaming
content library" last year. The firm spent $2.3 billion on these
additions in 2011 versus only $406 million 2010.
Comparatively, the "acquisitions of DVD content library"
accounted for only $48 million of Netflix's cash flow activities
in 2012, $85 million in 2011 and $123.9 million in 2010.
DVD Deals Are Rock-Solid
DVD content deals are all but permanent -- streaming deals are
not. Netflix can offer virtually any old film it wants through
the mail. Nothing (except a rare agreement) will prevent this
However, when Netflix streams movies, it is often for a
limited time only. This prevents consumers from simply
subscribing to Netflix instead of buying DVDs. This is what
Hollywood studios want, and it is one of many important reasons
why Netflix may never get the rights to stream every film for an
The Costs Are Too High
While co-founder and CEO Reed Hastings would
to dump DVDs for a stronger streaming platform, the company
cannot afford to do it yet. It would be much too expensive.
Netflix would need to spend billions to be able to stream just
a small portion of the movies it currently offers on DVD. The
bandwidth, storage space, licensing agreements, etc., would be
through the roof. Netflix is not prepared for that.
Cable Companies Are Too Powerful
Last but not least, it is important to remember that cable
companies and movie studios are heavily linked.
), for example, owns NBCUniversal. In the years following
Comcast's acquisition of NBC, Hulu users have noticed that old
seasons of 30 Rock, Parks & Recreation and other shows are no
longer available to stream through the service.
They are still available on Netflix, which may have had a
stronger agreement in place. Without Netflix, however, consumers
must subscribe to Xfinity Streampix to watch old seasons or
purchase the DVDs.
Comcast could choose to prevent Netflix from receiving select
or all NBC content in the future in an effort to strengthen its
own online streaming platform. Those restrictions would not apply
to DVD rentals, however.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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