Netflix's Streaming-Only Plan May Kill the DVD

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Netflix's recent announcement that its business was moving from "mostly DVD to mostly streaming" could help put the DVD out to pasture for good.

Netflix built its business 11 years ago on shipping DVDs to its subscribers. Now the company is huge: Netflix ended the quarter with 16.9 million subscribers, a 52 percent year-over-year growth, and revenue of $553 million -- 31 percent higher than last year. It's trading at more than $150 a share -- its all-time high.

But now that streaming video is here and occupying loads of our online time (Americans spent an average of three hours and fifteen minutes watching Internet videos in the month of June alone), Netflix may have finally turned its back on its roots to become responsible for putting physical media six feet underground.

Netflix Means Streaming

In Netflix's third-quarter financial results, it heralded the end of DVD. "In Q4 a majority of Netflix subscribers will watch more content streamed from Netflix than delivered on DVD." The report also said that the business was moving from "mostly DVD to mostly streaming." Indeed, 66 percent of Netflix customers watched instantly more than 15 minutes of a TV episode or movie in the third quarter compared to 41 percent last year.

"In fact, by every measure, we are now primarily a streaming company that also offers DVD-by-mail," Reed Hastings, Netflix's cofounder and chief executive, said in a press release.

Subscribers aren't shy about hogging bandwidth, either. According to a report from broadband network company Sandvine, Netflix represents more than 20 percent of downstream Internet traffic during peak times in the United States. (8 to 10 p.m.).

The Library Grows ... And So Does the Competition

Over the past year Netflix Instant's library has increased substantially. In 2009, Netflix Instant had just under 10,000 available titles; now it has roughly 115,000. Netflix just paid about $115 million to acquire new content for its library.

Based on this influx of content, moving to a streaming-only subscription plan is an obvious move -- and the idea comes straight from Hastings' mouth. "We will look to start [a streaming-only subscription plan] later in this Q4. Pure streaming could become our core offering in the USA, and DVD would be offered as a supplement for an additional charge, like we offer Blu-ray today."

But now that dozens of companies are also getting into the paid video-streaming business -- from YouTube, Amazon, Hulu Plus, Apple, HBO, Redbox, and many others -- collecting decent content will be a struggle for all. Netflix has an ugly history of having a subpar Instant selection (unless you dig "movies" like ThanksKilling) and right now there's an epic battle for premium content happening. Who will produce the bankroll necessary to win out?

New International Markets

"The introduction of our streaming offering in Canada in late September has provided us with very encouraging signs regarding the potential for the Netflix service internationally," Hastings said. You may remember the Canadian launch as the episode in which Netflix paid actors to generate false enthusiasm and later had to apologize for its puppeteer behavior.

Emphasizing an overseas move is definitely in Netflix's best interests. Sandvine's study also discovered that the Asia-Pacific region median monthly data consumption is close to 12 gigabytes per household compared with 4 gigabytes in North America -- an invitation for Netflix to learn a new language if I've ever heard one. And partnering with Asian media companies can only help bolster Netflix's foreign offerings.

DVD Will Stick Around ... For Now

Prophesying the total eradication of DVDs is foolish (I'm looking at you, Microsoft). There's little chance that online video will completely replace physical media. Even though streaming video is popular, you have to remember that between 14 million and 24 million Americans don't have access to broadband, meaning these people are missing out on the revolution.

Still, when companies like Netflix -- which essentially killed the brick-and-mortar video store -- decide to shift focus to streaming video, the future doesn't look so promising for DVDs, oh-so reminiscent of those things called Laserdiscs.

In Video: The NetFlix and Roku Set-Top Box

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