Netflix Still Renting Discs Despite Accounting Indifference

Netflix has quietly stopped including its legacy by-mail DVD rental service on quarterly financial reports. The Los Gatos, Calif.-based company launched in 1997 as the first home video service delivering DVD movie rentals in the mail. At its height, Netflix was the largest single customer for the U.S. Postal Service — generating hundreds of millions of dollars in operating profit.

Now it’s difficult to find mention of packaged media on Netflix’s balance sheet. To be sure, the company still offers two standalone DVD plans. The standard option ($7.99 monthly) affords subscribers access to one disc at a time, while the premier plan ($11.99) enables two discs out at a time.

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Beginning in Q1 (ended March 31), Netflix excluded disc rental revenue from quarterly financial tallies, opting instead to list revenue as a sidebar item. In the company’s North American segment, the $2.83 billion in revenue excluded $62 million from the rental of DVD and Blu-ray Disc content. Through June 30, Netflix has generated $126 million in packaged-media revenue.

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The service generated disc rental revenue of $366 million and $297 million in 2018 and 2019, respectively. Netflix ended 2019 with 2.1 million disc subscribers, which was down 553,000 from more than 2.7 million disc subs at the end of 2018. The segment remains immensely profitable, despite management indifference. For the 2019 fiscal year, discs generated $174 million operating profit.

“They have $445 million in revenue that is from something other than streaming,” Michael Pachter, media analyst with Wedbush Securities in Los Angeles, wrote in an email. “Impossible to know what portion is from DVD and what is from other stuff. But they don’t report it separately.”

Netflix Dropping Disc References in Fiscal Statements

Netflix hasn’t been shy about distancing itself from its DVD by-mail rental legacy. The SVOD pioneer characterizes itself first and foremost as a digital movie/TV content producer/distributor.

In the company’s 10K filling on Jan. 29, Netflix disclosed that beginning in 2020 it would no longer reference DVD in select financial statements such as the “consolidated statements of cash flows” and “consolidated balance sheets.”

In a reclassification of financial statements, the amortization of DVD content assets is now considered “other non-cash items” within “cash flows from operating activities.” In addition, cash flows from the acquisition of DVD content assets have been downsized to “change in other assets” within “cash flows from investing activities.”

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In the “consolidated balance sheets,” DVD content assets have been relegated to “other non-current assets,” and DVD content liabilities have been reclassified from “current content liabilities” and “non-current content liabilities” to “accrued expenses and other liabilities” and “other non-current liabilities,” respectively.

Disc rental revenue in 2019 was $300 million, down from $400 million in 2018 and $500 million in 2017. More than 2 million Netflix subscribers still rent DVD/Blu-ray Disc movies.

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Finally, Netflix will no longer separate contribution profit (loss) for domestic streaming, international streaming and domestic DVD, claiming its “chief operating decision maker” (CEO Reed Hastings) no longer reviews the data independently — due in part because Netflix increasingly obtains multi-territory or global rights for streaming content. Hastings apparently now focuses on the company’s global operating margin as the primary measure of profitability and basis for allocation of resources.

 

Netflix Lost 553K Disc Subs in 2019, Turned $174M Operating Profit Anyway

Renting DVD/Blu-ray Disc movies remains big business (and profitable) for Netflix.

The SVOD Behemoth launched in the late 1990s as a pioneering by-mail DVD movie rental company, taking on former brick-and-mortar heavyweights Blockbuster, Hollywood Video and Movie Gallery with a revolutionary Internet-based service.

While the company has put all its efforts into streaming video since 2007, it continues to cater to millions of DVD/Blu-ray Disc rental subscribers. Blockbuster & Co. shuttered operations years ago.

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Netflix ended 2019 with 2.1 million disc subscribers, which was down 553,000 from more than 2.7 million disc subs at the end of 2018. The service remains immensely profitable, generating $37.3 million operating income on revenue of $68.4 million. For the fiscal year, disc rentals generated $174 million operating profit on revenue of $297.2 million.

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Despite Indifference, Netflix Reigns Supreme in By-Mail Disc Rental

Netflix has all the luck.

The erstwhile by-mail disc rental pioneer’s brand name ushered in the ability for consumers to rent DVD or Blu-ray Disc movies online and receive the disc by mail 24 hours later.

Disc rental has been an unrelenting cash cow for Netflix, generating operating income and crazy margins most companies would call out in an earnings report.

Not Netflix.

The unit reported a $44 million profit on revenue of $71.8 million in the most-recent fiscal period. That revenue represented 98.9% of all by-mail disc rental revenue in Q3 in the United States, according to DEG: The Digital Entertainment Group.

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Instead, Netflix has largely turned a cold shoulder to packaged media for about as long as it has been streaming video — 10 years. In fact, co-founder/CEO Reed Hastings in 2011 infamously tried to spin-off the disc business into the short-lived Qwikster brand — a move that sent Netflix shares freefalling 75%.

Hastings was forced to retract the decision — initially announced in a Sunday blog post from his home — as a corporate misstep.

“It is clear that for many of our members two Web sites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs,” Hastings wrote at the time.

To be sure, the number of Netflix subscribers renting movies and TV shows by mail is dwindling. Subscribers are down nearly 18% to 2.3 million from 2.8 million last year. Revenue through nine months of the fiscal year is off about 15% from the previous-year period at $136.6 million.

One day, by-mail disc rentals from Netflix will be history, quietly removed from “consolidated statements of cash flows” on the balance sheet without so much as a thought. That day might be marked by some in the media as transformational, the end of an era, or just ignored.

Indeed, when Netflix shipped out its 5 billionth disc rental in August, it tweeted the milestone — from a separate corporate account.