The Enduring Value of Netflix by Mail

I’ve been thinking about Netflix’s Instant Watch service lately, how it’s fueled such tremendous growth for the company, and how it’s no secret that the company’s future lies in streaming on-demand content and not in its traditional business of delivering content on disc via the postal service. In fact, new customers looking to sign up today might be forgiven for thinking that Netflix is primarily a streaming service and that its mail delivery service is just an afterthought, so strong is the company’s marketing emphasis on the former.

At what point will Netflix stop delivering discs by mail and focus solely on streaming? For a lot of us who have been Netflix subscribers since the time when discs-by-mail was its only service, the assumption is that the company won’t make this definitive switch until such time as they can stream about as many titles as they can deliver by mail. I couldn’t find definitive numbers, but it seems generally accepted that the company currently streams somewhere around 20,000 titles from the 90,000 or so that it claims to carry. By any measure, its streaming catalog is currently just a fraction of its disc catalog.

Inflection Point

The likelier scenario is that the company will make the switch when its streaming business becomes as profitable as the disc business, or when its disc business becomes a drag on the company’s profits. Not being privy to Netflix’s internal calculations, I have no idea when that will be, but it’s clear that streaming a movie to its customers is far cheaper than mailing a movie. So it’s conceivable that at that future point at which it will halt its discs-by-mail service, Netflix may still have dramatically fewer streaming titles than disc titles.

If that turns out to be the case, it will be a shame. I enjoy the company’s streaming service, but as an enthusiast for films of all different stripes, I value its discs-by-mail service even more. It provides as thorough a back catalog of obscure movies as I’ve ever come across as a video consumer; you could probably combine the catalogs of every single bricks-and-mortar video retailer I ever patronized (back when that was how one rented movies) and it would still pale in comparison to the library of movies on disc that Netflix has assembled. For me, the great innovation that Netflix created was that I could find and rent just about any movie I was interested in, so long as it was available by disc. That’s tremendous.

Many Netflix customers I know have switched from its discs-by-mail service to its streaming service exclusively, and it’s clear to me that the company would like us all to do that. But I’m pretty sure I won’t be making such a switch anytime soon, because there are so many great movies currently available only on disc that I won’t want to lose access to. My current queue includes only 68 movies out of 311 (roughly one-fifth) that are available to watch instantly. Even if that number doubled, I’m not sure that would be enough to keep me subscribing. In its rush to transform itself into a provider of streaming content, I hope Netflix doesn’t overlook this essential value.

  1. Their mail service was always a mystery to me because I have been under the assumption that if they ever cut/reduced it, they would make all those movies available as streaming. So I’ve been wondering for a while why they wouldn’t just do that – streaming is so much easier (instant gratification!) but their streaming catalog is seriously lacking.
    Never considered the possibility that they wouldn’t make all those movies available…

  2. Yana: I think the issue is that the process and cost of acquiring rights to stream a movie is very different than simply acquiring a disc to mail on a rental basis. That’s why they haven’t been able to offer every movie they can mail you for streaming.

  3. > So I’ve been wondering for a while why they wouldn’t just do that

    Rights are not rights. NF doesn’t have rights to just rip any old disk into their server so they can offer it over the network.

    Aside from my own viewing habits, I remember when Netflix was always the case study in long tail articles. Like, more Bollywood movies were rented through NF than everywhere else combined (or something).

    There’s a market there, and if they go to the RedBox model of all blockbusters and new releases, I can only hope someone else will fill the niche, and then I’ll reluctantly, sadly, switch to them.

  4. @Yana: I’m sure Netflix would like to make their entire catalog available for streaming, but it’s licensing issues that are keeping that from becoming a reality.

  5. I have a lot of friends out in rural america for whom broadband is just a cruel phrase they get to hear rumors of and the fastest internet they could pay for (if they had unlimited disposable incomes, which they don’t) is latency-filled, from satellite.

    They therefore get through brutal winters with Netflix, delivered by the good ol’ Postal Service. If Netflix ever drops that valuable component of its service, these folks will clamor for a similar alternative.

  6. I don’t think the long-term returns on streaming vs. disk-by-mail are weighted so heavily as you imply. The key point is that disk-by-mail involves no licensing deals with the studios, thanks to the doctrine of first sale. So once Netflix has purchased a disk, it can send it out to as many customers as it likes, for the lifetime of the disk.

    By contrast Netflix cannot stream a single movie, to a single customer, without having an active in-effect license from the studio/copyright holder allowing them to do just that. So while the costs of streaming beat disk-by-mail at the moment, this is only for the lifetime of the current contracts and purely at the discretion of the studios.

    As soon as the studios figure out how to make money streaming directly to consumer, or get approached by other entities willing to pay top dollar for streaming (cable co’s? apple/amazon/google?), Netflix will be over a barrel.

    Hence, the days when Netflix makes money hand-over-fist via video streaming are surely numbered. In the end I expect the studios to extract sufficient “rent” from the licensing to make the returns to Netflix approximately the same as their returns from disk-by-mail.

    And so I predict the mail service will not be going away for a long, long time. Which makes me happy, as I feel roughly the same as you about the wondrous selection of movies available by that channel.


  7. I was a big time Netflix user from the early days. I also used Instant regularly. But I put all of Netflix on hold and dropped cable during a period caring for my elderly parents. I’ve stuck with it.
    Despite all its technical, licensing, bad interface, and other problems, Hulu+ now has the Criterion Collection.

  8. partialobs: Great point. I’m sure there’s an nontrivial financial case for maintaining their discs-by-mail business for the immediate future. It’s just that the company has emphasized streaming so heavily in recent months that it made me worry for their original service. I’m a worrier.

  9. I too hope that discs don’t disappear anytime soon. The breadth of catalog that you’ve already mentioned is one reason, as is the general quality of streaming. I’ve found time when movies will take quite awhile to buffer, will stop and start or change quality without warning. I blame most of that on my network provider, and some of it on my playback devices (i.e. Apple TV seems to stutter more than the XBOX which will switch quality).

    My wife and I have actually upgraded to the 2-discs at a time plan to accommodate the size of our queue.

  10. Discs have add’l content that is not available by streaming. I only take advantage of this occasionally, but the director’s/actors’ commentary is often quite interesting.

  11. I’m pretty sure that partialobs is wrong about Netflix being covered under the doctrine of first sale for their DVDs, because they’re renting the DVDs out rather than selling them, which requires a special license.

    Nevertheless, I can’t imagine Netflix dropping DVDs for quite a while. That business is still profitable in itself and, as others have mentioned, covers some use cases that streaming can’t replace (bad broadband or the tech-illiterate).

  12. Amazon has a lot of movies available for streaming that Netflix doesn’t. My movie watching has been split halfway between them and Amazon. Maybe that’s the solution? Competition? And movie studios offering streaming directly, plus sites like the Criterion Collection’s?

  13. > Maybe that’s the solution? Competition?

    No, that’s what I call fragmentation. I am supposed to have a half-dozen monthly fees, and the occasional PAYG fee for special movies? I say I’ll simply miss certain shows, and hope the inconvenience reduces viewership across the board and everyone wises up and licenses instead.

  14. Just to clarify what I mean by quality: I am talking about compression, not pixel dimensions.

    On some nights, Netflix takes up a huge amount of all net traffic (it’s 20% and going up). I’m not sure cable/DSL providers can keep up with NF’s growing demand. It sure seems to my eyes that NF is doing some additional video compression to deliver their video with as few buffering interruptions as possible, sometimes with noticeable compression artifacts. They certainly compress more than a DVD/Blu-Ray disk does, and at peak times I wouldn’t be surprised if they optimized performance by compressing their streams a little extra.

    My expectation is that (a) consumer adoption of streaming video, (b) capacity of the ISPs, and (c) NF’s license library will all grow at about the same rate. If (b) doesn’t keep up, however, I think we’re going to see further reductions in quality via increased compression. And if the movement towards net neutrality loses ground, the ISPs will almost certainly put the throttle down on Netflix, who if that 20% number is true is single-handedly costing them billions by increasing capacity demand faster than they ever imagined.

    I’m not an expert on all this, so I am of course talking out of my ass.

  15. I have NF and use its streaming content almost exclusively. From time to time I do come across titles that are not yet available (House 🙁 ), but we can’t expect instantaneous perfection. I applaude their efforts thus far and am eagerly awaiting the day that all titles can be available through their streaming service.

  16. I’ve been thinking of this as well, and I think this might be where the local video store can come back into some good use. I’m talking about the good, quirky, local store, not some Blockbuster-type. Just from my own use, I’ve started frequenting our local store (after not going to one for about five years) for those times we want to watch something right now, but it isn’t on instant watch (or pay-per-view or xbox).

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