AOL and its unprofitable media ventures famously persisted because of revenues from AOL’s ostensibly obsolete dial-up service. Turns out Netflix is in a similar situation, in that its popular streaming service has yet to break even while its original business of sending out DVDs is bringing in hundreds of millions in profit. Via the New York Times’s Emily Steel:
Netflix now counts more than 65 million streaming members in more than 50 countries and plans to expand across the world in the next 18 months. But that breakneck growth comes at a cost: The company expects its streaming business to just break even globally through 2016 as it pours billions of dollars into content and an aggressive expansion.
Helping fuel that expansion is the company’s dwindling, often ignored DVD-by-mail operation, known for envelopes that wind up under sofa cushions and viewed by many as an anachronism in an era of lightning-fast streaming.
Netflix has 5.3 million DVD subscribers, a significant falloff from its peak of about 20 million in 2010; still, the division continues to churn out hundreds of millions of dollars in profit each year. And behind the scenes, engineers are trying to improve customer service and streamline the labor-intensive process of returning, sorting and shipping millions of DVDs each week.
The difference is that Netflix – unlike AOL, whose dial-up subscriber base dropped from 5.8 million to 2.6 from 2009 to 2013 – does not expect its DVD business to end:
Netflix has not put a life expectancy on its DVD division. Even as its subscriber count shrinks, the group has kept a core base of customers, particularly in rural zones with lackluster Internet service and among people who want access to the breadth of its selection, and executives expect it to stay around.
The other significant difference is that Netflix, according to the NYT, is devoting real resources and engineering to its legacy cash cow. The subscriber base may be dwindling, but advances in efficiency can make up for it:
To hold on to those customers — and the profits they bring — Netflix continues to deploy state-of-the-art technologies that help trim costs as well as improve customer service…
Here at the Fremont hub, Netflix used to employ about 100 people to handle the returning, sorting and shipping of the DVDs. Today, about 25 employees work through the night, largely assisting the machines. Their shifts start at about 2 a.m. By 8 a.m., the discs are out the door and the steady buzz of the machines starts to fade.