Despite digital content push, Netflix says its DVD business will continue ‘for a very long time’

Netflix’s DVD subscriber base continues to dwindle, but CEO Reed Hastings has affirmed the company’s continued commitment to the format after noting in an earnings conference call that it will continue to ship discs “for a very long time.”

Domestic DVD subscriptions dropped to 7.51 million in the second quarter of 2013, down from 9.24 million a year ago. As its streaming business has ramped up, DVDs have fallen steadily from a height of 19.5 million subscribers in 2010.

As Netflix’s DVD business contracts, the division’s margins have actually improved. The company made $232 million in revenue and $109 million in profit from DVD subscriptions last quarter for a margin of almost 47 percent. That compares against a margin of 46 percent in the second quarter of 2012.

Considering Netflix’s operating income for the most recent quarter was $57 million, the company still needs DVDs to keep it profitable. DVDs may be dying, but they’re dying a slow death and Netflix appears intent to squeeze them for as much money as possible on the way out.

For those with a good memory, Hastings’ continued commitment to DVDs might seem a bit odd. After all, he tried to spin off the division into a new business called “Qwikster” in 2011. The company first announced the plan, which was itself a reaction to an unpopular price hike, in September 2011 before backing down from it weeks later after a massive backlash from investors and customers.

Looking forward, Netflix is focused on original content as its future bread and butter, but its Chief Content Officer Ted Sarandos admitted on Monday that its still in the “early innings” of its original content strategy.  As evidence of the potential of original franchises, the fourth season of Arrested Development, an exclusive Netflix reboot, contributed to a “little rise” in gross subscriber additions in the second quarter.

The upcoming year will be a crucial one in validating the business model as Netflix releases the second seasons of shows like House of Cards and Orange is the New Black. Assuming that Netflix’s other original series manage to build similar loyal fan bases across seasons, the company can expect to see similarly modest subscriber upticks.

Netflix had 630,000 new US subscribers and 610,000 outside of the US last quarter. The figure was lower than analysts had originally expected, but the firm maintained that it was in the middle of its guidance.

For now, investors haven’t been enthusiastic about Netflix’s second quarter. Shares of the company were down more than 4 percent in after-hours trading.

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