Netflix Knew That DVDs Were Dead

Netflix was apparently on to something when it all but turned its back on its DVD-mailing roots to push into streaming.

Redbox parent Outerwall met a wrecking ball last night after hosing down its outlook.

It now sees $569 million to $589 million in revenue for the quarter that ends this month, short of the original $604 million to $630 million top-line range that it provided two months ago. The news gets worse on the way down to the bottom line, as Outerwall had to spend heavily to promote what turned out to be softer sales than it was originally expecting. Outerwall is now eyeing $0.82 a share to $0.94 a share in core earnings. It was forecasting a profit of at least $1.36 a share for the period.


Things won't get any better during the next quarter, either. Outerwall's new outlook for the entire year -- $2.274 billion to $2.339 billion in revenue and $4.72 to $5.12 a share in core earnings -- implies a similar shortfall is now in the cards for the holiday quarter. 

Outerwall abandoned Coinstar as its corporate moniker two months ago. It seemed strange that it didn't just embrace the Redbox name at the time as its corporate identity, but it seems as if Outerwall was already sensing that there were broader opportunities to explore running different types of kiosks on the outer walls of commercial establishments. 

Netflix apparently knew what it was doing when it let DISH Network buy Blockbuster and watched Redbox take on the Blockbuster Express kiosk business when that cheap-date niche ran its course. Outerwall's DVD business is still growing on a per-kiosk basis, but likely not enough to offset the declines at Netflix and Blockbuster. DISH reported an operating loss of $5 million for Blockbuster in its latest quarter, and it's planning to close 100 of its roughly 450 domestic stores by the end of next month.

Netflix continues to offer DVD plans. There's no reason to slay the cash cow. However, DVD-based subscribers have fallen every single quarter since the company began offering streaming as a stand-alone business. Netflix knows that the real moat rests in its digital vault and not its network of regional DVD and Blu-ray distribution centers. It saw what Outerwall saw too late, since Redbox didn't dive into the streaming market until late last year, when Netflix had already run away with the market. 

When's the last time you fed your DVD player? If you don't remember, thank Netflix.

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The article Netflix Knew That DVDs Were Dead originally appeared on Fool.com.

Longtime Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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