M+E Daily

Netflix, HBO Talk DVD Opportunities Amidst Digital Growth

Executives from HBO and Netflix observe continuing opportunities in the physical disc business, even as home entertainment markets around the world move to digital models.

Speaking at the Nomura U.S. Media Summit June 2, Netflix chief content officer Ted Sarandos acknowledged that his company has been primarily focused on building its streaming services, while its U.S. DVD rental business “has been running calmly on its own.”

Still, Sarandos noted, “there are a lot of markets that are terribly underserved for DVD rental, and [that] don’t have the kind of broadband speeds yet to backfill with streaming.” Accordingly, “over the next couple of months, couple of years, you’ll see us putting a little bit more of a focus” back on physical media rentals.

The ramifications for disc manufacturers are difficult to ascertain, given that DVD sales remain in overall decline. Sarandos attributes waning DVD sales to persistent economic conditions, as well as consumer desire for greater digital access to a broad array of content.

“What we need to do as an industry, Sarandos said, “is figure out how to monetize the new [consumer] behavior, which is monetizing access to media, instead of ownership.”

Nevertheless, as Netflix CEO Reed Hastings himself has long held, Sarandos maintained that “the value proposition of the DVD business is going to be good for a very long time.

“Most of our subscribers will take a disc here and there,” Sarandos said, noting that customer tastes remain immensely broad. On an average day, customers are renting some 45,000 of Netflix’s 100,000-plus DVD titles.

While streaming services continue to be main source of growth for Netflix — as the company eyes expansion both in the U.S. and abroad — Sarandos acknowledged that physical media has a role to play in that market transition.

“I think Blu-ray probably becomes the default [physical medium], and will replace DVDs over time — because the [Blu-ray] machine is so much better for streaming,” he said. “Oddly, that’s the thing that’s going to attract people to Blu-ray.”

Even the DVD rental business’s “first-sale doctrine” — which Netflix leveraged as a bargaining chip in its 28-day window agreements with several studios — is providing the company with a counterweight against content owners such as HBO, which is withholding digital licenses of original programs to build up its own catalog of exclusive streaming content.

“I honestly think the ‘absolutely exclusive forever’ strategy will evolve over time,” Sarandos said, adding that HBO shows like “Entourage” are “on DVD, so [they are] really not that exclusive anyway.”

HBO Sees DVD ‘Uptick’

Naturally, HBO expresses a somewhat different viewpoint than Netflix. But the content owner is also continuing to pursue opportunities for packaged media in a digital world.

Speaking at the same Nomura conference, HBO chief executive Bill Nelson said that even as the company markets its exclusive “HBO Go” streaming services to its pay-TV subscribers, DVD sales of original programs are still contributing to the company’s global expansion.

On a global basis, Nelson said, “our DVD business is on an uptick, bucking the industry trend. It’s the result of our continued investment in original programming — not only have we upped the quantity but we’re upping the quality.”

Nelson predicted that as long as HBO keeps producing hit original series, its global DVD growth should continue. “Worst case,” he said, “it flattens.”