Netflix's Blu-ray Headache

The next-gen DVD format war is over, Sony’s (SNE) Blu-ray has won, and consumers are starting to demand Blu-ray discs. And in the near term, that could be a problem for Netflix (NFLX).

Netflix lowered its rates last July, a move that has helped the movie rental service sign up new customers and keep existing ones. But Blu-ray’s adoption may put pressure on Netflix to bump up rates again — or take a near-term hit.

Today, Blu-ray and HD DVD movies make up a tiny share of Netflix’s business: a small, single-digit percentage of its overall shipments, CFO Barry McCarthy said at a recent investor conference. But as Blu-ray players become more affordable, Netflix will add to its hi-def movie library. This year, the company expects to add 1300-1500 Blu-ray titles, including new releases and back-catalogue classics.

The problem: While standard DVDs cost the company around $18, Blu-ray discs cost about $23. That 28% premium will eventually shrink, but not in the near-term. So as those more expensive Blu-ray discs eventually account for a greater percentage of the company’s inventory, Netflix will have to make a difficult decision: Raise prices, set up a tiered rental service that differentiates between Blu-ray and standard DVDs, or deal with lower gross margins.

See Also:
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