The company that's still making a ton of money from DVD rentals

The Herald recently reported on the demise of Auckland's iconic Videon.

Most readers would only have been surprised that the bricks-and-mortar rental operation lasted as long as it did, given the shift to on-demand.

But there's an intriguing footnote here: Netflix still makes money from DVD rentals. In fact, a healthy wad of it.

Netflix began life in 1997, selling DVDs and renting them in a system in which users ordered them online then received them by snail mail, with an envelope supplied to send them back.

In 2007, the company underwent one of the more famous reinventions in business history as it launched a streaming service.

Yet Netflix also kept on its DVD business. And, in fact, right up until June last year it leaned on profits from its disc rental division to get into the black as streaming lost money most quarters. It was only late 2017 the on-demand business started to make consistent profits.

In the 12 months to December 2017, Netflix's DVD division - which only operates in the US - made a US$247.9 million profit on revenue of US$450.5m.

And in the three months to October 2018, it made a US$51.6m profit from ye olde discs on US$88.8m turnover. That's a huge margin.

After 36 years of trading the Mt Eden's Videon has been hit hard by streaming services and online piracy and closes down on December 31. Above, senior staffer Tim Beatson. Photo / Jason Oxenham

That's become small in beans in the Netflix scheme of things as growth surges.

Overall, Netflix made a US$402.8m profit on US$4 billion revenue in the October quarter.

Still, several million Americans are still renting DVDs, and Netflix is making a lot of money off them.

Netflix's success in DVDs in the US is partly a measure of the fact that Americans have slipped behind us in broadband. The Ultrafast Broadband (UFB) rollout here has helped to bust open the media market (just ask Sky).

But it's also a reminder that in video, bigger is better. And Netflix just has such massive scale with three million members still ordering discs (and 137 million in total).

Here, Sky TV was able to dominate the DVDs-by-mail market. It bought the rival DVD Unlimited and Movieshack and rolled them into its own Fatso without running into any regulatory headwinds.

But Fatso never gained much traction. Even in its heyday, then Sky boss John Fellet said it only generated as much revenue as a single video store. It was quietly shut down in September 2017.