The perfect virtual video store isn’t Netflix. It’s DVD.com.

Ruth Graham, a freelance writer in New Hampshire, decided to go retro last year and replace her streaming service subscription with a stream of red envelopes filled with DVDs, courtesy of Netflix-owned DVD.com. Shocked by the abundance of films the affordable DVD-by-mail service offered that she couldn’t also stream on Netflix, Graham “binged” — albeit on a schedule broken up by the post office and a limit to how many disks she could have out at any one time — on classics like 1931’s Frankenstein, Billy Wilder’s Oscar-winning The Apartment, and the work of German director Douglas Sirk.

“You realize your taste has all these little rivulets and corners,” she says of viewing via DVD, without the distraction of an endless sea of algorithm-suggested options just a click away. “My husband and I would be watching David Lynch, then Orson Welles, and then random Westerns, and think, ‘The algorithm just never would have put this together for us.’”

In 2011, Netflix’s DVD-by-mail service boasted 14 million subscribers across the country, who could select from a vast library of both popular and rare films that was hard to match. (Reports estimated the service to have offered more than 100,000 titles at its peak.) Netflix was the ultimate video store, with no late fees and offerings that far surpassed any other option. At one point, it was shipping 12 million DVDs a week. It seemed to have put the final nail in the video store’s coffin; DVD-by-mail would be the present and the future.

But also in 2011, Netflix spun off its DVD selection from its primary platform, eventually establishing streaming on demand as the status quo. Netflix promised to continue mailing out DVDs, but with a catch. They would be siphoned off to a separate service, now called DVD.com, fully divorcing the physical media from the digital.

Netflix’s lingering DVD business, which has gone from 14 million subscribers in 2011 to just over 2 million at the end of 2019, might seem quaint as the massive streaming wars get underway. As many of the biggest entertainment conglomerates, such as Disney and NBCUniversal, launch separate platforms and begin a protracted battle over subscribers, Netflix remains focused on its own content; it had planned to spend $17 billion globally this year, before the coronavirus pandemic hit, to entertain a global streaming audience, and still expects its worldwide audience to grow to 190 million by the end of June.

And as streaming content becomes the default viewing option, DVDs have largely fallen by the wayside; the company’s Q1 financials were the first to not list separate information about DVD subscription numbers. Industry-wide, DVD sales have plummeted 86 percent since 2008, a clear indication of how much the market has shifted.

But amid the race to create and expand streaming networks, and make digital access the default over physical media, is there a danger of losing access to classic and rare movies? There’s worry from some film lovers that the generational shift in film and TV content happening right now, including a scramble for rights, analytics-informed production plans, and algorithmic-driven discovery, favors the new, exclusive, and episodic, or, as Martin Scorsese put it in November 2019, “entertainment versus cinema.”

It’s a new economic model of entertainment that may have even less room for movies than the previous ecosystem of cable, movie theaters, and home rentals, especially foreign classics and those from Hollywood’s Golden Age that have limited audiences. An analysis by the Streaming Observer, a site that rates streaming services, found the number of movie titles available on Netflix has shrunk by 40 percent since 2014, from 6,494 to 3,849. While DVD.com offers every Best Picture winner in the Oscars’ history (yes, even 2019’s Parasite), Netflix’s streaming side only offers a fraction of them.

Netflix’s DVD.com represents the dream of the ultimate independent video store, one that has declined steadily over time; Variety predicted the service may be shutting its doors by 2022 at the current rate of subscriber loss (Netflix declined multiple requests for comment on DVD.com or its core business for this article.) As competing services proliferate and we focus on the shiny and bite-size, the continued downsizing of DVD.com means more than increased nostalgia for the era of red envelopes in our mailboxes. Its potential shuttering, based on a shrinking number of subscribers and declining investment by Netflix, would represent the loss of an affordable service granting near-universal access to decades of classic cinema, without other options for movie fans to gravitate toward.

The laws of streaming economics

Netflix CEO Reed Hastings knew from the beginning that the future was being an online platform. Ted Sarandos, Netflix’s chief content officer, said that in 1999, Hastings told him that with postage rates rising and the internet “getting twice as fast at half the price every 18 months,” online distribution was just a matter of time.

“At some point those lines would cross, and it would become more cost-efficient to stream a movie rather than to mail a video,” he added. “And that’s when we get in.”

Netflix is playing a game of scale by building a massive content distribution system and audience, says Eric Schmitt, a media analyst for the global market research firm Gartner. It has to, since the streaming wars pit Netflix against media giants like Disney, which can make massive bets and instantly gain a huge audience; the Disney+ service reportedly signed up 10 million households on its first day.

“You need to produce a basket of content every year that’s guaranteed to have some winners,” Schmitt says. “You need to have super-deep pockets because you will have bad years.”

Whether it’s movies or television, content is an inherently risky business; even today, there’s no algorithm that picks what’s going to be successful. So the strategy is to distribute online on a massive scale, vertically integrate by owning both the production and the means of distribution, and go global. That means consolidation.

After scale comes subscribers. Netflix’s rivals, a growing batch that includes Hulu, HBO Max, Amazon Prime, Apple TV+, Disney+, and Peacock as of 2020, are its real competition among the more than 270 streaming services available in the US. Each one is high-profile and currently or about to be battling over subscribers, trying to land new viewers, avoid losing established ones, and locking in recurring revenue. Success means having content that’s magnetic to most people, what Schmitt calls “maintenance to protect the customer base,” which is why billions of dollars are spent annually on new shows.

It also means knowing who your potential audience is, which is primarily a younger one less interested in the classics, according to Tom Nunan, a former film producer and TV executive who teaches at the UCLA School of Theater, Film, and Television.

“The audience for classic films generally skews much older, and the older demographic is not the one streaming giants want to attract,” he says. “You want to be attracting the 18- to 54-year-old audience, or, for Disney+, maybe 12 to 34. [Streaming services] don’t care about reaching a 75-year-old.”

Then there are the high costs, especially for licensing, where it gets even more challenging to make the business case for rare and classic films. Rival services don’t want to give any content advantages to each other, and are ending licensing agreements so they can use entice new subscribers with their back catalogs. Netflix’s loss of Friends to HBO Max was one of the most high-profile example of studios and streaming services keeping popular TV and film for themselves; Disney has also been keeping classic films from 20th Century Fox, which it recently purchased, in its infamous vault in anticipation of making them available exclusively for streaming subscribers, some critics speculate.

Streaming classic films may also have additional costs just to make them viewable for a modern audience. Old black-and-white films generally need to be retouched to offer the higher resolution and audio quality that today’s viewers expect. With fewer new DVDs being made and sold, studios are losing out on that revenue stream, which can help defray the cost of these conversions and digitization. Streaming services want content that can translate internationally, and there can be tangled rights issues with films made in an era when studios didn’t think about global distribution, says Schmitt.

Then there’s the issue of sunk costs. Emphasizing or acquiring classics for a streaming catalog means no new product placement deals to strike. Schmitt says as of last fall, 74 percent of Netflix shows, and just about every Amazon Prime series, tap into this revenue stream and work with brands to get their goods in streaming original content — making these services an estimated additional $50,000 to $500,000 an episode.

With all these new rules of the game for content producers, it’s no wonder that the least risky option — episodic, marathon-ready series that support audience retention — has become the most popular format. As Schmitt puts it, we’re living in an episodic world.

“Obviously the movies must matter, because Netflix wouldn’t spend $160 million on The Irishman” otherwise, he says.But as a business, it’s probably more sober to invest $160 million in an entire season of a series versus just one movie.”

The not-so-sorry state of DVD.com

Netflix and its rivals want to invest in broadly appealing content for today’s new-and-episodic-content-inclined audience. Classics and niche films, especially if they arrive on a disk in the mail via DVD.com, don’t fit that vision for the future.

Even DVD.com’s unparalleled library is shrinking in response to this shift. Right now, the entire DVD.com operation runs out of a single facility in Fremont, California. Its large selection of movies has traditionally satisfied the needs of a “weird genre and horror movie guy” like Jim Vorel, a film writer in Atlanta who has remained a DVD-by-mail subscriber since it was Netflix’s main line of business.

Vorel has long been an evangelist for the service. But he’s seen the overall selection contract significantly since the rebrand to DVD.com, to a point where DVD.com is now a “shell of its former self,” he says. Whether it’s simply culling titles that aren’t being requested or not picking up replacement copies (again, Netflix declined to answer any questions), over the past few years especially, DVDs that Vorel has saved in his queue have tended to disappear.

“You can’t really blame them from a business stance,” he says. “We’re the weirdos who want them to send us rare Hong Kong martial arts stuff and lots of B horror movies. It’s just not their bread and butter; it’s a lot less profitable for them.”

Complicating the idea that DVD.com’s downfall is inevitable, however, is that DVD.com isn’t a money-loser for Netflix. Instead, the DVD-by-mail service remains profitable. Its 2,153,000 users generated $37.3 million in profits for Netflix, or $17.34 per user, during the fourth quarter of 2019, the last time such figures were publicly available. It actually made more money per user than the streaming service did, which, according to just-released financials for the first quarter of 2020, saw a return of $13.09 for every US subscriber. At this point, the company has a large library estimated to contain tens of thousands of titles, has maximized efficiency, and can get by with minor infrastructure investments. The service can likely still count on film buffs and Americans with poor broadband access as core constituencies.

The DVD-by-mail model requires a lot more physical labor — and related costs — than streaming, making it a less attractive business investment.
Susan Biddle/The Washington Post via Getty Images

And DVD.com doesn’t have to worry about losing rights to film or TV, even if the streaming service loses licensing rights, according to property attorney and media expert Glenn Peterson.

“Playing a DVD does not infringe upon the copyright owner’s exclusive distribution rights, because the purchaser paid for an authorized copy and there is no copying of the DVD to watch it,” Peterson says. “Distribution of physical copies is not bad for the studios, nor is it bad for the artists. The authorized copies are priced so that they make plenty of money on the original sale. Just like vinyl records never went away, I doubt DVDs will either.”

There’s a real business case to be made to keep DVD.com running until it’s no longer profitable. Netflix built its entire streaming service on profits from those red envelopes, after all. But the writing’s on the wall. The company’s spending on acquiring or replacing DVDs has tracked the drop in subscribers. According to quarterly earnings statements shared with the public and investors, Netflix spent $77 million on buying DVDs in 2016, $54 million in 2017, and $38.5 million in 2018 (the company’s 2019 financial statement didn’t break out DVD investment). Netflix appears to be coasting with DVD.com, spending just enough to keep current with big new releases and reap the rewards of past investment, but under no impression that consumers will stop the migration towards streaming.

Will a substantial back catalog one day provide bragging rights?

The nascent streaming era does seem poised to challenge people’s access to classic and rare films, whether it’s through consolidation, licensing agreements, or placing more weight on new, original content. But what if these fears are based more on the momentary challenges of transitioning to a future of streaming, as opposed to welcoming the possibilities yet to come?

Schmitt, the Gartner media analyst, believes this “building the subscriber base” phase of the streaming wars will be temporary. As streaming services grow, they’ll become more technologically advanced, and server space will continue to get cheaper. That will mean more money in what’s called the long tail. In a digital economy, shipping bytes instead of physical products, there’s money in streaming lots of rare titles in small numbers to small groups of fans, as well as streaming blockbusters that appeal to everyone.

It’s silly to expect to eventually have every movie instantly available on your smart device, says Joe Adalian, who writes Buffering, a newsletter about the streaming industry for New York magazine (which is owned by Vox Media). But today’s cinephiles and film buffs arguably have more access to a variety of movies. Right now, it can be challenging to find classic, niche, or indie films on a mainstream streaming service, but niche offerings and digital rentals have made many films available, such as the Criterion Channel, that offer a deep library of world cinema (though that niche-content model has failed in the past with FilmStruck, which only lasted a few years and attracted an estimated 100,000 subscribers).

In the ’90s, tracking down a rare or older film might have meant finding an independent video store nearby and hoping the single copy wasn’t checked out. In the ’70s, it might have meant having access to an independent cinema and being lucky enough to not just know a particular foreign film was coming but watch it during its brief run. Vast swaths of film history have always been largely inaccessible or out of print.

“You can make the case that the film lovers of 2020, and eventually 2030, are better off than the classic movie lovers of the 1970s,” Adalian says. “Right now, streaming services are focused on what gets the most subscribers. But I wouldn’t rule out this stuff being revisited later. Five years from now, they will say, mine the back catalog and create HBO UltraMax for $3 extra a month. [With its streaming service Peacock, NBC] talked about having curated sections; they could decide to make an ad-supported classics stream, just like [the Turner Classic Movies] cable channel. There are different ways libraries may be mined in the future.”

Tom Nunan of UCLA believes that eventually, as the rush for new subscribers cools, new content will keep subscribers signing up. But a large library of content will be even more of a “comfort food” amid an increasingly dizzying array of choices that set rival services apart. With the film and television production industry shut down due to the coronavirus pandemic, perhaps a protracted delay will lead more services to start leaning into classic and older films (though Netflix already has most of the year’s programming in the can).

Classic content as comfort food has already happened to a large extent, with Friends and The Office routinely ranking as Netflix’s most-watched content (until their production studios effectively took them back for exclusive broadcast on their own streaming services). Technology is evolving at such a pace, Nunan says, that “searches for anything we’re looking for will be faster and more efficient, including avant-garde or experimental content.”

Schmitt agrees that the streaming wars of today might lead to a “renaissance,” not a removal, of classic movies.

“As these streaming wars unfold, the thirst for content will be so great,” he says. “The studios and publishers are relatively good at slicing and dicing content. As things stabilize, you’ll find content owners finding creative ways to license content.”

For film fans like Ruth Graham, this renaissance of classics can’t come soon enough. As DVD.com and its vast library slowly shrinks and fades away, many subscribers may feel like they’re losing an irreplaceable vault of films. It’s more than a novel business model that triggers nostalgia, like Betamax tapes or the Blockbuster video stores. The loss of DVD.com won’t make classics disappear, especially for the die-hards. But Graham sees the loss of easy access as a matter of mass taste.

“The fact that it’s so hard to find these classic films is degrading people’s taste,” she says. “If nobody grows up watching these movies, it’s incredibly depressing to think about what it’s doing to film as an art form over the course of a decade.”


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