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Streaming overtakes mail order for LoveFilm

Amazon’s European video rental company LoveFilm passed a landmark in February 2012, when, for the first time, it streamed more films and TV programs than it sent as DVDs or Blu-ray discs by mail.

But, it is far too soon to write off the mail order business, since that also increased in volume year by year, by 25 percent. It was just that Internet streaming to connected devices has been growing much faster, with volumes four times higher than in February 2011. Online streaming was boosted by heavy promotion late in 2011 and early this year to combat the arrival of Netflix in the UK, LoveFilm’s main market — it is also present in Germany and Scandinavian countries, and has 2 million subscribers in total.

Amazon taking full control by buying the 58 percent of LoveFilm it did not already own in January 2011 was another factor, providing full access to its global e-commerce platform and marketing power.

But, for LoveFilm, as for Netflix and other video rental companies, physical DVD rental remains a vital cash cow funding expansion and competitive positioning in the international video streaming business, which will take over completely over the next five to 10 years. It is only necessary to consider the case of Netflix, as the biggest company doing both video mail delivery and streaming, to highlight the importance of DVD by mail. In the fourth quarter of 2011, Netflix estimated that domestic DVDs would earn revenues around $360 million compared with $470 million for streaming, which had overtaken the physical media business there slightly earlier than at LoveFilm.

But, the telling point was that DVDs contributed over $180 million to profit, compared with under $40 million for streaming. This reflected the continuing cost of investment in streaming infrastructure, which more than offset the handling and mailing costs associated with DVDs. It was the revenue from DVDs, therefore, that are largely financing Netflix’ international expansion ( including the launch this year in the UK and Ireland), which is expected to soak up approaching $100 million before starting to pay back the investment.

One difference between Netflix and LoveFilm is that the former split its DVD and streaming business last year in a miscalculation that caused a temporary blip in revenues as customers defected. On Sept.18, 2011, Netflix CEO and Co-Founder Reed Hastings wrote in a blog post that the DVD section of Netflix would be split off and renamed Qwikster, with a separate website. But, less than a month later, it cancelled this renaming and said that the DVD-by-mail service would remain part of Netflix, following further negative reaction from customers.

The clear message is that it is too early to downgrade and devalue the DVD service.