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Netflix Wants to be Known as a Streaming Company

Netflix
AP
Netflix

Today Netflix unveiled its long-anticipated streaming-only option—$7.99 a month for unlimited access to its library of 20,000 digital films.

And the company that built its business on renting DVDs through the mail announced that it is primarily a streaming company. Despite the fact that there are 100,000 choices if you rent a DVD in the mail, more movies are watched from the limited online options. It's hard to compete with the instant gratification of streaming.

So why is Netflix focusing on its streaming business? First and foremost, distribution costs are dramatically lower —about 5 cents to stream a movie compared to the 80 to 90 cents it takes to send a DVD through the mail. Yes, more streaming will force Netflix to pay content creators more -- but it's worth it. We can expect more mega deals like the one Netflix struck with cable channel Epix, which is co-owned by Paramount MGM and Lionsgate. By some reports Netflix is paying the studios as much as $1 billion over the next five years. And in the meantime, consumers don't seem to mind the fact that they have fewer digital options than they do DVD choices.

Introducing this new lower-cost streaming option is crucial in that it allows Netflix to jack up the prices for its DVD option by $1 per month. Yes, Netflix is flexing its pricing power -- it certainly seems to have it. The $7.99 looks like a good deal -- the best deal in the country after a Happy Meal, according to Citi analyst Mark Mahaney. And Netflix doesn't expect to lose any customers from charging more for the expense and hassle of shipping DVDs.

What does this all matter? It's another nail in the coffin of DVD sales. Here we are ahead of the holiday shopping season when DVDs used to serve the role of quintessential stocking-stuffer. Why buy a DVD if you can gift one month of a subscription to Netflix? Unlimited streaming access is cheaper than a single film. And Oprah singled out streaming via Netflix as her favorite way to watch content. And as we know from many a precedent, "the Oprah Effect" should bring Netflix a flood of additional business.

Questions? Comments? MediaMoney@cnbc.com

  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.