There were rumblings last week that Netflix might consider raising prices on all high-def rentals as a way to recoup their costs on the discs. While you and I may find it difficult to stomach $30 for a disc, rental stores have to pay even more for their copies – it’s just a rule about how they do business with the studios. It looks like Netflix found another solution over the weekend…

Rejecting the “Long Tail” theory about how you can always find just about anything you’ll need online, Netflix comes out with the news today that while red may be the color of their famous envelopes, blu is going to be the high-def format that they focus on for the rest of the year. They will stop adding HD DVD titles to their selection and let the remaining stock run out on its own through the naturally occuring damage that occurs from the wear and tear of all those discs getting rented out.

The “Long Tail” describes an advantage that online merchants have over their brick and mortar counterparts, namely that their inventory and distribution needs are much less restrictive and thus they can carry products that may not be as frequently stocked elsewhere, and still make a pretty good profit. For example, you can find a lot more books at Amazon.com than any branch of even the largest bookstore.

Compared to Blockbuster, Netflix only has to run a set of regional distribution centers to support their entire operation. In contrast, Blockbuster operates a few thousand stores, and each one needs to be pretty well stocked. Anyone can do the simple math here: keeping a few thousand stores reasonably stocked is more expensive than running some dozens of distribution centers.

A store like Blockbuster is far more likely to carry the latest movies, and then the most popular of the older ones. If you want to find a less famous title, then your best bet is to look for it online. The “long tail” describes a graph of product demand, where there’s a spike of demand at the early part that drops down relatively quickly, but then settles in on a very slow decrease, thus producing a “long tail” where there’s still demand, but not of epic proportions.

Online merchants are usually the ones who can take best advantage of the long tail phenomenon, and Netflix is even listed as a prime example in the Wikipedia article on the subject. Well, in the case of HD DVD titles, it appears that Netflix is backing away from maintaining a certain portion of that tail. A few months ago, it appeared that Netflix was reporting good enough business on both formats to keep going with both for quite a while and let consumers have their way. They’re singing a different tune today.