Swaziland RPCV Reed Hastings stresses quality service
Netflix chief stresses quality service
Reed Hastings
By Paul Bond
Netflix Inc. CEO Reed Hastings founded the company in 1997 with the goal of harnessing the power of the Internet to make late fees and due dates a thing of the past in the movie rental business. Netflix passed the 1 million-subscriber mark in four years, and Hastings has told Wall Street analysts that the company will boast 5 million subs in 2007. He recently spoke with The Hollywood Reporter's West Coast business editor Paul Bond about the company's recent earnings trends and a swoon in its share price.
The Hollywood Reporter: How's your TV ad campaign going?
Reed Hastings: We've been running TV ads through Q1 and Q2, and we're continuing to do more in Q3 and Q4. We're growing new subs between 60% and 80% year-over-year, partially due to TV advertising.
THR: What will you do to fend off huge competitors like Blockbuster's in-store subscription service Movie Pass?
Hastings: We're able to benchmark ourselves against Movie Pass because Albuquerque (N.M.), Boise (Idaho) and other cities are Blockbuster franchisees that are not implementing Movie Pass. So we're able to do comparisons against cities that do have Movie Pass to see if it's impacting us, and it's not, either in acquisition or churn.
THR: And online competition from Blockbuster?
Hastings: The big news is if you go to beta.blockbuster.com, they're about to launch their service. It's priced halfway between Wal-Mart and us. Wal-Mart is at $18.76, Blockbuster is at $19.99, and we're at $21.99. But they don't have overnight delivery; they have two- or three-day delivery.
THR: One analyst suggested you raised your price too soon, considering your intent is to sign up as many consumers as possible before Blockbuster revs up its service.
Hastings: With the price increase we're able to offer superior service with more new releases and overnight delivery from our 25 distribution centers throughout the country. What consumers want is a service that's flawless. If the only thing they shopped on was price, then Wal-Mart would be doing great.
THR: What do you mean when you say studios will "protect" DVD for a decade or more?
Hastings: In a window sense, they won't allow video-on-demand or downloading to happen in the DVD's window.
THR: When, and how, will your downloading service work?
Hastings: We'll launch it next year, other than that we haven't shared details for competitive reasons.
THR: Some have suggested that TiVo is better positioned than you are for a successful move into downloadable, on-demand movies.
Hastings: TiVo is very well situated. I don't know that it's better.
THR: TiVo CEO Michael Ramsay sits on the board of directors at Netflix. Is there any partnership between your two companies in the works?
Hastings: We're always brainstorming about how to work together. It's too early to do anything concrete. The reason Mike's on my board is to help me build a great company.
THR: How's your expansion into Europe coming along?
Hastings: We're ready for a Q4 launch, we're building up staff, getting organized and looking forward to it.
THR: Your stock was hammered after your second-quarter earnings report, sinking 28% in a day. What spooked Wall Street?
Hastings: We have a very high short interest. Those people who are betting against the stock have an economic interest in whipping up a storm, and the storm they're whipping up is that subscriber acquisition costs going up to $38 from $35 -- as we're forecasting -- is the beginning of the end. Nothing could be further from the truth. That rise will cost us $2 million, and despite that we were able to raise our earnings forecast for Q3.
THR: Those shorts have to be covered, so will the stock rise shortly?
Hastings: That's a better question for analysts. Our track record for predicting the stock is not so great. The reality is, when Wal-Mart entered our business two years ago, our stock tanked a lot worse than this. It was down to $2.50. People saw we were successful despite Wal-Mart's entry, and the stock came back in a big way.
THR: Your shares have been selling for more than 1,000 times earnings. Is that bubble territory?
Hastings: That's for the last four quarters. Stocks trade on forward projections. If you look at analyst reports for next year, they have us earning around $1 per share, so that would put us at 23 times earnings.
THR: As opposed to 31 times before you reported earnings.
Hastings: You trying to rub it in?
THR; How many shares do you own?
Hastings: About 5 million.
THR: That makes you quite a wealthy man.
Hastings: It's kind of unreal.
THR: I know people -- early adopters of new technologies -- who are subscribers of Netflix, TiVo and satellite radio. When I have asked, "Which would you give up first?" they most often answer Netflix. Does that anecdote concern you?
Hastings: That's depressing. But no, because it's not a choice between the three. The better question is, "Would you rather rent movies from Netflix or Blockbuster?" You'll get a pretty consistent "Netflix" out of that one.
THR: What kind of polling have you actually done that suggests your business will be around for a long time?
Hastings: We ask our customers about their likelihood to recommend us to friends. Those numbers have continued to trend upwards. They're extremely high now.
THR: You have suggested that your business model is having an impact on the movie distribution business.
Hastings: The smaller the film, the bigger impact we have. Look at "Whale Rider," "Charlie's Angels: Full Throttle" and "The Hulk." They all came out together, and we got "Whale Rider" to do as much as the other two. Talk to Miramax about what we did for "Capturing the Friedmans." According to VidTrack, we doubled the rental business.
THR: Are movies becoming DVDs now that might not have been without Netflix?
Hastings. I'll give you an example. The Oscar-nominated documentary "Daughter From Danang" wasn't going to get on DVD. We said, "that's nuts. This is a good film. We'll commit to a high buy level." So the studio put it on DVD.
