Swaziland RPCV Reed Hastings, founder and chief executive of Netflix, spoke recently about growing competition in the online movie rental market.
`Consumers are very social and they want to talk about movies'
Reed Hastings, 44, founder and chief executive of Los Gatos company Netflix, spoke recently with Mercury News Staff Writer Dawn Chmielewski about growing competition in the online movie rental market.
Q Were you surprised when Blockbuster launched a competing online movie rental service?
A What's the Chinese proverb? ``Those who don't believe it can be done need to get out of the way of those who are doing it.'' Early on, in 2000, 2001, very few people -- including Blockbuster -- thought that online rental would be a large, profitable business.
We are amazed that Blockbuster waited five years and for us to get to $500 million in revenue in their core business. Amazon, we're not amazed. Clearly it's an optional market for them.
Q How did the Hollywood studios react to you in 1999? How did you present Netflix?
A We tried a number of things, none of which worked until we hired (industry veteran) Ted Sarandos. He knew all the right people. They trusted him. They knew each other. They all had a network of friends that went back 20 years. Ted was able to put those (revenue-sharing) deals together within a year with all the studios. It was very much a hire-the-right-person strategy as opposed to camp-out-on the-doorstep.
Q How do the studios treat you now?
A In the first two or three years, the studios were tolerant. And to the degree that they supported us, it was because they wanted more competition in the rental market. Which makes sense for them. And so they were supportive perhaps more than our economics at that time justified.
Now they love us because we do such a great business for them on the hard-to-market films. So, ``Spider-Man 2'' we carry. We have it. Everyone has it. We're not adding any particular value to it. But then, you go into Sony Classics, we do a huge business.
Q Do you ever feel like a geek boy in Hollywood?
A You know, I'm not capable of making a film. But I love watching films. Now that I have an excuse, I'm able to do it more. So I watched 21 movies at Sundance. And my favorite was ``Hustle & Flo,'' which is about a pimp with an existential crisis. And I just thought it was incredibly well done.
The more I've gotten into film from the appreciation standpoint, I've come to really value also what Netflix does. We do some work with the Independent Film Project. And for many of those artists, you know, 60, 70, 80 percent of the friends they bump into who have seen their movie saw it on Netflix. You would then see first hand the difference in the lives of filmmakers that we've made. Small filmmakers. Not the big ones.
Q I understand the whole company went to Utah for the Sundance Film Festival. Is that true?
A Our buyers go for the whole time just to see what's coming out for the year. So they're there professionally. The other 150 or so people who go are there because they love movies and want to watch a whole lot of interesting movies. And so, it's a shared passion.
Q As you examine your innovator's dilemma -- creating a new way of doing business that others attempt to copy -- which companies do you look to for inspiration?
A HBO and Starbucks are the ones we look at most. HBO started, of course, as a movie channel and then was faced with direct competition from other movie channels. They worked hard to improve their content with first the comedians and live comedian stuff. It took them five or 10 years to build up to ``Band of Brothers'' and ``The Sopranos.'' Now, movies are actually a small part. So they innovated in content distribution in a substantial way.
Starbucks, similarly. It's not that hard to open a coffee shop. What they've done is phenomenal, in terms of defining the brand around the passion for coffee. And still today, Wal-Mart sells more coffee, whole bean coffee, than Starbucks.
The studios know, Wal-Mart is always going to sell more of your DVDs and make you more money. So treat 'em well. But we're going to be the passion brand that helps grow the whole category. Those are the two best examples.
Importantly, they're not technology examples. It's not about coding faster. The thing that has made a big difference in our continued evolution is we find consumers are very social and they want to talk about movies. And so we just launched this Friends program, where subscribers can give each other permission and then share each other's movie ratings and queue and other aspects. It makes it a lot more fun to see what your friends are watching. That's an example of the kind of innovation we're doing.
Q Some Silicon Valley companies have a highly visible founder, like Apple's co-founder Steve Jobs, who creates a powerful brand in part through the passion he brings to the product. Do you need to do the same for Netflix?
A There's no question that the personality of the CEO is one of the aspects of the brand. But there's a danger in making it a personality-based company, which has less of a chance of outlasting me. And anyone in my shoes, including me, wants their company to be a great company for 100 years. And so I struggle with what's the appropriate level of visibility for me vs. the company. For the company, it's infinite. I inevitably have to reinforce and represent the brand.
HBO is a great brand. But people don't know who runs it.
Q Blockbuster and Amazon are the near-term threats to Netflix. What about long-term threats of video on-demand services?
A The studios make so much money in DVD sales that DVD gets an exclusive window against cable video-on-demand and Internet video-on-demand. We believe that the DVD exclusive window will last for at least the rest of this decade. That's because it makes economic sense for them.
Think of book publishing. You've got hardcover and paperback. There's a lot more money made on the hardcover side. If you ask consumers, would you like the paperback up front? They'll say, ``Absolutely.'' They don't get it, because the publishers need the hard cover phase to pay for all the publicity.
Similarly, if you ask consumers would you like to download any movie, anytime? Of course they'd say, ``Yes.'' But they don't get it, because the profit on a DVD sale is about $14 to the studio. Whereas VOD or Internet downloads, it's $1 or $2 to the studio. That's why it makes economic sense for the studios to protect DVD sales.
Q Many analysts predict Netflix will be forced to sell its online service to a larger media company to survive? Is that the case?
A In the near term, over the next couple of years, we're a strong independent company leading the DVD rental business. As the development of Internet delivery comes, it may be that we need to be part of a Viacom, a Disney, a Yahoo, to compete effectively. We'll see at that juncture. But in terms of the DVD rental business, we're strong, profitable, have $175 million in cash, no debt, we have no need to be part of someone.''
