The following interview with Reed Hastings, CEO of Netflix, is a fascinating glimpse into the present and future world of entertainment. Interestingly, Hastings’ business model for Netflix resulted from a very common experience of the past: late fees. He was presented with a $40.00 late fee from a local video store. He paid up. But the implications of the event did not leave him. He realized that he could not have been the only person who has experienced the annoyance of late fees.
Netflix was not always a success although Hastings adds that Netflix was always on solid trajectory (Charlie Rose). Hasting points out that successful companies use a scale model. He talks about Southwest Airline who—according to him—simply cannot afford to run a business at their prices.
US consumers have taken to Netflix. And with this phenomena there is the inevitable competition. He talks about a high definition DVD. “Once you see high definition DVD, you never go back (Charlie Rose). It is interesting that he mentions that consumers still want DVDs despite the availability of downloadable movies. He says that the name of his company represents his vision. In essence, Netflix was created with a future vision of downloadable movies. What he says next is even more interesting. He says that consumers want DVDs and so—at least for the moment—he will continue to focus on that immediate consumer demand.
In the full interview aired last Thursday, Hastings told the story of Costa Rica where cable lines capable of delivering bandwidth are being placed on dirt roads before they pave them. He predicts by 2021—using Moore’s law of increasing bandwidth—we will have one gigabyte streamlining capabilities. My point is the ways in which we communicate are rapidly changing. While I caution the reader of reading utopian visions into these words I feel that I can safely say that the modern cultural landscape is and will continue to change.
What does this mean to the entertainer and the entrepreneur? It means that there is a great potential to develop unique businesses offering new services that will be understood of significant value to the customer. It also means that—as entrepreneurs and artists—we will have to carefully consider how we structure our business strategies. Not only will we have to demonstrate to investors our ability to understand the rapid development of technology, we will also have to convince investors that we understand the opportunities and risks involved in applying this technology.
As an entertainer from a different generation, my world was about cassettes, four-track recording systems, and cassettes. Cell phones were typically large, bulky, and had limited areas of use. I made due with what was in front of me, and created great music. In today’s world that will no longer be enough. It will not be long until the DVD will go the way of the four-track. It is inevitable. As such, we need to create the product and then find innovative ways of delivering it to the public for profit.
This interview with Hastings is significant because it presents an eloquent message to the public. He demonstrates a sound business model founded on providing a product in the present that the public is willing to pay for. He also demonstrates the fundamental principal that an entrepreneur and artist can never truly rest from the search for multiple streams of marketing and income.
In conclusion, Hastings envisions a day not long in coming when laptops will sell for $100, a world where the consumer is connected at will with each other through new technology. Imagine this sort of world, it’s strengths, its weakness, its opportunities, and its threats. As Betty Davis once said in a wonderful movie called All About Eve, “Buckle in, it’s going to be a bumpy ride.” And I just love a good roller coaster. Don’t you?”
Hastings predicts that the next wave will be in the form of HD DVDs.
Video of this interview is available at Reed Hastings Interview Video
Partial transcript of interview follows:
Charlie Rose Talks to Netflix's Reed Hastings
The CEO discusses his company's startling growth, its foray into original programming, and his belief in the future of streaming video
Did you cannibalize your DVD business when you started to stream content to customers?
DVD has continued to grow for us. It's grown every quarter. It's been phenomenal. Eventually—in fact, maybe even this quarter—it will start to decline slightly for us. But it's been such a steady grower, it's been fantastic, and on top of that we've grown the streaming, and when you add the two of them together, that's what's helped make us so successful.
You've now got more subscribers than Comcast (CMCSA). How big is Netflix (NFLX)?
Well, we're about 24 million subscribers today, and that's up from about 15 million a year ago, so it's a very high rate of growth, and that's what's exciting about the business—more and more people are getting smart TVs, they're watching Netflix on their iPads. It's really on all of the devices. And it's not just Netflix, it's also Hulu, YouTube, all of the online video is experiencing an explosion in viewing because it's so convenient, the click-and-watch.
The idea used to be that you had mostly older movies. Are you part of the move toward premium-priced early releases?
We have a very wide range of content, but the brand-newest movies, what's happening with those is a $30 pay-per-view option—not from Netflix but from DirecTV (DTV) and others—of movies that are in the theater.
So what do you see happening to movie theaters?
It's unclear. That's why the studios are moving slowly. They're moving with DirecTV and others to try that $30 premium window, and I'm sure they'll watch what happens with the theaters. And I'm sure they very much want the theaters to stay highly relevant. So much of the downstream revenue is linked to that initial excitement, to how much revenue is produced in the domestic box office. For example, what we pay for a film three years later is highly correlated to how well it did in the box office.
Tell me about Netflix's move into original content.
When HBO (TWX) does original content, they're real creative. They do scripts, they cast people, they own it on a global basis. What we did is we licensed the premiere from another studio, Media Rights Capital, that's creating a show called House of Cards. David Fincher is directing it, Kevin Spacey's starring in it, and like The Office, it's a remake of a British success. And that's what is characterized as original content, because it's going to be exclusive on Netflix. It's coming out next fall.
Should HBO be worried?
In some ways. We're like baseball, and they're like football. We have no overlap in content, but we sell to the same person, the same aficionados are passionate about our products. But I don't think the NFL worries about baseball encroaching on their territory.
With this platform, aren't you going to be inclined to want to create content, not just license it?
Well, we're inclined to do things that are profitable for us. [HBO has] an incredible competence that we don't have in creative, and in figuring out what's going to be popular. We can be a licensor of prior seasons from Showtime, HBO, and others and be very successful, so that's our current ambition.
You learned about the power of streaming video from YouTube?
That's right. YouTube was our clarion call—and then we raced and it took us a year and a half, to the beginning of '07, to launch our first streaming.
Where will streaming be in five years?
In plastic media, you have to standardize it. So DVD lasts for 10 years. Then Blu-ray. You get a chance once every 10 years to make change. On the Internet you get continuous innovation, so every year the streams are a little better. Now it's got 3D, now it's got 1080p, you know, it'll be 4K in a couple of years, which is ultra-ultra-high-def. With the Internet, the decoders are very flexible, so you can just keep making it better and better and better. ... Just 10 years ago, AOL (AOL) was the king of the world, right? And 56K was the typical speed people connected to the Internet with in the year 2000. Then you just do Moore's Law, doubling every 18 months ... it would predict that this year the average speed would be 14 megabits in the U.S., which is just about right with a cable modem. And if you drag that out to 2021, the typical American home will have one-gigabit connectivity. And that sounds shocking, and then you realize, wait, that's what Google (GOOG) is rolling out this year in Kansas with their Google Access project.
Resources:
Bloomberg. Charlie Rose Talks to Netflix's Reed Hastings.. Retrieved May 7, 2011, from http://www.businessweek.com/magazine/content/11_20/b4228026487218.htm
Charlie Rose. A conversation with CEO Reed Hastings of Netflix. (Video) Retrieved May 7, 2011, from http://www.charlierose.com/view/interview/606
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