The increasingly popular internet video streaming service Netflix has expanded into roughly 40 countries, and has taken on its traditional media competitors by creating its own original shows, such as political drama House of Cards and taken on the latest season of comedy Arrested Development. Reed Hastings, the chief executive of Netflix, sat down for an editorial board meeting with the Financial Post. This is an edited transcript of that conversation.
Q: You say you still have cable so you can watch big sporting events. Is that an acknowledgement of the crucial limitations of Netflix?
A: Actually, I think of Netflix as a channel, not as a cable replacement. So it’s one channel, a big broad universal channel.
Q: What do you think is going to happen over the next five or 10 years in internet video?
Internet video provider Netflix is facing an onslaught of competing streaming services launched by Canadian media giants such as Bell, Videotron and Astral as they clamour to cash in on the increasingly popular platform. But Reed Hastings, the chief executive of the Los Gatos, Calif.-based Netflix, is nonchalant about the market his company pioneered becoming increasingly crowded.Keep reading.
A: Well, you know, the fundamental thing is the internet has been getting faster. And now it’s video capable, which is really a last-five-years phenomenon. And, internet video will be very transformative across all societies for telemedicine, for online learning, for education. For communication of various sorts. And it brings, whether it’s person to person, or a recorded video like a movie or a TV show, to a person it will be very transformative.
And, TV in the future will be like a giant iPad. It will have a bunch of apps on it, each app will have a unique experience. An app that has sports content will be quite different from an app that has Netflix type content, movies and TV shows. An app that does hockey may be quite different from an app that does baseball in the way that it gives you more context and makes it a richer experience. So we’re getting beyond just a stream of video, which is all broadcast technology can do, to really try to be innovative about the interaction.
And iOs and Android and mobile systems give us our lense into what’s going to happen in television. And some of it will be smart TV, some of it will be things like Apple TV that attach to a TV, and some of it will be you’ll choose content on an iPad and just hit play on the screen. It will be all of those modalities, but it’s basically internet centric. And today, video has been very premises centric, or residence centric. Like a power utility, you hook up power to a house and you don’t expect it to give you power on the road. Cable is like that. It really goes to your TV, and only your TV. And you don’t expect it to be portable.
Whereas an internet service like YouTube or Netflix runs on all your devices. It runs on a big screen but it also runs on the small screen too. It has got an internet sensibility in terms of application updates, and integration with other services, and you know, all the things that come along with it. And what’s happening now is all the existing networks are figuring out that they need to have good applications. And over time, CBC will have a great application. If you look at the BBC in the UK they have been working on the iPlayer for four years now, and you know it’s a great application. And in the UK it’s extremely popular and it’s all internet video. Networks that build a great app will prosper. And networks that build applications and only have their linear feed will lose share.
And if you think of the fixed line telephone. Lots of people still have fixed line telephones. But they mostly use their mobile phones. Fixed line will go down a little bit every year, and so that’s how I think of linear TV. Fixed line and linear will age out of the society steadily… in favour of this internet era, where there is not a single provider. There’s a bunch of different apps that are constantly competiein for your time, for your money.
Q: In Canada, where it is a highly regulated industry that protects and encourages local content, what are your plans regarding the creation of Canadian media content or local productions?
A: “We licence local content, and so we support the ecosystem in that way. But we licence it because people want to view it. We don’t licence it to fill out, because we’ve got so many hours. When you’re on demand, no one really knows what it means to like between 20 per cent of your broadcast time has to be that type of show or that type of show. Because it’s ultimately what the consumer chooses when it’s on demand. So we could carry a bunch of conent for, say, regulatory reasons, but if nobody watches it, it’s not really achieving the objective.”
Q: Where do you see the percentage of content creation in Canada going?
A: “Hemlock Grove is a show that we produced for a global market, and we produced it here in Toronto.”
Q: But you’re only going to do it if you can sell it?
A: “We’re fundamentally driven by the consumer. You know, what people want to watch. So that is the core focus, what consumers want to watch.”
Q: One of the issues has been getting the copyright for movies and TV shows for particular markets. How do you negotiate your way through that?
A: “It’s like sport rights, like the Olympics or anything else. It’s bid out by market. In each market, we have to win the bidding for the shows that we want to carry. A recent exmaple, is a popular TV show, Community. We lost bididng in U.S. against Hulu, so Hulu has that exclusively. But in canada, we won the bidding, so Community is on netflix. There are other cases where its the reverse. Some content in the U.S. that we don’t have here. But it’s because the content owner is bidding it off market by market, as to who will pay the most for that content.”
Q: Is it strictly a dollars thing?
A: “It’s 90 per cent a dollar thing, 10 per cent is strategy, in which is they don’t ever want one bidder to get too big. And so, if they perceive somebody as dominant, they’ll help out the other guy. But mostly they want their peer companies to help out the other guy, they don’t want to be the one doing it. Other than that, it’s the bidding. The artists and prodcuers, they get paid on how the content sells, and they have agreements that each company has to maximise the efforts around each piece of content.”
Q: How do you assess how much to pay?
A: “That’s the art of our programming. It’s one of the core competencies of Netflix. I’ll use the example of the TV show Community. We develop an estimate of how many people will watch it, and we’ll use watching as a substitute for enjoyment, because they’re voting with their time. If we’re right about how many people watch it, then we know this is the highest bid that we should bid for it.”
Q: So, you’re in the business of creating a big pipe of content, that’s not necessarily comprehensive, but has a good variety?
A: “It’s got to be enough to get people to want to subscribe, and that they keep watching. But we can’t be everything at $8 a month. And even if you [say] ‘We’re everything’, you’re still not YouTube. I mean, you’re not really everything. So, there’s nobody who is going to serve every need of the consumer. It’s just we’re all trying to get better and win more of people’s time and money in terms of their entertainment.”
Q: You have a big day coming up with Arrested Development. You’ve done other series where the whole season drops online in one day before, with House of Cards. But the popularity doesn’t compare to the popularity level of Arrested Development. What have you done to prepare for this extra capacity on May 26, from a technological standpoint?
A: Our system is highly distributed, we have our own content distribution network, and we use Akamai, Limelight and Level 3. And so, I think everyone is pretty prepared for it. So we don’t anticipate any problems. We’re releasing Arrested Development at the same time everywhere around the world. And so it’s one global release, so that is an additional stress point. But we do release this all at 12:01 am California time. So that helps a little bit, as it’s sort of for the next day. Some people will wait up to 3 a.m. to do it… It will be really fascinating to see what happens.”
Q: But no Bluth banana stand in Toronto or anywhere else, just New York?
A: So far, just New York.
Q: There have been many Canadian subscriber numbers floating around out there. Some say 3 million, and the Astral CEO recently estimated that Netflix has around 2 million. What is your subscriber base in Canada?
A: “For competitive reasons, we no longer release any per country or per market numbers. What we’ve said to our investors is we’re growing in every market. And you know YouTube is growing, and the internet, i player, bbc is growing, internet video has such a big tailwind that everybody is growing.”
Q: Has data caps in Canada been a hurdle to your penetration rate?
A: “It hasn’t been so far. It’s a deterrent to Canadian society. It exists nowhere else in the world. In Britain, everything is uncapped. In the U.S., by Comcast, for $45 a month is 300 gigabytes. And then the marginal 10 gb is like a dollar, it’s really cheap. In Mexico, it’s completely uncapped internet, and people get to use as much as they want. It’s expensive to lay a network, but the marginal gigabyte really doesn’t cost very much at all. So I think what we’ll see is the data caps will get higher and higher and go away here. So, today Rogers is doing a big promotion, [saying] ‘Now we’re unlimited data.’ And, so, things are starting to shift more towards the embrace of the internet society. So, I’m optimistic that it will happen more and more. And that’s not just driven by Netflix, it’s driven by Skype and YouTube and all kinds of video scenarios.”
Q: What is the role you see Netflix playing on next-generation gaming consoles?
A: Video game consoles are high-end intensive experiences that are great for gaming, but they’re probably more powereful than they need to be for just video rendering. If you’ve got one, because you’re a gamer, it’s nice to run Netflix and other applications on it. But the big growth area for us really has been tablets. Both the iPad and the Android tablets have gotten more popular, because it’s portable, it’s easy, the devices are so in. Game consoles are good for us, and I’m sure we’ll be on all those new platforms. But, those platforms, at least the new ones, will be expensive as they were five years ago in the first generation. And the people who will buy a PS4 are those who already have a PS3. So It’s not going to be an uplift for us.
Where as tablets and phones opens up more viewing opportunity. Fundamentally, you should think of mobile phone a remote control for life. It’s going to control your thermostat, when you get in the car it’s going to synchronise and tell you when you are going to get the oil changed, and how you upgrade. And of course its the centre for your music. Over five or 10 years, as mobile phones get better and better, more and more of your interactions with various things will be through the mobile phone. And video watching will just be one scenario in that.”
Q: How does Netflix into Canada’s regulatory environment?
A: So far, and I think its true in all 40 countries, governments are treating Netflix like YouTube. For the most part, it’s part of unregulated news services. Now the question is, as it conflicts with regulated regime, where you’ve got broadcast spectrum that the nation owns and licences, and all those conflicts, will the internet side get regulated? Or, will the other side get deregulated? And I’m sure that will vary nation by nation. People will try different things.”
Q: Do you anticipate Netflix coming under regulation?
A: “Each nation will make different decisions on that. And we’ll have to comply with those decisions. It does not seem imminent from everything we can tell. We’ll see how it evolves. Videotron recently launched a competitive service to Netflix that’s focused on French language content, and doing a great job on that. Rogers is likely to launch a competitive service to Netflix. And the more that everybody does that, it’s a little tougher for us. But you get the validation of everybody’s saying this is the way to go. Internet on demand, iPad based or XBox viewing, but you get a lot more energy around it. And that might draw in regulation. But we haven’t yet seen any country regulation other than very culturally sensitive topics.”
Q: Are you pushing for any regulatory changes here?
A: “The things that affect our business and that we care about are data caps rising. But that’s not a regulatory mechanism at this point. And there’s enough market pressure, it seems to be, that the caps are rising.”
Q: You don’t seem too worried about the number of big media companies looking to jump into the online streaming model. Why not?
A: “It’s recognizing that it’s a very broad market for your entertainment time. So you can turn on the sports game, you can watch a DVD, you can kill some time browsing the web, you can read a magazine. It’s 8:30, the kids are doing homework, you’ve got an hour, what are you going to do? And we compete against this broad range of leisure activities, or you can turn on Netflix. So, having two other internet networks that are a lot like Netflix but with different content, doesn’t particularly affect us. There’s not a category called ‘I want to watch streaming video.’ You know, ‘This is my streaming video time. Which service am i going to do?’ The category is, ‘how am i going to relax, what do I feel comfortable with? i’m bored, what am I going to do.”
We compete with video gaming. You know a trillion hours spent on angry birds, on the phone, that’s what we compete with. So that’s why we’re not overly concerned about, ‘Oh my god, what if that person does that?’ They’ve already got cable, they’re making cable better. And what we can definitely say is Netflix in Canada has driven, and is driving, better consumer experiences. Rogers and Bell, they know they need to improve their systems to hold on to people. And that’s the classic benefit of the competition.”
Q: But some of these competing services may have more premium content, or more newly released movies. Aren’t you worried about that?
A: “You have to accept in business that you’re going to have a lot of competition. there aren’t any interesting markets where you’re the only car company or the only newspaper. So, you know, we got out in front early because we saw the opportunity about internet television. But, we’ve always known there’s going to be a lot of competitors. And, if you look at TV networks, there’s a lot of different TV networks and many of them do well if they focus on the programming that they have and the experience. Look, there’s going to be multiple networks. You’re going to open your iPad and there’s going to be a bunch of different networks. We hope to be one of them, but we’ve never thought we’re going to be the only one. Because there is too much other content. We don’t have any sports content, news content, music. And there is lots of other types of content that people are going to want, but it’s not what our brand is about.”
Q: Are you going to go into those types of content?
A: “No, I don’t think so. Certainly not in the next couple of years. We’ve got so much to go to get more movies and more TV shows. Every incremental million dollars we’ll spend on getting those. In the long term, I think there will just be different brands. I imagine that like hockey and baseball, it will be more direct to consumer. Like MLB TV network, it’s a really great app for baseball fans. And that’s an example of the kind of innovation that will happen.”
Q: Do you want to segment your services into specialized channels? So customers can pick and choose the type of content, and tailor their payment to that?
A: “The challenge when you’re a growing service is you don’t want to be complicated. There are still a few people who barely know what netflix is. And so, for us, we want to really focus on unlimited viewing, $8 a month, great selection, keep it really simple. But over time you could do a range of different pricing things. None of which we plan to do in the near term, but you’re right, it could go that way. If you think of a normal S curve of adoption of a business, we’re on the early phase, because the internet is still getting mainstream in terms of internet video. But in the maturing phase you tend to segment the market more.”
Q: What is the thing you worry about most?
A: “Well, there is always the Netscape nightmare. That you’re the pioneer, you’ve figured something great out, and then you get run over as the big competitors enter the market. We have a different business model than netscape. they sold software. [But] we don’t want to take it for granted, because that can happen. So, what we have to do is every day figure out how to make the service better. We use the Netscape nightmare as a motivational framework. This can happen, we gotta get our content better. We have to get the streaming better. We have to get the UI better, we have to get the marketing better. So, we don’t know what will happen as these large companies, Rogers, Bell or Comcast enter the market. So the most we can do is just try to be the best service we can. And then it will sort out. There is nothing we’re going to do that is going to affect what they do. because those big companies operate on their own rhtyms.”
Q: With House of Cards, and other new series, does that finally put to rest the notion that Netflix has old, or older, content?
A: I think so. But what we need to do is continue to innovate. we have a great new show called orange is the new black, coming out. That’s just going to be one more amazing show. We’ve got a series of other shows coming out. so, it’s not like we’ve spent the money on the originals, got that problem fixed, and then we stop. We want to now build on and do more and more of this global programming. We’re trying to get shows from around the world and build this global audience more.”
Q: Is piracy an issue?
A: “When we were doing our research into Canada a few years ago, it was stunning to us, because suburban moms would openly talk about bittorrent and how they would get shows. But since we’ve launched, bittorrent usage in Canada has gone down quite a bit. That’s been reported by Sandvine. And, it turns out that people are willing to pay for content at $8 a month. So the piracy has gone down a lot. So. yes we worry about it, it’s a competitor. But we feel if we do our service well, we can still prosper.”
Q: You have had the same price point since launch. But with the introduction of exclusive content, do you plan on moving up the price point? Or do you feel like you’re locked in?
A: “If we stay at the same price and grow sufficiently, that’s another way to grow the revenue. So far we’ve been very happy. So we’ve launched streaming only in the U.S. at $8 and we’ve never changed that price. With streaming, we’ve always ad a low price of $8, and have had that here in Canada from our launch. And that’s helped us grow. I don’t know if we’re locked in or not, but it’s been working very well for us, because we’re continuing to grow the number of subscribers. And that let’s us then get more content. So we’re very happy with this and there’s no particular reason to change.”