Online Rental Blog

NETFLIX CEO HASTINGS Q & A

Posted on October 5th, 2007 by freedvdtrials.com

Netflix founder Reed Hastings

Q Despite recent losses, Blockbuster has deep resources, combining brick-and-mortar stores with online rentals and brand identity. Do those advantages make it an inevitable winner against Netflix?

A I’d like to say they don’t have a chance on the planet, but the reality is they do, and that’s what makes it an interesting battle. They have stores (and) they have a brand that’s known by every American. We’re known pretty broadly and we’re known very well in the online segment, but they have broader branding.

They’re about five times larger than us in (annual) revenue. They’re about $5 billion compared to our $1 billion. So that’s a big benefit also. But we’ve got some assets, too. We’ve got $400 million in cash in the bank and no debt, and they have almost no cash and lots of debt. Their stores are both an asset and a liability, because as people leave stores it starts to be a real problem - what do you do with those leases and those kind of things. And we’re an Internet company through and through.

Our view is that the smart money is that they can’t sustain the battle. . . . Last year they were $251 million of positive free cash flow, calendar year. The first six months year to date, they’re negative $215 million. Big numbers and a big change.

Q One view is that Netflix and Blockbuster are in a mutually destructive competition that threatens to erode both companies. How would you describe it?
A It’s growing the market. Investors are concerned about eroding profits, but not an eroding market, not eroding revenue. Consumers are signing up for online rental in droves. Two years ago, it was about 2.1 million net (subscriber) additions to the online market. Then it was 2.5 million, (measuring) mid-year to mid-year. And then the last 12 months, it went to 3.7 million in increased total subscribers. We got about half that, and Blockbuster got about half that. So the total market is steeply accelerating.

There used to be a lot of questions, “Well, how big is that online rental market? That’s kind of a niche. Hardly anyone will do that.” Now you never hear that. You hear the analysts saying 20 to 25 to 30 million total subscribers. We’re at 10 million now between Blockbuster and us. Everyone’s like, “The market’s going to double.” And then the question is, does it stay like it is now, two-thirds share for us, one-third share for them. Or does it flip?

Q What kind of timeline do you envision for most movies or mainstream entertainment content being downloaded instead of being on the various DVD formats?
A It was 10 years ago when we started. And what we realized is, yes, there’s going to be a world of Web-based television, and you’re going to be able to watch all kinds of video content from all kinds of sources. But we realized that there was going to be a generation before that of digital, of optical, disc, and that we could build a company because not many people would realize this.

It has come along basically as we thought - which is, we thought it would be a three-decade situation, kind of like a three-act play. There was going to be the decade of DVD, which is what we’ve been doing. There’s a decade of hybrid, where there’s a lot of content on DVD and only a little content online. And then the third decade will be online only. . . . If you mean the pure online world, which we’re getting close to in music, then it’s another decade away. If you mean the beginnings of it, it’s already starting obviously (at Netflix) with our Watch Now service.

Q The big challenge is getting the downloadable movies and content to TV sets, right?
A Cell phones have a lot of online content (and) game systems have a lot of online content, so we’re already seeing the beginnings of connectivity. New televisions in the next two years will have WiFi just built into them. . . .

We’re developing the ecosystem on the PC. People under 25 are willing to watch movies online on a PC. Then you’ll see a market grow and then Cisco and a hundred other companies will make devices that connect the Internet to the TV.

I would say the big message is, Web-based television, video Web, is what I think will be coming, even if it doesn’t exist today. Think of all the video content you can get on your PC. You want to get all that on your television. And some part of it will be Windows Media and some part of it will be through TiVo and some part of it will be through game systems and some part of it will be through dedicated Internet media boxes and some part of it will be through WiFi televisions. It will be a bunch of different things because we think bandwidth is growing to the home and it will get to the TV.

Q What kind of demand are you seeing for Blu-ray and HD-DVD?
A We carry all the Blu-ray titles and we carry all the HD-DVD, so we’re agnostic. And we think the solution in that market is to have the studios publish on both. . . . (Customer demand) is pretty evenly split between them (but it’s) tiny, like a percent or something.

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