Netflix CEO Talks About Growth Opportunities

Discussion
Mar 28, 2007

By George Anderson

Netflix CEO Reed Hastings knows that the business of renting movies through the mail is not long for this world. He’s not sure how long that will be, perhaps 20 years, but he’s not worried.

Mr. Hastings in an interview with The Wall Street Journal talked about how Netflix, the online video rental service that delivers titles through the mail to consumers, has defied naysayers up to this point and how it plans to continue doing just that.

The company currently has 6.3 million members on its monthly plans; that’s a 51 percent increase over 2005. Revenues were up 46 percent during the most recent fiscal year and Netflix continues to stare down the likes of Wal-Mart, Blockbuster and Amazon.com.

Mr. Hastings said those that doubt the long-term prospects of a DVD rental service using the mail are smart to do so. He said “there’s a known obsolescence” and the service will be eventually be replaced by another form of delivery. “We can argue about whether that’s 10 years or 25 years [away]. Some people probably think it’s five. I think they’re wrong. It’s probably more like 20,” he said.

Online downloads are one of the delivery methods Netflix is exploring along with its growing list of competitors, including Apple’s iTunes service.

“We’re taking it (online downloads) pretty aggressively. We’re investing about $40 million into it this year,” he said. “We feel that that’s the appropriate size investment, given the size of the market. If you over-invest in a market, of course, a lot of the money is wasted… We’ll be up to 5,000 films by the end of the year, open to all of our subscribers.”

Netflix expects to see continued strong growth in its subscriber base despite initiatives such as Blockbuster’s Total Access service, which gives members the option of returning films to stores in addition to going the mail route.

“We’re forecasting around two million this year in net additions [of subscribers]. They’re forecasting around two million net additions. The amazing thing is that that’s four million net additions total, that the market is growing that fast. While we’re competing hard and that can be challenging, it’s absolutely having the effect of growing the market faster than either one of us could have grown it on our own.”

Ultimately, said Mr. Hastings, Netflix is looking to connect with consumers through every channel possible. “Our view is we should get to every internet-connected screen over the next two years, as we also grow the title selection. That includes cell phones, laptops, where of course we are today, and television.”

While Netflix has worked on many prototypes for delivering content, according to Mr. Hastings, the company is not ready to publicly comment on those it intends to pursue.

Discussion questions: How would you assess the current state of the retail movie rental and sales business? Where do you see the business heading in the future?

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14 Comments on "Netflix CEO Talks About Growth Opportunities"


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M. Jericho Banks PhD
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M. Jericho Banks PhD
15 years 1 month ago
Hello. My name is Doc and I’m a Netflix junkie. I’m on the four-at-a-time plan and trying to cut back. It’s not working. I’m embarrassed to carry my multiple red return envelopes to our community mailbox, so I do it at night. If we could watch the movies in our Netflix queue via DirecTV for the same price, we’d choose that. Busted or otherwise inoperative disks would be a thing of the past, and no more envelopes. (My postman tells me that they often receive “whole trays” of messed-up Netflix shipping envelopes that have to be returned to Netflix.) As a step in the right direction, Netflix seems to have eliminated their “throttling” program, where they delay for a day or two the shipment of new titles to subscribers to their higher-end programs. Now they need to clearly indicate which movies are subtitled (I hate subtitles), buy enough disks to fill all orders immediately (no more “long wait” or “short wait”), and be aware of systemic problems (I returned the same disk four times with… Read more »
Liz Crawford
Guest
15 years 1 month ago

Millenials and Gen Xers are tech native (unlike poor ole’ boomers)–and they have been using downloadable video on multiple platforms for as long as it’s been available (legal or no). The only market for a mail-order movie will be a luddite boomer in years to come. Convergence is here. To paraphrase William Gibson, “The Future is here, it’s just not distributed evenly.”

Joy V. Joseph
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Joy V. Joseph
15 years 1 month ago

Domestic high speed internet HH penetration is around 70% right now, but has been leveling off in recent quarters (NetRatings data). So, if with these high levels of penetration the bulk of the renting population is not already using downloading as a channel vs. mailing, then there must be other dynamics driving this market. I would imagine that Gen Yers must have the highest propensity to use this mode of movie watching, but the average Gen Yer is under 21 and not yet fully part of the regular wage earning population, so they are probably looking more for online freebie downloads than to actually pay and rent. That would probably imply that this demographic is not a very large part of NetFlix’s market. The next 5-10 years would see some amount of switching and NetFlix is right to develop their technology to handle this in advance of the switch. But will it be obsolete in 10 years? I don’t think so.

Al McClain
Guest
Al McClain
15 years 1 month ago

If the “video through the mail” business hasn’t peaked already, it will soon. There is no good reason to keep mailing a physical product back and forth when it can be zapped to the consumer in an instant. Sure, bandwidth is an issue today, but it’s less and less of an issue every minute.

Race Cowgill
Guest
Race Cowgill
15 years 1 month ago
If so many people are so good at predicting the future of these things, maybe they ought to invest more of their money in the stock market, where they could put their prediction powers to use and make millions. Or maybe we like to think we can predict the future. Does it make us appear smart or clever? Why do we insist on pretending we can do this? Of course, prediction is the bread and butter of some occupations, such as Wall Street and industry analysts, and to suggest that we can’t predict the future doesn’t put these occupations in a good light. Maybe we should remember the investor’s mantra: “Past trends do not indicate future ones.” Yes, Ben. “There’s a known obsolescence.” Obsolescence: “the process of becoming no longer useful.” Let’s see: the DVDs still work, the DVD players still work, the US Postal Service still works. How is mail delivery of DVDs no longer useful? And are these folks really predicting, as it seems, that NO one will want DVDs through the mail?… Read more »
Ben Ball
Guest
15 years 1 month ago
Predicting the end of tangible delivery forms for products that are capable of digital delivery seems smart enough. Why wouldn’t people do that? Well, why don’t you download all your magazines and catalogs? Certainly we distribute our consumption of such media between both digital and hardcopy formats, but why? Part of the answer is certainly that “we just continue to get them that way”–for now. But are there other motivations? For example, impulse. Will we stop grabbing the occasional People magazine at the checkout if it is available online? (Experience to date says no.) To the same, will we stop picking up DVDs at a whim, or forgo completely the experience of browsing the titles in a Blockbuster just because the same experience is available on our computer? I don’t think so. At least not all of us. (Full disclosure, Ryan has called me a Luddite before!) Finally, there’s a convenience element to this. For the foreseeable digital future, it is going to be more convenient to select your titles online than it is to… Read more »
Laura Davis-Taylor
Guest
Laura Davis-Taylor
15 years 1 month ago
All brands should be (and stay) worried in this day and age, as the worry will keep them on the edge. 20 years is ridiculous, as anyone can look around and see the mach-speed of technology in our lives. We are a mere handful of years away from on-demand for almost anything across the four screens in our lives (TV, personal computer, hand-held and place-based screens). Many services and distribution platforms will converge to enable this and Netflix is in a prime place to take advantage of it, as their consumer profiles are chock full of rich personal data. Netflix was a dark horse that no one saw coming. Their success was driven by the fact that they saw a consumer need and made it easier to get the movies that people want for a reasonable price. They went a step further and developed helpful tools and fun social sharing to make it all the more rewarding. If a company emerged tomorrow that could do the same thing but serve up any on-demand movie on… Read more »
Bill Robinson
Guest
Bill Robinson
15 years 1 month ago

The life cycle of retail segments keeps getting shorter and shorter. Frank Woolworth invented 5 and 10 cent store in the 1880s. About 100 years later, tens of thousands of stores were reduced to a handful.

Video rental stores were invented in the 70s and quickly spread to every neighborhood. Now mom and pop video stores have vanished and video rental chains are holding on, a mere 30 years later.

Netflix was invented a few years ago exploiting mail delivery. Soon, it will have 10 million subscribers. But with the promise of digital on demand services, it is likely that the new channel will fade quickly. Perhaps, in ten years.

How long will the successor form persist? Don’t blink, you might miss it.

Roger Selbert, Ph.D.
Guest
Roger Selbert, Ph.D.
15 years 1 month ago

As the article indicates, the current state of the market is growth, growth. And I concur that the market still has 20 healthy years left in it. It would take at least that long to lay the “last mile” of fat pipe (broadband) into every home, unless you think it will done via wireless. But even then, not everyone will buy the necessary equipment. Read today in the LA Times that 20% of Americans still use rabbit ears and risk being without TV when the switch to digital is completed in 2009!

Here’s the main point: even if movie studios themselves were able to distribute their product directly to consumers, there will still be a need and demand for aggregators–that’s right, retailers. The role of retailers is underappreciated in our modern economy. They are clearing houses of products and information, and market clearers as well (accurate price setters). This would be my point concerning the Supreme Court case as well!

George Anderson
Guest
George Anderson
15 years 1 month ago

What Reed Hastings said. His vision and execution have been spot on to this point and there is good reason to have confidence in his vision for Netflix and the video market moving forward. That said, remember that past results are no guarantee of future performance.

Ryan Mathews
Guest
15 years 1 month ago

The future is now (more or less). A shift to online downloads isn’t far away so the key metric to watch is penetration of PCs/laptops/phones or other receiving devices. Sure some people like bigger screens but most computers (including the one I’m typing on) can be easily hooked into home entertainment systems. Who needs to go out, and worse, return things?

Mark Lilien
Guest
15 years 1 month ago

Last year Netflix made $49 million on $997 million sales. A billion dollars is a lot of money, but it’s a modest amount compared to the capitalization of the large entertainment media companies like Time Warner, News Corporation, Sony, etc. Will the large media companies get any value by dealing through Netflix or Apple for downloads? Or will they make more money dealing directly with the public?

Entertainment companies, since the movie industry’s formative years after World War I, tend to be strongest when they own their outlets. Until the antitrusters broke them up, the most successful movie studios were all owned by real estate folks who ran the theaters. TV networks liked owning their studios until they were forced by the government to partially disgorge them. Netflix might be worthwhile to an undercapitalized small producer, but a Disney-size copyright owner might not feel they’re worth their cut of the action when downloads become the norm.

Vahe Katros
Guest
Vahe Katros
15 years 1 month ago

The concept behind http://www.iletyou.com–a firm that enables folks/firms to rent their stuff/DVDs, specifically to create a personal netflix is something new and interesting–the shift to YouTube-based content is changing this business.

Justin Time
Guest
15 years 1 month ago

Netflix is America’s support system. It saved my mom’s life. It is convenient and with so many Americans, yeah those boomers and beyond, technologically challenged, sometimes the simplest and the most direct approach to delivering entertainment is what catches on.

With cable service subject to being down, Netflix provides good entertainment at reasonable cost. Netflix’s delivery system is so much better now than it was just a few years ago. My Mom gets new releases in her mail every Monday. It fills a void left by the death of my dad. It gives us something to talk about during nightly telephone conversations. Netflix movies really make the difference in the quality of life for so many American families. Sure, the delivery system of movies in the future will change, but for now, Netflix has the right product delivery model.

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