NETFLIX DEFIES NAYSAYERS (WSJ)

By Nancy Vialatte

The Wall Street Journal today runs a Q&A with Netflix’s Reed Hastings. The 46-year-old Silicon Valley veteran has defied naysayers, says the Journal, by maintaining strong growth even in the face of such comers as Wal-Mart, Amazon.com and Blockbuster.

Netflix finished last year with 6.3 million subscribers, up 51% from 2005. Its revenue also grew 46% to nearly $1 billion and today, Netflix rents out 1.5 million DVDs a day.

In answer to a question about Netflix’s sustainability, Hastings notes, “We're sure that we're going to be buying cars in 25 years, whereas renting DVDs through the mail in 25 years? For sure that's not going to exist…If one thinks of Netflix as a DVD rental business, one is right to be scared. If one thinks of Netflix as an online movie service with multiple different delivery models, then one's a lot less scared. We're only now starting to deliver the proof points behind that second vision.”

On pushing into Internet-delivery of movies:

Hastings: We're taking it pretty aggressively. We're investing about $40 million into it this year. We feel that that's the appropriate size investment, given the size of the market. If you overinvest in a market, of course, a lot of the money is wasted.

If you underinvest, then someone else can get ahead of you. We'll be up to 5,000 films by the end of the year, open to all of our subscribers.

On Blockbuster’s attitude:

Hastings: We have to recognize that now there are tens and maybe hundreds of start-ups who think that they're going to eat Netflix's lunch. The challenge for a management team is to figure out which are real threats and which aren't.

During the Internet bubble, Blockbuster was very disciplined. Their primary competitor, Hollywood Video, bought a video sales company for $100 million -- Reel.com -- and then plunged another $200 million of losses into it and ultimately cratered Hollywood's balance sheet on a business selling VHS online. It's conventional to say, "only the paranoid survive" but that's not true. The paranoid die because the paranoid take all threats as serious and get very distracted.

Examples of how Netflix was choosy in reacting to potential threats:

Hastings: There are markets that aren't going to get very big, and then there are markets that are going to get big, but they're not directly in our path. In the first camp we have small companies like Movielink -- a well-run company but not an attractive model for consumers, sort of a $4-download to watch a movie. We correctly guessed when it launched four years ago that this was not a threat and didn't react to it.

The other case I brought up is markets that are going to be very large markets, but we're just not the natural leader. Advertising supported online video, whether that's at CBS.com or YouTube -- great market, kind of next door to us. But we don't do advertising-supported video, we do subscription, so it would be a huge competence expansion for us. And it's not a threat to movies.

On how the Blockbuster rivalry will play out:

Hastings: 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.

On getting movies from the Internet to TVs:

Hastings: 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 cellphones, laptops, where of course we are today, and television. At this point we haven't made any further announcements on that.

On being squeezed by AppleTV and iTunes:

Hastings: Obviously cable and satellite have been very large closed systems, as is the Apple system, as are games. On the other hand, PCs have been very open. There's a whole continuum.

We're big believers in the power of the open Internet to get to the television. Our view is it's certain that, from the television, consumers will be able to browse online video from millions of Web sites because the demand is there.

On the importance of renting HD-DVD and Blu-ray movies for Netflix:

Hastings: (It’s) tragically small. We have all the titles on HD-DVD and Blu-ray. They're running neck-and-neck, but the total volume is less than 1% of our volume. Consumers want high-def, but the perception of a format war is freezing consumers out. Until that perception stops, very few consumers will try the new high-def discs.

On the relationship between technology and entertainment:

It's fashionable to say the record companies are awful. But they're no better or worse than any other company. They're trying to grow and make money, and there are going to be less artists that get signed to their deals now because they have less revenue. Fortunately, that hasn't happened in the movie business. Now, to have it grow, it's not extorting consumers. It's giving consumers such a good experience that they feel good about paying. That's what's hard in online video -- making the consumer happy and making the studio happy.