Netflix CEO Q&A: Picking a fight with the Internet service providers


CEO of Netflix Reed Hastings at the White House Correspondent's Weekend Party  in Washington, D.C., on May 2, 2014. (Tony Powell)

LOS GATOS, Calif. — Reed Hastings recently stood before new employees packed into the company’s campus movie theater, pulled a gray hair from his head and held it up for all to see. A single fiber optic strand, as thin as that hair, could carry massive amounts of data — the equivalent of all of Netflix’s global video traffic at any given time, he marveled.

The co-founder of Netflix has been thinking much more about broadband providers these days, with his company spearheading a lobbying effort to get federal regulators to monitor how Internet service providers charge Web firms like his to move data around the Internet.

It’s a risky effort. Netflix, which gobbles up one-third of bandwidth during peak hours, doesn't think companies like theirs should pay extra to place its servers closer to the networks of Comcast and Verizon.

The issue reveals Netflix at an important turning point. It won kudos with television critics, nominated for 31 Emmys on Thursday. But it’s making enemies out of the companies it relies on most — the cable and telecom firms providing all those lightning-fast Internet connections as thin as his hair.

The following is an edited transcript of a recent interview in the “Hawaii Five-O” conference room at the company’s headquarters. Hastings had just returned from watching the U.S. play against Germany in an early World Cup 2014 match.

When you watch events like the World Cup, do you think of how that kind of content will make it on to Netflix’s app?

No. We are really focused on movies, TV shows and surrounding ecosystem like the comedian Chelsea Handler. Of all the movies and TV shows, we have one in ten. We have so long to go to fulfill our mission of having the best of the world’s content.  That is more like 10 to 20 more years. We don’t have any ambitions or interest in sports, which is a unique and wonderful entertainment option but it’s a very different space. It’s just not what our brand is about.

At the same time, it feels like you are going more into the territory of traditional TV. What was your thinking about late-night talk shows and the deal with Chelsea Handler?

It’s a talk show, that it’s different than movies and TV. But it’s a talk show about entertainment, movies and TV shows, so it feels like a natural complement. But it’s still very different from reality, sports, video games and music videos. Another category that we don’t do is educational stuff, all the stuff like “cook the perfect quiche.” If you want to make the perfect quiche, type it into YouTube and that’s where you'll find that content. We think of Chelsea as expanding and filling out a certain proposition. Maybe she'll do an incredible show and with her, we'll reinvent the format and you'll watch them in stacks and you don’t have to watch at 11 at night but watch earlier, maybe  more convenient than the current system but still feels topical and fresh.

Did you use data on viewer preferences in your decision to sign up Chelsea Handler?

It would be great if the computer could say, 'Here’s a talk show with a blue Canadian that would be popular.' Mostly we are betting on a creative vision, on reading a script, and in her case, watching her show. Where the data is used is for who to promote Chelsea to when she is live. That gives us affective targeting. She’s controversial, so some will love her and some won't like her at all. The data is a breakthrough in terms of matching and who to promote her to.

You just raised prices for new customers by $1. And you’ve talked about how creating original content will continue to be a big part of costs. How can you support new content without having to raise prices again and stay out of advertising?

HBO has been commercial-free for 40 years. We've been commercial free for 12, depending on how you want to count our time in just DVDs. It’s great positioning for HBO and for us. Looking at others like FX and Hulu that have advertising, they are carving out a different niche.

How much will customers be willing to pay for Netflix?

Consumers recognize that “House of Cards,” “Orange (Is the New Black),” and “Lillyhammer” are new things and this is not some older TV shows. People have been watching more and more. No one likes a price increase but they like increased content and they want us to do more and more.

When did you first foresee problems with ISPs?

I didn’t know this issue would get as contested as it has. ISPs are highly profitable and small ISPs don’t try to charge, us or Google or Cogent or Level 3. Cablevision, RCN are just a few examples of ISPs that agree not to charge.

Why did you officially oppose Comcast’s merger with Time Warner Cable? You've always articulated a more markets-driven vision of business.

The idea that one company, if the merger goes through, will control half of U.S. residential Internet is a scary idea. But 98 percent of my time is making Netflix service better, with algorithms, all of that. A small part of it is on merger opposition.

Why are we only hearing from Netflix about trouble with Internet service providers?

From our point of view, we try to say what we are thinking and be clear. The quality of an argument is not in the number of people arguing or the popularity of the thing. It’s an issue that makes sense for consumers and, if necessary, we are willing to go it alone.

But it is hard to go it alone and hard to get attention in Washington without lots of voices behind you. Comcast says this demonstrates how your regulatory lobbying is just about boosting your bottom line and getting for free the exchange of traffic that has to cost someone along the chain.

Comcast is paid for 10 megabits or 50 megabits for about $30-80. Consumers deserve to get those speeds they pay for and Comcast is responsible for the delivery of those speeds. Comcast would like to charge us and then also charge the consumer. That’s great for their business and I don’t blame them for trying. But I don’t think that’s the right way to set it up.

Everyone keeps saying the amount you agreed to pay Comcast and Verizon for interconnection charges is small. So what’s the big deal?

We want to get them to agree that is stays at zero and then it stays at zero for a long time.

What happens if it doesn’t?

Then the danger is that it becomes like retransmission fees, which 20 years ago started as something little and today is huge, with blackouts and shutdowns during negotiations. Conceptually,  if they can charge a little, than they can charge a lot, because they are the only ones serving the Comcast consumers. Think of Comcast, post-Time Warner merger. Overnight, they get 40 percent of U.S. households with broadband. When DSL fades, we think that’s more like 50 percent of U.S. households, which is a lot of market power.

Are you saying that with Internet television, quality of delivery will become the new retransmission fees fight?

That is the danger. Then you get into battles constantly.

How important is interconnection to your ability to compete with other content companies?

It isn't. We are arguing for everyone that no one gets charged and that ISPs have to bear the cost for service they have charged consumers

I still don’t understand why you are raising so much attention to this issue then. If it’s not a big deal —

We think it is a big deal. We think the right principle is that they shouldn’t be charging, impeding or favoring data. So we think strong net neutrality is that an ISP shouldn’t charge, favor or impede data sources.

What about the cable industry’s arguments about costs? You do take up tremendous amounts of bandwidth.

The fiber optic infrastructure we have is incredibly efficient and that is why you see all these different services offer 100 megabits, 500 megabits, 1 gigabit for very small incremental. Once you lay the infrastructure that is very expensive, costs are marginal to increase capacity.

What is your digital entertainment diet? Do you watch sports, cable television series, read e-books, play games, or subscribe to streaming music?

All of the above. But I’m not a video gamer — I missed that generation.

What will Netflix look like to a consumer in five years?

The user interface will continue to get better. The mobile phone in your pocket will be the remote control of your life and you’ll use it to program your refrigerator and be the center of entertainment, too. We'll use more voice and our algorithms and data will be so much better so that you will always want to watch something on Netflix. The content library should be much much bigger and we'll be much more mobile.

 

Have more to say about this topic? We take your questions every week in our weekly livechat, Switchback, Fridays at 11 a.m. ET. The comment box is open, so submit your questions now.

 

Cecilia Kang is a national technology reporter, writing about tech and Internet policies at the Federal Communications Commission and Federal Trade Commission and how regulations affect businesses and consumers.
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