Netflix takes on Hollywood with original shows


Netflix chief executive Reed Hastings says the company is investing big in its Web-streaming service with new studio-content deals and creating its own series to compete with offerings from HBO and major television networks. (RICHARD BRIAN/REUTERS)
February 2, 2013

Tech giant Netflix is going Hollywood. As the dominant paid provider of streaming online videos, it now sees making its own videos as the key to its future.

This big bet — and an expensive one — turns the ever-evolving company into a chief rival of HBO and major television networks.

Chief executive Reed Hastings was in Washington last week to promote Netflix’ s $100 million Web-only series “House of Cards,” starring Kevin Spacey. He dropped by The Washington Post to talk about the future of television entertainment and the tensions he’ll have to sort out with his biggest frenemies — networks and the telecom providers that deliver Internet services like his to homes.

The company is regaining steam on Wall Street after a stock freefall last year, following the embarrassing mistake of prematurely canceling its DVD mail-order business. Hastings changed his mind and announced that the company will keep that service for at least a decade, he says now — or as long as the Postal Service survives.

Here’s an edited version of the discussion:

What’s in store for the next couple of years? Will you look more like NBC Universal or YouTube?

We want more members, more content and to serve more countries. The people at YouTube have that space figured out; it’s all ad supported. For us, we will license more movies, television shows and create more original content.

Why do you do original content? For buzz?

For subscriber enjoyment and the buzz. If there is more buzz, more people join.

But it seems awfully high-risk.

That’s how you differentiate. With on-demand, you can have doubles and not a home run. But networks can’t. That’s why they have to do pilots and pay for overhead. We don’t. We have incredible shows for the Hindi community and other audiences. The whole notion of what is a hit is different. We are about figure out what people are passionate about. We aren’t trying to program to the lowest common denominator. Linear TV has had a one-to-many broadcast, whether its NBC or HBO. We have more creative latitude.

What will the market look like in five years?

Linear TV today will be like landline telephone. You’ll still have it. Many people will pay for it but won’t use it very much. The most communication will go to the mobile phone. Electronics will get better. There will be an iPhone 9 or iPhone 10, and it will be impossibly thin and have amazing resolution, and we’ll have incredible bandwidth.

We’ll have 4K TVs that will be cheap and have large screens. You will control your TV with your smartphone. So the smartphone will be the remote control for your car, give you diagnostics. It will open your house, and it will be your remote control for your life, too. You’ll buy channels like Netflix, Hulu and others on that remote control phone. And whatever screen, whether upstairs, downstairs or in a hotel, will recognize you from your mobile phone-centricity.

Who will own the pipes for Internet connections?

For residential, cable will have their own, fiber will have theirs, too. There will be radio stacks and different providers. The question is how much speed will there be and how much competition.

Do you think we will get detached from the monopoly cable provider?

Billing and bundling will be tricky. I don’t know to what degree the bundle will break up. More likely than not. HBO in the Nordics is competing as a stand-alone [offering]. The question is if the [cable providers] can handle the disruption.

Will your move into content push those changes?

I don’t think so. But we are becoming more like HBO faster than they are becoming like us. We were an Internet company, and then we became a content company. Maybe in the long run, there will be two great companies battling it out, and that’s fine. That’s good for everyone.

Talk about your relationship with the telecom ISPs. What are pain points in that business relationship ?

Right now, it’s not really painful at all. The customer experience is great. You click and you watch. In the long term, there is potential conflict because we’re capitalist and they’re capitalist and everyone wants to expand their profit pool.

ESPN and HBO get a percentage of total cable cost. Cable costs 70 bucks and ESPN gets like 6 bucks of that.

So we look at it and say, “Hey, there’s a $60 ISP bill that is hugely profitable for ISPs. Maybe we should get a part of that because [consumers] are getting broadband to get Netflix.”

They say, “One-third of our bits, our costs, are Netflix, and so Netflix should pay part of our costs.”

There will be some battle around there. Our basic view is that there is a safe medium that avoids all the [television] carriage battles that we’ve had over 15 years.

What are you doing to that safe medium?

We have Open Connect, how we connect to their networks. It’s servers that have all our discs. We bring the servers and connect them to their networks. We have to carry the bits to where they want, to each metro area, at our cost. The ISPs carry them. And we don’t charge them, and they don’t charge us.

Are they happy?

Small ISPs are thrilled. But the big guys, they are used to better deals than that and they don’t want smaller guys to have the same deal.

Consumers want a change in their cable relationship. No one is mad at the equipment makers. They don’t say Samsung is doing things wrong. It has nothing to do with the electronics. It has to do with service side. What’s hard is that businesses are interlocked between cable, satellite and long-term contracts [with networks]. They sign up for 10 years for ABC stuff and ESPN.

But we are changing that. We signed a deal with Disney where movies like Pixar and Lucas Films will only be available on the first pay window on Netflix starting in 2016.

Does it make sense to move in Apple’s direction and become a gateway for how users get video content — through a set-top box?

Consumers want a box with multiple services. They want Hulu and YouTube and ESPN. We’re trying to be like Google Maps, on every device.

What’s your relationship like with Amazon?

Great. We are doing great work with Amazon Web services. We compete on the retail side, bidding against each other for NBC and ABC and other networks. Competition is healthy. Different providers will have different content.

Will you every advertise on Netflix?

No. Our position is like HBO, to be a commercial-free network.

Why not? You already have a ton of information about users. You could target ads to them, too.

It depends on what you are trying to attract. Part of our proposition, like HBO, is to differentiate ourselves in a way so that we’re worth paying for. Being commercial-free is part of that proposition.

How much longer will you keep mailing DVDs?

It depends on how quickly the Postal Service has problems. Taxpayers soon will be bailing out the post office to a huge number. So we’ll stay in that business for at least a decade, because people still need the post office to deliver Social Security checks, medicine, etc.

Will you take user-generated content? Sports?

Don’t think so. YouTube is already so good at it, and it’s not part of our brand. Same thing with sports; we don’t think we will do that. Movies, TV shows are the main places we are focusing and adding more content and getting better. Knowing that you are in middle of a series and going home to watch the next episode of “Lost” or “Mad Men”is a good feeling. We want you to feel that all the time.

What do you need from Washington?

There is this ISP battle stuff. In an ideal case, we need nothing at all because it will all be worked out commercially. AT&T and Comcast in particular are very sophisticated with their regulatory mechanism. Yes, we compete with them on the video side. but we are also one of the main reasons people get broadband.

What makes you think you are driving broadband adoption?

In peak traffic on a Friday, 30 percent of it is Netflix.

But ISPs could say you gobble up so much bandwidth because your service is so bandwidth-intensive.

We don’t gobble anything. Their users choose to watch us. They sell a service to their members, and their members are using it.

What has surprised you the most about Washington?

How hard immigration is. In 1998, I worked hard on H-1B visas, and it’s been a long and hard-fought battle. I’m optimistic something will pass this year.

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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