Hacking Netflix Interviews Netflix CEO Reed Hastings

You posted your questions (here and here), and Reed Hastings answered:

HN: Why don't you work on Saturdays? It seems to be such a competitive advantage for Blockbuster, and everybodys interested in getting more movies… Is it cost-prohibitive?

Hastings: Prohibitive is a strong word. It’s a cost tradeoff, right, because then you can’t run a standard five day shift. So when you move to a 6th day, then you’ve got not one management team, you’ve got staggered. So the cost is not just 15% more, because you’ve got to figure out dual management, and how you’re going to infringe on people on people’s weekends and yet give them a life. So we make sure that the Monday through Friday works well, and that’s the focus.

HN: Can you be more upfront with the readers about “smoothing” or “throttling?” because there’s no magic number. I know you have to allocate movies based on what’s available, but a lot of my readers would like you to be more upfront and say that maybe it’s 13 or 15 movies a month rather than unlimited. What are your thoughts on that?

Hastings: Two. We have the highest customer sat on the entire Internet. Of all of the e-commerce companies, to be anywhere near Amazon is an incredible compliment. To be a hair above them, and #1 in e-commerce satisfaction says that what we’re doing is a great set of tradeoffs. That’s the main thing we focus on is how we improve continuously. Now we’re two points above Amazon, and we want to be 4 points above Amazon and be even better. The tradeoff and disclosure is we certainly want subscribers to have a sense of straight-forwardness, and we’ve improved the terms of service a lot and its clarity, and the tradeoff is where does it go into trade secret relative to our very aggressive competition with Blockbuster. You know we have to balance those, we try to make a balance of it. I don’t that that it’s perfect, but it’s pretty good because the model is working. More people are signing up, it’s growing. Mostly I take it as a sign, a compliment, that people care enough that they want to know the details. And it is frustrating, I’m sure, for them to say that it’s a trade secret, but much of it is.

HN: Noe638 asks, If you were the CEO of Blockbuster, what would you do?

Hastings: I don’t know what I would do. It’s like people guessing at what they would do if they were running Netflix. If someone was really in and running Blockbuster, they would have a lot more knowledge about it than I do, so I can’t really intelligently comment.

HN: That’s fair. You don’t really want to give them any ideas…

Hastings: No, but I would say they they’re very honest. So a great case is Enron. They did a deal with Enron in 1999. It didn’t work out, so they recorded it as a loss like a normal, honest business. Of course Enron recorded it as a huge profit. We compete fiercely, we respect them – they’ve been very aggressive, creative and very high integrity.

HN: I know you’ve answered this question several times, but maybe you could put a new spin on this. Dave, Aron, and others asked “Why don’t you do game rentals?” You’ve answered the John Madden question. Is it pure economics?

Hastings: We might as some point in the future. It’s something that we look at. Gamefly is probably the best service that does this model for games now. We keep an eye on them and track it. But for now the movie market is so large that we feel like it’s best to focus on that market.

HN: Sean asks, “What are you going to do with the $100 million?”

Hastings: Mostly just put it in the bank. The companies as we go into downloading that we’ll be competing with, Yahoo!, Apple and others, all have multi-billion dollar balance sheets. So we feel that it would be prudent to have more than we did before. We had about $200, now we have a little more than $300.

HN: Do you think that there’s going to be a bidding war for content for exclusives on downloads?

Hastings: So far, if you look at the music space, there have been no exclusives. And if you look at the download movie space, which is less mature, Movielink, CinemaNow, etc., there’s no exclusives. So I think it’s unlikely, and I think it’s because the content owners can make more money having many channels carry it. For example, with DVD, they have us and Blockbuster, Walmart and Amazon. That way it maximizes customer satisfaction and revenue for them.

HN: Aron asks, Why not an in-theaters tab? Why not make more money by selling tickets to shows? You’ve already got the save this movie button, why not sell tickets?

Hastings: It’s possible that we’d get into that over time. Theres two companies that lead that market, Movietickets.com and Fandango. It’s fragmented today, it’s hard for any company to give a good solution, including Yahoo! and others. Our current market in DVD rentals is so large, we’re a little under $1 billion in revenue this year, Blockbuster is at $6 billion, and Movie Gallery is at 3. So there’s a lot of room to grow in the current market, and that makes us want to improve our service, continue to push up the customer sat ratings, above where they are today.

HN: Netflix Shill asks, Business model patents. What is your view on them? Obviously they’re a defensive mechanism for you at this point. Should they exist?

Hastings: I don’t have an informed view on the different types of patents. I know business method is like genetic stuff that’s patentable, and I know there’s controversy about them, but I can’t tell you why. I can tell you its part of U.S. Law so we accept it.

HN: Riklogic asks, What’s the highest number of movies on a 3-out plan that someone can expect? This sort of readdresses the smoothing issue.

Hastings: Gosh, it all depends on how fast someone turns them around. Where they live, what movies they select – it’s a pretty high number. If you did it on the 3-out plan for $18. I don’t know what the max is that anyone’s ever gotten.

HN: Gregory asks about compensation for signing your friends up. Some sort of reward or free month or something else if you refer so many people. You guys seem very savvy online, with the friends list and profiles. Is there some reason you haven’t figured out a compensation program for people?

Hastings: Yeah, we tested it a couple of years ago. What we found is that it doesn’t increase the amount of friends you sign up, and that makes sense, really, when you think about it. If you love a service, you tell your friends because you like your friends. If you don’t like a service, you’re not going to tell them, for $50, you’re not going get your friend to do something you think is lousy. When people are dealing with friends, the right thing to do is to give the friend a benefit. Our standard free trial is 2 weeks, and sometimes we’ll allow you to give your friends a one month free trial, but the benefit to your friend. It’s taking advantage of human altruism towards your friends, and trying to improve our service rather than trying to get one to sell out your friend in that way.

HN: Scotty and Aron ask, Why don’t you include more information about movies, such as writers? Become more like IMDB? You’ve got the data, it’s pretty easy to do, and updating 60,000 movies can’t take that long? Why don’t you make the site more resourceful?

Hastings: Well it absolutely should be comprehensive on the movies. Maybe writers is something we should add, cause if we have the data, it’s pretty easy to add it. That be a thing we should be doing.

HN: Why don’t you have a blog? You’re very opinionated, you’ve written opinion columns, you’re outspoken in several areas. Why aren’t you a blogger? I’ve heard rumors that you have one, a secret one…

Hastings: You know I tend to communicate verbally, and there’s no good reason I don’t have one per se. In education stuff, so I do a lot on that side. You know, I’m trying to think… Would I have the Reed Hastings blog, or would it be the Netflix blog, or would it be the education blog. It’s an opportunity out there, but I just haven’t done it yet.

HN: Do you read Hacking Netflix?

Hastings: Sure.

HN: Oh boy. What do you think of it?

Hastings: It’s a useful impression. I caution people internally that it’s over-represented with highly passionate people, so it’s not an accurate market research indicator, nor is it trying to be. But it’s a provocative independent voice, and something that people read, forward, as they do the NY Times. To be mentioned in the same sentence as the NY Times is a great thing.

HN: Sean asks, If you believe so much in the company, why are you selling stock?

Hastings: Because I’m over-concentrated. In asset allocation what you want to do is have a diverse portfolio, and I’m heavily concentrated in Netflix stock.

[Note: I bungled this last question because I didn’t understand the Overstock relationship to the question. Reed Hastings figured it out and answered the question anyway.]

HN: Aron asks, Is there a Sith Lord?

Hastings: That’s a reference to…

HN: Star Wars. It’s a movie-related question. He’s asking if you know if there is a Sith Lord.

Hastings: I’m not a big Star Wars buff, so I’ll have to pass on that one.

I wonder if question that doesn’t refer to the short-selling thing, because Overstock. You know he says that there is a Sith Lord that is manipulating his stock with the short sellers. I bet that’s a reference to it, because in the last year, like in the Wall Street Journal, he says there is a master Sith Lord out manipulating – which for all I know may be true. Could be…

Comments

[Dave Zatz]

Great job! Thanks to Hacking Netflix and Reed Hastings for communicating this with us.

I still think they should add games and do away with throttling. ;)

[Aron]

Well done, Mike. I'm sure many of the readers will be happy that the questions weren't all softballs. Hastings went into more detail on some things, such as Saturday delivery, than I have seen anywhere else.

Re: Sith Lord. He's right about it being an Overstock CEO reference to illegal Wall Street trading behavior. Some of the same 'evidence' also applies to Netflix. He appears to be only somewhat informed on the topic. Or maybe, he just wants to appear that way [fade in conspiracy music].

[Jg]

Nice interview. I would have liked a little more elaboration on the throttling question -- it wasn't as clear a response as I'd hoped for -- but that's to be expected, I guess.

You didn't ask my question: what was it like growing up with a name like Reed Hastings?

[mikek]

Sorry -- I only had 15 minutes with Reed Hastings for the interview (it was the only time both of our schedules were free), so I had to leave a few questions out.

I thought the Sith Lord question was silly, but something to throw into the mix. Next time assume that I don't know about esoteric stock references. ;-)

- Mike K.

[Aron]

btw, talk about a backhand complement:

'Yeah - back when they decided to partner with ENRON and the partnership completely FAILED, they wrote it off as a LOSS. At least they're honest!'

There's something almost deliberately contradictory about calling Blockbuster honest and with high integrity, willing to admit failed ventures and move on, and then suing the pants off them.

"Friends, Investors, Customers... I come not to bury Blockbuster, but to praise it.."

[Jes]

Aww shucks. My question about Netflix giving us better queue organization abilities, didn't make it. I could swear you wished for that once here too, Mike? I could be crazy.

I understand you didn't have long with him, though. I think you did a great job!

Personally, I feel a bit better now about Netflix, after this interview from Reed.

[Jes]

Should also mention, that I think it was nice of Reed to grant the interview. He didn't have to do so at all.

Thanks, Reed!

[corey3rd]

It was nice to see Reed completely duck the "magic number" before they start messing with your turnaround.

[C Nyze]

Good interview and I agree with Jes, it was awesome that Reed even did the interview! The only question that I wanted to hear that was missed was "What is in your queue?" ... that would have been a fun one for him I think.

[storm72]

Blockbuster doesn't process and ship on weekends anymore. The last time they sent me anything on a Saturday was back in March.

They specifically state in their FAQ that they ship Monday-Friday.

http://tinyurl.com/h5bg8

[noe638]

I can't believe that he called Blockbuster creative and honest...they were getting the tar knocked out of them by Netflix and their response was to clone them. Do you accuse honest people of stealing your ideas?

Sage advice to tell his employees to remember that this site is "over-represented with highly passionate people". Most of my casual Netflix friends probably watch 4-8 movies a month, 100% absolutely love the service, and don't even know what throttling is.

[CJ]

Interesting Interview. Hastings is kind of vague stating the obvious in some answers:

The business model, which requires a full day USPS availability, wouldn't work on Saturday.

The answer on "smoothing"/"Throttling" is hilarious - of course the allocation algorithm to keep both low and high turnover customers as customers is a trade secret.

You always want to praise your competition as you bury them - it's not nice to throw barbs at a funeral.

And I'd bet NetFlix places more credence on this blog than Hastings lets on in his answer to if he reads Hacking Netflix.

[NetflixShill]

"over-represented with highly passionate people"

He's saying the people who can't see through his fraudulent lies are not passionate. What is wrong with being passionate about movies, or the companies we rent them from? He would rather we just say "who cares?", and conform to whatever his expectations are, I suppose.

Netflix can make us happy, simply by telling the truth. Stop claiming "unlimited" and all variations. A universal limit of 4-5 cycles per month (12-15 DVDs on 3-out), maybe with roll-over for light users. Very few get more than that, so it's fair to say that IS their limit. NF creates bad PR by trying to profit from the "unlimited" claim, which they only honor for a few rare people.

[NetflixShill]

"Why don't you work on Saturdays? It seems to be such a competitive advantage for Blockbuster, and everybodys interested in getting more movies… Is it cost-prohibitive?"

Blockbuster hasn't sent me a DVD on Saturday since January. They have received DVDs that arrived Saturday, until recently. That might now be coming to an end, as well. Maybe they work Saturdays for new/light users, but they aren't doing it for me now. Anyone else?

[NetflixShill]

"Blockbuster doesn't process and ship on weekends anymore."
"They specifically state in their FAQ that they ship Monday-Friday."

Saying they only SHIP Monday-Friday does not mean they only PROCESS Monday-Friday. Until recently, they have received on Saturday. If they have stopped doing that, it's still too soon to say. They missed my last Fri return, but that might just be a postal glitch.

[Super-Bat-Man]

chill out Netflix Shill, he's just saying to his people don't worry too much, because there are millions of others who love the service. and he has a great reson for not changing the "unlimited" limit - IT'S WORKING! and his company is growing.

it amazes me that you post negative comments on here regularly, go do something else that makes you happy. you're so negative. I hope you're not this miserable around your friends and family.

[Super-Bat-Man]

and speak for yourself I wouldn't be happy if they set a limit at 12-15 cause I've been a member for a little over a year and I get 18-21 on the 3-out plan. i live near a big city, and don't rent anime or new releases.

they can lie all they want at this point, I know, hell, WE ALL KNOW BY NOW what each of us is going to get monthly. it's different for everybody depending on where you live and what you choose.

deal with it, they are not changing it because you complain

[Aron]

I really wish we had asked what Reed thought about a YouTube-like component to their VOD solution. While YouTube is enormously successful in terms of total usage it may not actually be compatible with a commercial interest. That is, it may be very difficult to make any money off of it. And on top of that, there is a large amount of potential legal copyright violation and policing issues.

YouTube content is the very long end of the long tail, but people are gonna be loathe to pay much for dancing teenagers singing Kelly Clarkson.

Mike, when you send Reed your thank-you note, you should attempt to negotiate a second round. ;)

[storm72]

I guess you could infer that BB may process, but not ship on Saturdays. My experience is that movies I have returned that should arrive on Saturday (mailed on a Thursday) are not checked back in until Monday. I think this is a pretty good indication that my BB DC is not processing on Saturdays.

[RAYMOND KNIGHT]

I have to say that the answers to the question of throttling and Saturday delivery were non-answers. At least with the throttling question, he answered a question that wasn't even asked. Mr. Hastings is good, to say the least. He ought to run for Political office. I thought it was funny that he talked about openness when the only reason he changed the terms of service was because he was sued and forced to admit at least part of their practices. They still haven't completely admitted throttling and that it happens automatically with most users not just heavy users. The only group of customers it doesn't happen to is the occassional user. Anybody above 13 DVDs a month is throttled. As far as Saturday goes it is a question of money nothing more nothing less. More days open means more DVDs sent out and more cost to NETFLIX. Saturday processing is an internal decision it has nothing to do with the UPS.

[thattherepaul]

Yeah, I say "over-represented by highly passionate people" is a good call. Some of the frequent posters here seem to perpetually teeter on the brink of hysteria. A great interview. Aron's question on including movie writer information being well received, maybe we can look forward to seeing that added to the Netflix site, and in turn, begin selecting movies for their writing, not their glitz.

[Michael Peak]

Raymond - his no delivery on Saturdays answer actually made perfect sense and he was quite honest about the truth. I have often thought that they should add Saturday delivery but his answer certainly cleared up some of my thoughts on the issue.

The fact is because of they way 5 day shifts work in the US (that probably >90% of people work on), if they added Saturday processing the number of rentals would increase at most 20% but the costs would increase more than 20%. therefore even if you got more rentals per month your cost per DVD would go up. if you want to get more DVDs per month the more cost effective method is to increase your monthly plan limit, not to add Saturday delivery.

[Aron]

"over-represented by highly passionate people"

You'd have to be crazy not to agree with this delicately phrased description. I don't think average Joe Blow is looking for "Hiyarazaki's magic mushroom vol 2: Wide Screen director's cut with extra color magic, european edition" or prefers to watch movies with headphones on a computer screen.

[NetflixShill]

"speak for yourself I wouldn't be happy if they set a limit at 12-15 cause I've been a member for a little over a year and I get 18-21 on the 3-out plan."

Of course you wouldn't be happy, because you are gaming the system. You're also way above the norm. I've never gotten more than 16 per month, and mostly just 12-14. Why should you get more than me? Is your money worth more?

"i live near a big city, and don't rent anime or new releases."

I live IN a big city and don't rent anime or new releases. I still never got as many as you claim to get. The question you still can not answer is why YOU should get more than others who pay the same money. I understand that you don't want to get less than you are getting, but your own greed and selfishness isn't a reason why NFLX should discriminate against other users and give you priority.

[NetflixShill]

"or prefers to watch movies with headphones on a computer screen."

I don't even own a TV set. When my old unit had to be de-gaussed monthly, I ditched it. I also canceled cable to save $$$. I prefer to join 3 DVD services than pay $50 a month for basic cable (no movies), or $100+ for a complete line-up. Cable and satellite are a rip-off. I've never seen a TV set look half as good as my LCD monitor. I've tried many, and they were all crap - poor black levels, soft, washed out, and dull. Using component and HDMI cables, it still looked inferior.

Speakers can not compare with the frequency range and fidelity of good headphones. Best speakers may have a 20-20,000 Hz range with lots of distortion at both ends. Headphones can have a 5-30,000 Hz range (or more). You obviously aren't an audiophile if you don't acknowledge the superior quality headphones provide. I hear the cut-off, and cross-over with ordinary speakers that is absent on my high-end cans ($200+). I prefer them, since they are less harsh and distorted, and they produce the full range of DVD. Speakers can not even reproduce CDs faithfully.