HackingNetflix interviewed Netflix’s Chief Content Officer, Ted Sarandos, about the deal with Warner to delay new releases by 28 days, and Sarandos explains why they did the deal, compares Netflix to HBO, and even recommends a movie.
HackingNetflix: There’s a lot of controversy… I haven’t seen this many comments on a story in a while. Can you explain why you have effectively created a new DVD rental window?
Ted Sarandos: The most practical reason is that the savings derived from this deal enable us to be in stock completely on day 29. Remember that we’re a subscription service and the way that you manage the economics of a subscription service is to manage the demand of any disc, depending on the economics of the disc. In the case of the most expensive disc, which in this case is a Warner Bros. disc, purchased through a 3rd party, those discs were out of stock for far longer than 29 days for most Netflix subscribers. So what were able to is create a deal with them that gave them a little open running room in terms of creating a sell-through window ahead of rental, for us, and hopefully that they’ll find enough value in that it’ll extend to other retailers and other studios will take note and it’ll extend across other studios as well. The net savings derived from technically creating a better customer experience have been redeployed in additional streaming content for all customers.
HN: Can you give us some examples of some of the titles we’ll see in streaming?
Sarandos: The additional savings will not be spent on Warner streaming content, they’ll be spread across all of our upcoming deals. Specifically in the Warner deal it’s an expansion of their rich catalog titles, Caddyshack, The Matrix 1, 2 & 3, the entire Dirty Harry film collection, the cream of the crop of the movie catalog that Warner Bros. controls the rights to. The money itself is being redeployed across several deals to expand the streaming content; both movies and television shows.
HN: It’s interesting to put Netflix is perspective; you have the same challenges that HBO has.
Sarandos: You bring up a good observation. We are much more like HBO than we are Blockbuster online; we are a pure subscription service. Other pure subscription services don’t have any movies on the DVD street date or 6 months after.
HN: You’re almost half as big as Comcast, and HBO has 38 million subscribers. On your growth path you’ll be half as big as HBO soon. You have the same challenges, as HBO doesn’t have every movie or TV show that’s out there.
Sarandos: We will have it, but in a slightly different window. Availability windows have been so fluid in the last 18 months, moving out and moving back, that I don’t know if the Netflix subscriber is going to feel it specifically, and certainly not all subscribers on all titles. This affects two titles in January, and yesterday we shipping 48,000 titles, so the demand for any particular title among our subscriber base is not that big. Most people over time become much less sensitized to street date, ‘cause it’s in their queue and they have a high comfort level they’re going to get it, and the speed at which they get it is variable.
HN: Will this deal impact customer subscription pricing?
Sarandos: Deals like this enable us to continue to be a low cost provider of all-you-can-eat content.
HN: Do you think Redbox (with all of their legal troubles) and Blockbuster will follow with the DVD rental window?
Sarandos: I can’t speak so much for Blockbuster because we are considered to be a value chain, both Blockbuster and Redbox are in the same camp in that way, a low cost alternative to transactional rental. Blockbuster, because they command so much per transaction, and they give the studios a pretty big share of that, there’s not a lot of economic incentive for the studios or Blockbuster to move that window in-store, so I’m not sure about that one. It could be that the studios generally see rental as a deterrent to sell-through, so by creating a small window can lift sell-through by a couple of percentage points, and for studios DVD is the most profitable transaction they make. So if they can swing the sell-though market up by a couple of points without dramatically hurting the rental experience, it’s a great win for studios and it’s a great win for rental in that we can enjoy better margins, and create a better customer experience by plowing those additional monies into service enhancements like streaming.
HN: This is a pretty bold move. You wanted to do this on your terms instead of waiting for the studios to force it?
Sarandos: We brought this to Warner Bros. over a year ago. The ability to rent a DVD on DVD street date is something that the studios tolerate because it’s a business practice protected by law in the first sale doctrine. Anyone can go to Wal-Mart, buy a DVD, open a video store, and rent it. No studio can stop you from getting content if they don’t like your business model. There’s not much hope that they’re going to reverse that legislation, they’ve have tried to many times over the past 30 years. I went to the studios and said that we know you hate the first sale doctrine, and you’re probably not going to legislate your way out of it, and you can’t impose retailers out of it, so why don’t you incent me to create the window?
HN: Isn’t that what Redbox is doing? Walking into Wal-Mart and buying discs when they can’t get them?
Sarandos: Exactly. We can do the same thing and we have.
HN: Are you worried about customer defections? In the press release you said that 30% of shipments are new releases.
Sarandos: I’m always worried about customer defections. We think we’ve created a net-positive customer experience. It’s a little complicated, but we think it’s net-positive for subscribers. If you joined Netflix specifically to rent new releases in the first week of release, you’re probably pretty frustrated because we’re generally not in stock on the first week of street date for everybody, we’re about managing the demand on the disc over the life of the disc. We never really positioned new releases on street date as core to our consumer proposition, much more about all you can eat and low, low prices, in a 100,000 title universe.
HN: I have two accounts and I’ve noticed that depending on the seasonality, how hot a release is, or an unexpected hit on DVD it’s not available for weeks.
Sarandos: The unpredictable nature of how many people are not only going to have a movie in their queue on street date, but how many people are going to have it in the first position on street date, and how many people are going to turn a disc on street date. That’s what I mean by the fulfillment of new releases in the first couple of weeks is highly variable. We’re talking about predicting the behavior of 11 million people at any given point on any given title.
HN: You guys are very metrics based, so in terms of your models will it dramatically improve new release availability? That’s one of the things touted in the release.
Sarandos: On a net basis it absolutely improves new release availability.
HN: Why do you think some customers are so upset about this? Was this an expected reaction?
Sarandos: Remember that the people who write [comment on HackingNetflix] are the people that are the most vocal and most passionate about the company, which is great. It’s a very difficult to understand deal because when ever there are winners people are looking for losers. The subscribers want to be assured that they’re not the losers. This is one of those rare deals where there really are no losers. If you really are excited about a specific film at a specific time, you might go out and buy it. By the way, most of our subscribers do that all of the time. Our subscribers purchase DVDs at the exact same rate as the national average. Our subscribers go to the movies at slightly higher rates than the national average. Our subscribers subscribe to pay TV channels at exactly the rate of the national average. I don’t think any one service tries to or successfully meets the entire consumer appetite for every movie all the time. I don’t think anyone does it better than Netflix, and that will continue.
HN: Every time I go to buy a DVD, especially an old catalog title, no less than a week later it seems to show up on Netflix streaming.
Sarandos: We’ve been very aggressive in that space, and part of our long-term core strategy is to aggressively expand on the streaming space. It might come at the expense of DVD in some cases, but in this case in a net basis there’s no expense.
HN: Do you have a movie recommendation? You’re Netflix’s content guy….
Sarandos: Sin Nombre. It’s available on streaming, and it’s a title we picked up 90 days after DVD from Universal. It’s a fantastic foreign language film.