- Netflix is entering New Zealand and Australia but facing increasing competition
- Content costs are more than US$3b a year and Netflix is beginning to generate its own films
- Linear TV will experience the same decline as landlines are as a result of mobile phones
By Leon Gettler
Photography by Sebastien Micke
“We hope to make Netflix available everywhere in the world over the next two years and then steadily build up content so that we can make available the best Chinese films and the best Russian films, content from around the world so that we are connecting the world,” Hastings says.
“There will be lots of providers but if we are one of the biggest and one of the best that would be great. People think of me as someone who is very passionate in this area, stitching this together with our content to make a little bit of progress on global understanding and people’s happiness.”
Netflix was launched in 1997 by Hastings and Marc Randolph. Its initial public offering occurred in 2002. At the time, the company offered a DVD-by-mail subscription service that won the hearts of consumers with its no-late-fee model. The DVD subscription service, which has been credited with decimating the Blockbuster video chain, has since been eclipsed by Netflix’s streaming video service, launched in 2007.
Global expansion is a key part of the business model. In the fourth quarter of 2014 Netflix earned US$1.48b in revenue and reported a profit of US$83.4m. One third of that came from outside the US, but Hastings says that figure has to be put in context.
“You should say that’s very disappointing when you look at Skype or YouTube services that are global. They have about 80 per cent international revenues and only 20 per cent from the US because they are global.”
While Skype and YouTube are his benchmarks, Hastings is very optimistic about the prospects for Netflix as it expands into Australia and New Zealand this month. “Australia has been a very strong free-to-air market,” he says.
“It’s pretty light on Pay TV but it’s very strong on internet access and people are pretty active on the internet so there should be a particularly strong market for Netflix.”
Australians are going from very little in terms of choice to a lot of choice; the benefit of competition from Netflix is that everyone is going to be working harder to please Australians so it’s a classic ‘competition helping consumers’ story.
He is not at all fazed by the prospect of competing with Rupert Murdoch, who owns half of Foxtel in Australia. (Murdoch sold out of Sky TV in New Zealand in 2013.)
Competition can only be good for consumers, he says.
“What’s happening in a very short period of time is that Australians are going from very little in terms of choice to a lot of choice; the benefit of competition from Netflix is that everyone is going to be working harder to please Australians so it’s a classic ‘competition helping consumers’ story,” he says.
Competitors in New Zealand and in Australia have tried to beat Netflix to the punch by unveiling rival services.
TVNZ, in February, relaunched its OnDemand service and Sky TV launched a video on demand service, Neon. Spark has announced it is doubling its investment in its video on demand service, Lightbox.
Meanwhile in Australia, Foxtel has launched a subscription streaming service, Presto TV, with the Seven Network. In February, Presto released Android and iPhone apps. Reed shrugs it off as healthy competition.
“We are not particularly worried,” he says.
“We have done such a good job around the world of pleasing our customers — and many people will subscribe to two or three of the services.”
He does not expect Australia and New Zealand to be profitable in the short term due to the cost of investing in content while building market share.
“What we hope for is it paralleling the US. That would be a great outcome. It took us seven years to get to a third of households in the US. Think of that as a goal and we would become profitable over that time. It will take years to get to one third of Australians as Netflix members.”
The same logic would apply to New Zealand where the introduction of Netflix could spell dangerous competition to such services as SkyTV and Lightbox.
Netflix has made a couple of big announcements recently about movies with an Adam Sandler deal. There is also an IMAX release. All this is costly. Why this big push into movies?
“Our members tell us they don’t want to wait; they’re tired of the feeder habits of waiting for four or five months and then there is a delay and they get movies a year later,” he says.
“The only way that we can provide big movies to our members at the same time as the feeders is to fund those movies, to produce them ourselves. So we are going to find great movies to fund. That will be quite different because they will be available both in the theatres and on Netflix at the same time around the world.
“Our content costs are huge, they are more than US$3b a year now. You’re right to wonder about it but when you have a large and growing membership around the world then it makes sense to produce some of the best content on the planet and making it available at the same time for everyone. That’s why not only Pay TV is upset with us but also the movie theatres.
“Our goal is to please the customers, it’s not to please the competitors. If the competitors are upset with us, we’re probably doing something right for consumers.”
Innovation and disruption
Hastings says ongoing innovation is critical to the growth of Netflix. “We are set up for innovation because we manage very loosely through freedom and responsibility. We really try to have our employees understand what we do so they can make great decisions and that leads to a very flexible [structure] and very little hierarchy.”
Keeping a growing company like Netflix nimble comes down to having good people and keeping them emotionally involved, he says.
“We try to be really clear with our employees on the goals over time so they get to know them and care about them and keep them. That creates a sense of passion.
“Another way is by being a positive force in changing entertainment. They read about how much people love Netflix — customers can watch it any time and it’s very inexpensive, it has all these great new shows — and everybody likes being part of the big new thing.
“We are really focused on the way that the internet can be used to transform entertainment. We had linear television for more than 50 years. We did get colour 40 years ago but outside of that there hasn’t been a lot of change. The internet is a new platform to change it quite a bit.
“You get control. Instead of someone else programming for you what’s on at eight o’clock, you decide and that’s as big a revolution as the mobile phone.”
Hastings notes it took many years for the mobile phone to develop, become widely adopted, and then become "100 per cent of communication".
“Internet TV will get better and better for the next 20 years. In 20 years from now, linear TV will be as small as fixed-line telephony.” So what future does he see for free-to-air TV companies? Not much, unless they adapt to the internet.
“In the US, CBS and NBC started as radio networks and they were radio networks in the 1920s and 1930s and then TV rose and they became TV networks. Now they are mostly distributed over cable and satellite. Free to air is quite small in the US.
“If you look at the UK, the BBC has been investing in the iPlayer and now the iPlayer is a huge percentage of the BBC’s viewing and eventually the BBC will just be an internet content server.
“The future is internet. It might mean the demise of free to air but not the demise of television or great content or even current free-to-air networks.”
As existing television businesses adapt to the internet, Netflix will face increasing competition. But Hastings doesn’t see that as a big risk.
“Think about the way the internet transformed the news business and brought down a lot of the barriers and profit margins of the existing regional newspapers. The same thing will happen with internet for video. There will be a lot of players and they will have to work very hard to entice tens of millions of consumers.
“There will be specialty sports networks, there will be specialty Bollywood networks, speciality Chinese networks, so as a consumer you will have quite a bit of choice with internet TV.”
In the face of these niche competitors, can Hastings and his colleagues keep a giant like Netflix competitive?
“There is no precise formula, we just have to keep making Netflix better and better and get better content and better streaming. That’s what we are working on.
“There is no rest. What we provide is a great service but there are a lot of competitors so we are very used to that. We are not going to consume up all the viewing time. Consumers will also do video gaming and they will do tweet TV and they will do YouTube. There will always be lots of competition for entertainment time.”
The real risk Netflix has to manage, he says, is growing too fast.
“We have gone country by country. Last year we launched Spain and Germany. This year we launch Australia, New Zealand and Japan. We are moving forward at a steady pace so we can concentrate and keep the right content and do a first-class job so that streaming works well and all the devices work well.”
Still, global expansion makes sense. There are only so many people in the US and the world is a big place. And besides, as Hastings says, it’s exciting when the world is Netflix’s oyster.
“When I am in Costa Rica, or Iowa or Norway and hear people talk about Netflix in a café, it is really stimulating.”
Leon Gettler is an independent journalist, author and public speaker.
This article was first published in the April 2015 issue of Acuity magazine.