In the mid-1990s, as the rest of Silicon Valley was dreaming up futuristic visions for the Internet, Reed Hastings was starting a firm that let people use the World Wide Web to rent an unlimited number of movies for a monthly fee.
He built his novel concept around a decidedly un-futuristic strategy, however: Hastings' Netflix Inc. delivered discs through the mail, not downloads through the Net.
"Not many people thought that made sense," Hastings said. "But the only time when you really succeed at a company is when you have something that most people think is idiotic and it turns out to be really important."
Los Gatos, Calif.-based Netflix has grown faster than anyone expected. After a 30% jump in the first three months of 2004, the company has close to 2 million subscribers paying $20 a month to keep up to three Netflix DVDs for as long as they wish. Hastings, the self-assured chief executive, talks confidently of hitting 10 million.
On Thursday, shares of Netflix rose $2.02, or 6%, to $37.65 on Nasdaq.
His ambition isn't just to make Netflix the dominant online movie rental company, but also to change the economics of Hollywood. Netflix encourages its subscribers to rate movies so it can recommend others to them. With this kind of targeting, Hastings says, Netflix can deliver lesser-known movies to the right audience, enabling the studios to take chances on more films.
Hastings recently discussed the company's plans with The Times.
Question: Your biggest competitor for online movie rentals has been Wal-Mart Stores Inc. How serious has the challenge been?
Answer: Wal-Mart entered the market two years ago, and there was a big ballyhoo about how Netflix isn't going to survive. Back then we had 400,000 subscribers. Now we have almost 2 million. In Wal-Mart's case, great company; how've they done online? Not very well. So the fact that we're beating Wal-Mart is not really testament to how great we are. It's because Wal-Mart.com is completely clueless.
The only company in DVD rental that we fear is Amazon. We have 24 [distribution] plants; they only have five. We send out about 3 million packages a week, which is higher volume than all of Amazon worldwide.
Q: What about the threat posed by movie download services?
A: There's a couple things to understand. The studios will protect DVD sales for as long as they possibly can because it's now about 60% of domestic revenues, and it's growing. When the studios sell a DVD, the average retail price is $18. They get about $15 of that. Then there's a bunch of price points that are $4: pay per view, rental, downloading, on and on. Studios get 2 bucks, in that range.
Any smart studio exec says, "I don't want to put out paperback at the same time as hardcover." So that gives DVD a long-term advantage -- not a three-year advantage, but more like 10, 20. The service that wins the downloading battle is the service that can do both [discs and downloadable files], and that's what we can do.
Q: So when do you get into the downloading business?
A: We'll start offering downloading sometime next year, limited selection, as much as we can do. We think there will be very limited consumer demand. But it's good to get out there, and we should be early rather than be late.
Our view is also [that] downloading to the PC is not very relevant or interesting. We'll [eventually] have wireless access to all kinds of devices in the living room, but in five years, it will still be 80% DVD.
Q: Will that be download to rent or download to own?
A: Download to rent. Our view is, one subscription, 20 bucks a month, unlimited DVDs and unlimited downloads, and we just mix the two modes.
Q: What is Hollywood's stake in Netflix?
A: The way we're trying to transform the movie business is not actually digital delivery per se; it's really about creating demand. And what we're trying to do is figure out, for each person, what are the best movies for them. We have 20,000 movies. There's 450 new [Hollywood studio] movies each year, there's way more than anybody can watch, and you can't generally as a consumer figure out which ones are best for you.
The studios have this monster problem, which is they spend an ungodly amount of money marketing their movies, and because of that, it's very homogenizing. They have to make movies that appeal to a wide range of people. Your "Adaptation"s and "Whale Rider"s fall by the wayside and you only get the big movies.
What we're trying to do in the demand creation is really changing those economics by matching from the ratings and recommendations and the other things [users are] doing.
Q: How many people use your recommendations?
A: Over half of the subscribers are active with recommendations, but that still leaves us half a million people who we haven't sold the benefits to.