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Thursday, June 30, 2005

A chat with NetFlix CEO Reed Hastings, after the Grokster decision

I've been working on a piece the last couple days that will run in the San Jose Mercury News soon, which asks the question of how the motion picture industry (and the music and TV industries, too) will respond to the Supreme Court's unanimous ruling this week in the case of MGM vs Grokster.

Will it be more lawsuits, or more creativity in the way the entertainment industry presents its products on the Web?

Hilary Rosen, the former chief of the RIAA, seems to indicate that the answer to that question is quite important to the future of established entertainment companies:

"The euphoria of this decision does not and should not change the need for the entertainment industry to push forward and embrace these new distribution systems." (from her blog on the Huffington Post)

"The entertainment industry has no choice right now but to speed up its licensing activity and risk-taking... Sure there are some promising things happening, but they are not being embraced nearly fast enough. (again, from the Huffington Post)

But in a phone conversation this week, NetFlix CEO Reed Hastings pointed out that there's a problem: consumers want entertainment content to be free or nearly free, and available on exactly their terms and schedule. (For instance, they want a download of the new release 'War of the Worlds' to be available the same day it opens in theatres.) "Consumers naturally want everything, and they want it cheaply," he said. "There's a tension between what consumers want, and what media companies want."

"There's a reason that books come out in hardcover first and paperback afterward," Hastings continued. "It is to maximize profit." For the same reason, movie studios put new releases into theaters first, then four months later (on average), onto DVD.

Hastings believes that the Supreme Court decision will help the entertainment industry put file-sharing sites out of business, which will "tamp down piracy until it is a very marginal phenomenon," eliminating it from "mainstream behavior."

NetFlix eventually plans to shift its business to offering movies as a download, rather than shipping them as DVDs through the U.S. Mail. Hastings said that back in 2001 when I spoke with him, but since then, nothing has launched, even though the company devotes 1 or 2 percent of its annual revenue to R&D in that area.

"We haven't felt the need to compete with [sites like Movielink and] CinemaNow," Hastings said, because the studios' "content restrictions are so severe." (Pricing is too high, and the selection of films being offered for licensing is too narrow.) "We're at 3 million susbcribers now. The question we ask is how do we get to five, ten, or twenty million. That gives us a tremendous asset in being the leading company in downloading. The technology is just not that hard."

Finally, I've found it fascinating that NetFlix has begun playing a role in distributing movies that weren't able to get traditional distribution. (One example Hastings cited was "Nice Guys Sleep Alone". NetFlix bought 1000 copies of the film on DVD after it failed to snag a traditional distributor at the US Comedy Arts Festival, and it got such positive reviews among NetFlix members that HBO eventually picked it up.) Hastings says that "we're not trying to be a studio. We think that doesn't help the artist. It's much better for us to help a filmmaker get a deal with a small studio so their rights can get maximixed over several channels."

But NetFlix has two assets that studios don't have:

1. A long-term relationship and open communication channel with its subscribers
2. A wonderfully rich trove of information about the kinds of movies its subscribers enjoy

Those two assets would enable NetFlix to do some really interesting stuff in the future, in terms of matching its subscribers with independently movies and niche video content. In five years, a filmmaker may not need a theatrical release at all to be a success...


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