Charlie Rose Talks to Netflix's Reed Hastings

Did you cannibalize your DVD business when you started to stream content to customers?
DVD has continued to grow for us. It's grown every quarter. It's been phenomenal. Eventually—in fact, maybe even this quarter—it will start to decline slightly for us. But it's been such a steady grower, it's been fantastic, and on top of that we've grown the streaming, and when you add the two of them together, that's what's helped make us so successful.

You've now got more subscribers than Comcast (CMCSA). How big is Netflix (NFLX)?
Well, we're about 24 million subscribers today, and that's up from about 15 million a year ago, so it's a very high rate of growth, and that's what's exciting about the business—more and more people are getting smart TVs, they're watching Netflix on their iPads. It's really on all of the devices. And it's not just Netflix, it's also Hulu, YouTube, all of the online video is experiencing an explosion in viewing because it's so convenient, the click-and-watch.

The idea used to be that you had mostly older movies. Are you part of the move toward premium-priced early releases?
We have a very wide range of content, but the brand-newest movies, what's happening with those is a $30 pay-per-view option—not from Netflix but from DirecTV (DTV) and others—of movies that are in the theater.

So what do you see happening to movie theaters?
It's unclear. That's why the studios are moving slowly. They're moving with DirecTV and others to try that $30 premium window, and I'm sure they'll watch what happens with the theaters. And I'm sure they very much want the theaters to stay highly relevant. So much of the downstream revenue is linked to that initial excitement, to how much revenue is produced in the domestic box office. For example, what we pay for a film three years later is highly correlated to how well it did in the box office.

Tell me about Netflix's move into original content.
When HBO (TWX) does original content, they're real creative. They do scripts, they cast people, they own it on a global basis. What we did is we licensed the premiere from another studio, Media Rights Capital, that's creating a show called House of Cards. David Fincher is directing it, Kevin Spacey's starring in it, and like The Office, it's a remake of a British success. And that's what is characterized as original content, because it's going to be exclusive on Netflix. It's coming out next fall.

Should HBO be worried?
In some ways. We're like baseball, and they're like football. We have no overlap in content, but we sell to the same person, the same aficionados are passionate about our products. But I don't think the NFL worries about baseball encroaching on their territory.

With this platform, aren't you going to be inclined to want to create content, not just license it?
Well, we're inclined to do things that are profitable for us. [HBO has] an incredible competence that we don't have in creative, and in figuring out what's going to be popular. We can be a licensor of prior seasons from Showtime, HBO, and others and be very successful, so that's our current ambition.

You learned about the power of streaming video from YouTube?
That's right. YouTube was our clarion call—and then we raced and it took us a year and a half, to the beginning of '07, to launch our first streaming.

Where will streaming be in five years?
In plastic media, you have to standardize it. So DVD lasts for 10 years. Then Blu-ray. You get a chance once every 10 years to make change. On the Internet you get continuous innovation, so every year the streams are a little better. Now it's got 3D, now it's got 1080p, you know, it'll be 4K in a couple of years, which is ultra-ultra-high-def. With the Internet, the decoders are very flexible, so you can just keep making it better and better and better. ... Just 10 years ago, AOL (AOL) was the king of the world, right? And 56K was the typical speed people connected to the Internet with in the year 2000. Then you just do Moore's Law, doubling every 18 months ... it would predict that this year the average speed would be 14 megabits in the U.S., which is just about right with a cable modem. And if you drag that out to 2021, the typical American home will have one-gigabit connectivity. And that sounds shocking, and then you realize, wait, that's what Google (GOOG) is rolling out this year in Kansas with their Google Access project.

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