How fares the biggest subscription service for streaming movies and TV shows? Netflix has seen its stock battered since July and has taken a public-relations hazing from its customers -- 800,000 of whom abandoned the company in the third quarter. The media has been none too friendly either. Has the streaming giant learned its lesson after its first major stumble? Ted Sarandos, the chief content officer at Netflix, sat down to get grilled by Wrap founder and editor-in-chief Sharon Waxman and said, essentially -- Yes.
Sharon Waxman: Netflix stock has had a precipitous plunge, and did again last week. How are you feeling about the company in general at the moment?
Ted Sarandos: Actually, I'm as excited right now as I was a year ago -- and as I was 10 years ago. The market opportunity has not changed one bit. The only thing that’s different over the last nine weeks or so is our stock price. We have over 20 million streaming subs and around 25 million paid-subscribers including DVD subscribers.
SW: Did you say 25?
TS: I’m just rounding the numbers. But the point is that it’s a very large subscriber base, we’re licensing great content for them, and it’s a great product. So yes, we toyed with the separation (of DVDs and streaming), and yes, we implemented price increases, and yes, subscribers revolted from those things. But from where we’re sitting right now, we are in the driver’s seat of one of the greatest opportunities in the convergence of entertainment and technology.
We have deals with every major content supplier, studio and network alike. We’re in 46 countries streaming. We have technology deals in place with Apple, Google, Microsoft, Sony, Amazon. Every time that there’s a new product announced that has got the capability to deliver video from the internet, Netflix is invited in. We’ve become completely ubiquitous with this idea of internet-delivered content on the screen. Just last week we were announced on the Amazon Fire, on the Nook, every hot product that’s coming out. We’re doing great expansions of our deal with Microsoft, with Apple, we’re getting more and more devices.
So I look at all this and say the only reason that you’d be worried is if you really believed that unlimited streaming of video online at a low, low price on any device you own is a product that won’t hunt, then I would be worried. I don’t believe that’s true.
SW: Despite the fact that the public is annoyed ...
TS: Yes, there’s a ton of negative momentum in the press and certainly in the stock price.
SW: You’re saying all these fundamentals are sound, but you're admitting you’ve had a lot of negative momentum in the press. Why do you think the stock has been hit as hard as it has been?
TS: I would say that the stock has always been very volatile, with very big swings up and down ever since we’ve been a public company. So there’s been positive overreactions and negative overreactions. We’re a new business, we have been blazing new trails in terms of this over-the-top direct–to-consumer movies and subscription model, the migration from DVD to streaming. There’s a lot of change in a relatively young company’s life.
The reactions of the stock prices are from people who have varying degrees of confidence in our ability to make that transition successfully.
SW: Reactions you think are not justified. There are also questions about sensitivity to your customers.
TS: Yes, I would say we could have been more sensitive and had better insights into that, probably; we could have done it slower. But our strength was just our weakness there. Our strength is that we’re willing to make the good long-term decision and do it quickly. And I think that it is and was in the best long-term interest of the business if we’re an international streaming company. We could have been more sensitive to our customers. It was uncharacteristic of us in that way, which is I think why it was so jarring.
SW: Are you still losing subscribers?
TS: The losses are slowing. And we expect subscriptions to turn positive in December.
SW: So you’re trying not to pay attention to the stock price.
TS: I’ve lived through some pretty dramatic drops in the stock. And I’d say that when you look back at that chart that you’d think that the fundamentals of the company had been radically changed back and forth and back and forth, and they really hadn’t been. There was steady growth, there was profitability, there was great cash flow, all the things that you’d track a company on. But you’d seen our stock be very volatile based on Walmart’s entry into the market for direct shipping DVDs through the mail. That was the biggest percentage hit we ever took. Things that Blockbuster was doing -- the external market was influencing our stock price far more than our individual performance. So this was the first time where it’s been tied to a quarterly result or a change in the pricing.
SW: And the negative momentum among the public?
TS: Probably the first shot fired really was from the (end of the) Starz deal. And what’s interesting about the Starz deal is when a program is very expensive to produce or license, and relative to its cost it draws a very small audience, that show gets canceled. And that would be business as usual in the entertainment business. But somehow the fact that we didn’t renew this deal at a highly-inflated price came off as a negative and that this was taking away content.
SW: I think that in part people were perceiving that you were losing content. But what people had been saying for months was that Netflix was not going to be able to sustain its model because all the content deals that were coming up starting with the Starz one were not going to be able to be replicated at the price that you got last time.
TS: That was uniquely true of the Starz deal. Because the other content that we had licensed from day one have all been renewed. The Starz deal was uniquely cheap for what it was. I give you that.
SW: And that gave you a lot of confidence.
TS: At the beginning of our streaming license, it was 40 percent of what people watched, it was incredibly important. And if we’d had any idea back then, five years ago, or four and a half years ago when we did that deal, that we would grow that fast, I would have not been able to close that deal at that price, and they wouldn’t have done it at that price. But it was a huge windfall of money for them considering how much money they were losing on Boingo, so it was a very good deal for both parties at the time. It was a three and a half year deal that we did. We had streamed for about nine months before we did the Starz deal. In January it will be five years of streaming, and about nine months had passed, so three and a half years. So my point is that if we knew at that time that we would grow that fast, we wouldn’t have been able to close that deal on those terms. And at several checkpoints along the way, I had offered to renew the deal at higher prices all along. And the truth of it is that they have a very conflicted business model with the MSOs. (Multiple System Operators, or, the cable companies.)
SW: Explain. You had offered them more money along the way to renew the deal and they said, “No thank you?”
TS: I would say it was better for them to have a perceived end of the deal so they can use that with the MSOs to manage their core business relationships better. So it gave them the flexibility of saying if our core business is in jeopardy because of our Netflix deal, because Netflix could be perceived as a big danger to cord cutting, all those kinds of things, and they would be able to throw a bone back to their core business and say we’re not going to do that deal. And with the dollars we’re talking about, you’d want to maintain that flexibility. So I would say they wouldn’t have done it before because they weren’t prepared to put their bet on this horse. Not on Netflix, just on the internet instead of on cable. And those were our discussions at the beginning. I said, “Look, if you guys think that most content is going to be delivered on cable and on satellite for the next 25 years, then you would be crazy to talk to anybody else. But if you think that sometime in the next 25 years that the internet is going to challenge that model, then you better switch your horse to a different wagon.”
SW: Explain why losing the Starz deal didn’t mean that you lost content off of Netflix.
TS: If we did the Starz deal, it would have had to come at the cost of more content that was being watched in greater numbers. So I would have had to give up content that people really were watching and loving to be able to afford the Starz deal. For example, the CW deal and the AMC television programming deal have been additive. Those are new deals that we just have executed.
I’m not saying that the Sony and the Disney output is not valuable, it’s just wasn’t as valuable as Starz wanted me to pay for it. (Starz licensed Sony and Disney movies to Netflix.) And they needed me to pay a very high price because of the nature of their deal with Sony and Disney. So that’s really the bottom line.
SW: Do you see a path to getting that content at some point?
TS: Not at those price points. They have an exclusive deal, and they pay dearly for it. And I think there’s another thing that’s happening at the same time, which is the value of all studio movies in the pay-TV window is dramatically eroding. And I’m saying that in the context that by the time movies get to the pay-TV window, they’ve been in the theater, they’ve been on VOD, they’ve been on DVD, and they’ve been pirated. So you’re down to the audience basically that almost went out of their way not to see some of these movies. I think what Netflix does that’s unique to others is we create audience and market for those movies. And I do believe that our pricing with suppliers should reflect that.
SW: You’re talking about it creates a market for movies that are way down the road.
TS: It would surprise you how close we can build the audiences for “Hot Tub Time Machine” relative to a big Disney output title in terms of people watching movies.
SW: How close?
TS: Very close. In other words, It would be very difficult for you to tell me that movie A is premium to movie B in Netflix titles.
SW: What did you compare them to?
TS: “Hot Tub Time Machine,” and I just said a Disney output -- “Tangled.” What I think is when you say something’s premium, eventually it has to be proven out to be premium in the form of viewing hours. So when the Super Bowl is a premium ad slot, it’s the biggest audience in America every year. So it is really a premium ad slot. But if you just say it’s premium and no one’s there, you can’t keep charging the same amount for it.
SW: How are you feeling about Hulu these days as a competitor and alternative?
TS: There hasn't been any runaway growth from anyone else. So there hasn't been like a fundamental shift in the marketplace, where you're not seeing hours or traffic or any of those things increase from any of those people who you think of as our competitor.
SW: So you’re saying that people who have unsubscribed from Netflix haven't gone elsewhere, they're just pissed off and waiting to come back?
TS: I think that's certainly a feasible theory when you look at the external statistics. I also think that, normally, when you see something's fundamentally in trouble, you would see that shift in the marketplace -- right? -- that some of the growth would be shifting somewhere else. It just isn't happening.
But I'm saying, when you think of them as a competitor, we obviously looked at Hulu, but we also think fundamentally Hulu is in a very different space. Where they're focused on last night's episode of TV shows, we're focused on last season's. We're focused on the history of the total series of the show, where they're focused much more on kind of the last five episodes.
SW: So are we through with price hikes for a while?
TS: We're not messing with prices. We're not messing with prices.
SW: Do you have any big deals on the horizon?
TS: The deal-announcement flow will be slower than it had been, because the content flow is following it, and a lot of those deals were forward-looking. So we're renewing deals that are constantly refreshing and adding content. So when our deals go from one-off deals to output deals, there's fewer announcements and more content. As those deals are maturing, they're more likely to be output deals, they're more likely to be longer deals. So you see a lot more new content out of the existing deals. The DreamWorks deal we just announced, but it won't flow content until 2013, as an example.
SW: What about original content? Give me an update on that.
TS: Well, we just announced "Arrested Development."
SW: That was a big coup.
TS: Yeah, for us it was very exciting, because it was something we were working on for a very long time. A lot of people tried to make that deal work. The origin of that deal was I literally ran into Ron Howard at a party. It was during the NBA All-Star weekend, and I started a conversation with him about Netflix. He was a big Netflix fan. And I said, "I think that Netflix would be the perfect home to bring back 'Arrested Development,' because we could do it in a way that would be creative -- it could be an environment where people could be creatively looser than they could on network television. They could -- we could work around the talent, so we wouldn't have a hard delivery date. We made it a very easy deal to say yes to creatively. And then we had to do the hard work, which was getting the deal with Fox TV to get the deal closed.
SW: Can I ask a stupid question? This will be seen exclusively on Netflix?
TS: Exclusively on Netflix. Season four will be an exclusive Netflix show.