Netflix has always defied its critics, and every year more skeptics surface with a new reason why the company lies on the brink of extinction. But over the past four years the company has been engaged in a strategy to take it well into the next cycle of the film viewing experience. It has embraced the advantages of the internet, and even prepared itself for the death of its bread-and-butter, the DVD. I sat down with Ted Sarandos, Chief Content Officer, to discuss the future of the industry, and the space his company will find itself as it moves ahead. He will also be delivering a keynote address discussing many of the following topics at the Future of Film Conference in March.
1) Everyone talks about the rivalry between Blockbuster and Netflix. Why? Do you think it’s a relevant comparison? Do you compare yourselves to Blockbuster?
When you talk about Blockbuster’s brick-and-mortar as a good differentiator, I would argue that it’s building a bridge to the past. Because the very thing that makes Blockbuster work are those stores being in your neighborhood, but it’s the fixed cost economics of those stores that’s killing them. So they can talk about brick-and-mortar being a competitive differentiator, but at the same time they’re closing those stores, while we’re expanding our online presence both with DVD and internet viewing.
At the end of the day, Blockbuster doesn’t have the ability to change the existing merchandising policies that create demand. They’re purely in the demand fulfillment business, and we’re squarely in the demand creation business.
Once computer-to-TV connections (via devices like Apple’s iTV) become more common, your set of competitors will really change. What’s the strategic goal for Netflix when that happens?
I think our real competitive advantage is that there are 75,000 titles that you can get anytime you want on Netflix, and every day we ship about 35,000 different titles. That’s how diverse people’s taste really is. And if you have the tools to put the right content in front of the right people, then you really have something.
What Netflix has done an amazing job of is personalized merchandizing, based on billions of movie ratings and incredibly sophisticated algorithms that put the perfect movies in front of every individual subscriber. It’s about finding a movie that’s perfect for you. And if we’re successful at that, the subscriber will follow us through any format or delivery method.
2) I think a lot of people would find your content acquisition and development choices surprising. What drives your decisions about which films to put on the site?
What we’re trying to do is take the random nature of movie marketing out of the equation. So when you can target market to every individual – really laser market, not just target market – and be really accurate about it, then you can be really diverse in what kinds of content you bring to the table.
I’m not looking for something for all 6.3 million subscribers every time. I’m looking for something for one hundred thousand people, and building the economic model that serves those hundred thousand people. And much bigger than that, obviously, with things like Sherry Baby (starring Maggie Gyllenhal) and This Film Is Not Yet Rated. We acquired SherryBaby at Sundance last year, and we co-produced This Film Is Not Yet Rated with IFC (Independent Film Channel), and half a million Netflix subscribers had one or both of those in their queue on release day.
So to me, when you can take two films that did less than $300,000 at the box office and create that kind of demand, where those two films were in higher demand than World Trade Center, a film that probably had $30 million in P&A on it, that’s really something.
Let’s talk about An Unreasonable Man, the documentary about Ralph Nader that just played at Sundance and is soon to be released nationwide. Obviously it’s an interesting topic, but potentially very controversial. Was there concern over acquiring a political film?
The great thing about documentaries is that they have a point of view. And the more controversial they are the better, because people are very passionate. There are some audiences that will absolutely, under no circumstances, watch An Unreasonable Man, because they hate Ralph Nader. And there are other people who won’t miss that movie. So the trick for me is to make sure the “won’t miss it” audience gets that movie front and center.
And for them it doesn’t matter if they like or dislike Ralph Nader, it’s that they won’t miss it.
Exactly. For a segment of the population, that movie is bigger than Harry Potter. And where I blow it is if we don’t put that movie front and center for that subscriber.
Say you see a great film, like Jason Kohn’s “Manda Bala,” which won the Sundance Grand Jury Prize, do you think, “I want that,” and go get it? What’s the process for acquiring it?
First of all, I would say that no question, Manda Bala was the best thing at Sundance. So once a bidding frenzy starts on a movie like that, it is, by definition, not for me. Because when a studio is going into a film like that and put up a high seven-figure offer, they’re intending on marketing that film in a very traditional way – television ads, bus stops, and billboards – and that’s not what we do.
Now once that movie comes to market, I have an output deal with every major studio, so there’s no question that we’ll be able to bring that film to our subscribers. What I’m really interested in at a festival like Sundance are those movies that are good enough to get in, but so difficult to market that it may never get out. When you look at films that are on the cutting edge, either stylistically or cinematically, the studios then start to waffle because they’re not quite sure how to talk to a specific audience. They’re good at talking to broader audiences.
We don’t do a lot of deals at Sundance, but we do in the weeks and months after. Last year we acquired 7 films from Sundance. We may be the single-source largest buyer at Sundance by the end of next year.
What’s your eventual acquisition goal for Sundance?
I don’t think there’s any reason to believe we can’t acquire half of the films.
3) Much is made over the “death of the disc” and how we’re nearing the end of the DVD’s life. What’s your take on that?
I’m not exaggerating when I tell you that it will be a minimum of five years before you start seeing meaningful deterioration in the disc business. And it’s not only dependent on the technology. Just because you can build it doesn’t mean consumers want it.
What consumers love about DVDs, and what we try to address in our instant viewing feature (movie steaming), is simplicity. Downloading offers a lot of complexity (relative to streaming). What most people say they love about Netflix is that it’s simple to use. I compare it to a light switch. Most people don’t know what makes it work, but they just flip the switch and the light goes on. And that’s how simple watching a movie should be. So if it’s any more complicated than dropping a disc in the tray and pressing play, people won’t be interested. Our instant viewing feature is that simple. You press play and ten seconds later you’re watching the movie.
4) Netflix offers a user-submitted content feature. How’s that going to develop over time?
We get hundreds of movies a week, all in various stages, and that’s what the Red Envelope Entertainment initiative is all about. Sometimes what comes from the submission is that the creator has already made their DVDs, they’ve already cleared all the rights, and we’re just buying a couple hundred discs for the site, and then they find their audience. That’s one end of it. The other end is where we end up doing rights acquisitions and distributing it over all windows, from small theatrical to paid cable, and offering it on DVD on Netflix.
How does the acquisition process work then, when you’re getting so much content?
It’s Sundance every day. It’s cumbersome, because there’s so much content submitted. Some of it’s very easy to weed through. We’ve also established a network of replicators and distributors that we can refer some of these films to. If it's a good film, but isn’t for us, we refer it to other niche distributors who have picked up maybe two times the amount of content as we have.
Do you see Netflix engaging in the festival concept, and in essence moving into Sundance’s turf?
I believe each individual festival has its own voice. When you go to Sundance, there’s a sensibility there. And you’ve probably heard Robert Redford’s remarks. He doesn’t want to be a market. But because right now Sundance is a market, they get the best of the best. And those big ticket sales are what keep the best films flowing to Sundance first.
And it’s about the whole festival experience. All I’m trying to do is scale that, because these movies were not meant to only be seen by a couple hundred rich people in Park City. What we’re trying to do is take those films that otherwise wouldn’t get out, and provide them a platform to get out to 6.3 million subscribers and, ultimately, anywhere in the country.
So Sundance will continue to play its role, because they’re curators. And watching curated content is a perfectly legitimate and very important part of movie consumption. Netflix is more about curating to each individual, because the definition of a great film is very different from one person to the next.
What this is doing is leveraging what’s great about the internet, and impossible to do off the internet, because you can’t re-merchandise the store for everyone who walks in. That’s why we’ve never thought of ourselves as Blockbuster. It’s really about solving a big problem, and movie marketing is a big problem, because it’s taste-based marketing, which is really difficult to do.
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