The DMW Interview with Ted Sarandos, Netflix Chief Content Officer

Authored by Scott Goldberg on February 1, 2007 - 2:10pm.

Ted Sarandos, Chief Content Officer, Netflix

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?

We compete with Blockbuster, but we also compete with HBO, we compete with Comcast, and we compete with all of these other movie delivery formats.

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.

Scott Goldberg

Related Links:
Spotlight: Will Netflix’s Red Envelope Entertainment be Sundance 2.0?
Now Is the Time for Blockbuster to Make Its Move
Netflix to Launch Online Movie Viewing With 1,000 Titles

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Netflix - Web Site: 7 million discs delivered weekly

Submitted by anonymous (not verified) on February 2, 2007 - 1:28am.

Also, from the Netflix web site, for the 3rd Qtr, 2006, Netflix had 5.662 million subscribers. That means that Netflix delivered 1.24 discs each week to each subscriber, on average. How do you reconcile that with the statement that their 3-out-at-a-time plan is by far the most popular? Perhaps, they are mistakingly understating what they report to the studios for revenue sharing? Or maybe users are not being stoked sufficiently by Netflix's being "squarely in the demand creation business." Why do journalists give Netflix so much leeway with their grandiose statements?

'''''''''''''''''''''''''''

When Netflix first projected, in 2005, that they would have 20,000,000 subscribers in 2010 to 2012, it was clearly defined (see the website) as the "total potential online DVD rental market." Since 2005, the amount of competition in the video space has boomed and the competition for eyeballs includes the latest wave of game consoles. Yet Reed Hastings continues to say he will have 20,000,000 subscribers in 2010 to 2012? Why is it that he does not at least subtract the 2.2 million subscribers that Blockbuster has gathered in the last 2 years?

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Subscriber Growth
2005 - 60.1% 2006 - 51.0%
2007 - 27% to 33%---Netflix projections
2008 - ? 15% 10%?---my guess
Maybe not a good stock for the college fund? The institutions have been selling. Legg Mason had 7.5 million shares in a mutual fund at 9/30/06 and now is not on the mutual fund top 10 holders list. They do still have a large position at the institution level.

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But other institutions are selling:
Yahoo Finance
http://finance.yahoo.com/q/it?s=NFLX
Net Institutional Purchases (Sales) Qtr to Qtr
Net Shares Purchased (Sold)-----------------(9,682,380)
% Change in Institutional Shares Held-------(18.4%)
(This is the smart money.)

More on HackingNetflix...

Submitted by robert on February 2, 2007 - 6:06am.

Here are some comments on the interview over at HackingNetflix.com:
http://www.hackingnetflix.com/2007/02/dmw_interviews_.html

Netflix - physical delivery at risk from VOD

Submitted by Rick Hanley (not verified) on February 3, 2007 - 3:03am.

The Wall Street Journal Online (WSJ.com)
Tech Trader Daily
February 2, 2007, 2:02 pm
More Evidence: VOD Growth Poses Risk To Video Rentals
Posted by Eric Savitz
…In a brief research note yesterday, Oppenheimer’s Thomas Eagan pointed out that in his company’s post-earnings conference call, Comcast CEO Brian Roberts said that buy rates are up substantially in the company’s “day and date” trials, which is industry jargon for allowing people to watch videos on demand the same day they are released on DVD. He notes that Roberts indicated the trial will roll out to additional cities. Eagan points out that Comcast also said it would soon announce the availability of ad-supported VOD prime time programming from 3 of the 4 major broadcast networks…

‘’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’

We are in a digital world, at least to some extent, right? Why not let people enjoy movies via VOD, IPTV and Internet download? Mailing physical DVD’s all over the country and back to Netflix distribution centers millions of times a week produces a lot of carbon emissions.

Netflix - Wal-Mart to offer 60,000 films by mail

Submitted by Rick Hanley (not verified) on February 6, 2007 - 1:46pm.

Wal-Mart Video Download Below is an additional point that I haven't seen in most reports on Wal-Mart download. Catalog film availability had mostly been via the online physical DVD rental model - this differentiator is to be diluted by Wal-Mart: Red Herring The Business of Technology Wal-Mart Intros Movie Downloads …Wal-Mart will use the foray into digital movies as a way to build a full-service online store aimed at home entertainment. “We view this as the first step to move toward a multi-format and multi-channel strategy,” said Cameron Janes, director of digital media for Wal-Mart. “We are looking at leveraging the digital platform to support manufacturing on demand and offer a range of movie titles.” Those include independent films, foreign films, as well as hard-to-find titles. Willem de Zoete, head of HP’s digital entertainment services business, said the company is building a business based on custom DVD distribution. About 60,000 DVD titles will also become available through a mail-order service in which consumers have an option to go online and order the discs. The service will launch mid-year. © 1993-2006 Red Herring, Inc. All rights reserved. http://tinyurl.com/35daub (Red Herring)

Netflix - TiVo goes with Amazon

Submitted by Rick Hanley (not verified) on February 7, 2007 - 12:33am.

TiVo Chief Executive Tom Rogers said TiVo decided to go with Amazon.com in its new venture because the online retailer had a large customer network and a large catalog of distribution rights, which Netflix couldn't deliver.

The one major advantage of this relationship is that a TiVo is already connected to the TV, while many other services (Netflix, Wal-Mart, iTunes, Cinemanow, etc.) are waiting for a device to connect them to the TV. Tivo, Xbox 360, and MovieBeam are the early leaders in getting movies to the TV, but Apple is expected to join them shortly with the AppleTV.
via PVR Blog.
http://www.hackingnetflix.com/2007/02/tivo_and_amazon.html

Netflix - in-store download and burn is here

Submitted by Rick Hanley (not verified) on February 8, 2007 - 4:59pm.

Cleared for Takeoff Imagine 'in-store download and burn to DVD kiosks' in Wal-Mart, Target, Best Buy, and/or Walgreens? Extremely cost effective availability of tens of thousands of titles. The content owners, retailers, and consumers all win. And the environment, too. No more online, physical DVD rental models that involve millions of physical deliveries each week. What had been the key differentiator for Netflix, catalog films, will now be widely available to retailers. Clearly, we all want to see the day when in-home download is as easy as using the TV is today. That will come. '''''''''''''''''''''''''''''''''''' '''''''''''''''''''''''''''''''''''' Video Business Online Download-and-burn cleared for takeoff Movielink plans summer test with new CSS-enabled discs By Paul Sweeting -- Video Business, 2/8/2007 FEB. 8 | The DVD industry has cleared the way for retailers and consumers to burn movie downloads to DVD for set-top playback. The steering committee of the DVD Forum on Jan. 31 formally approved technical specifications for a new type of recordable disc for use with in-home and in-store burning of CSS-protected movies, removing the last remaining administrative hurdle to commercial deployment of download-and-burn services… Online download services have been waiting for the approval to give consumers the option of burning movies they can now only play on their PC or portable device. Studio-owned download service Movielink plans to begin testing burn-to-DVD downloads this summer and offer it to all consumers by the fall, chief marketing officer Mary Coller Albert said… Wal-Mart also is said to be considering adding download-to-burn for its just-launched service. “We expect that to improve over the course of the year, and we’ll continue to aggressively explore/evaluate opportunities and models for this option over the next year,” Wal-Mart said in an e-mailed statement… With the final specs approved, disc makers can now begin manufacturing DVD Download blanks for sale to consumers and in bulk for enterprise applications such as in-store burning kiosks. The discs are similar to standard DVD-R’s but are “pre-keyed” with CSS decryption codes so they can accept encrypted data. The use of CSS—the same copy-protection system used on commercially pressed discs—is considered critical to ensuring that discs burned from downloaded movie files will be compatible with all set-top DVD players… Initially, download-and-burn may be a bigger opportunity for bricks-and-mortar retailers that bring in DVD burning kiosks rather than for online download companies… “In theory, it can be a very nice revenue generator [for retailers] without having to give up any kind of significant footprint,” Goodman said. © 2007, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved. http://www.videobusiness.com/article/CA6415121.html Rick

Netflix managers say the darndest things

Submitted by Rick Hanley (not verified) on February 18, 2007 - 8:57pm.

Dramatic Interview Quotes from Netflix Management ''''''''''''''''' June 7, 2006 The New York Times What Netflix Could Teach Hollywood http://tinyurl.com/2twl3h (NY Times) Reed Hastings, CEO "Americans' tastes are really broad," says Reed Hastings, Netflix's chief executive. So, while the studios spend their energy promoting bland blockbusters aimed at everyone, Netflix has been catering to what people really want — and helping to keep Hollywood profitable in the process. [30% of Netflix rentals are those 'bland blockbusters'] ''''''''''''''''''''''''''''' February 1, 2007 digitalmediawire The DMW Interview with Ted Sarandos Ted Sarandos, Chief Content Officer “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.” '''''''''''''''''''''''''''''''' February 1, 2007 digitalmediawire The DMW Interview with Ted Sarandos Ted Sarandos, Chief Content Officer “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.” '''''''''''''''''''''''''''''''' February 15, 2007 indieWIRE World Cinema Web http://www.indiewire.com/movies/2007/02/world_cinema_we.html Steve Swasey, Director of Corporate Communications "We are a bastion of distribution for smaller independent films that wouldn't see the light of day otherwise." '''''''''''''''''''''''''''''''''' February 15, 2007 indieWIRE World Cinema Web http://www.indiewire.com/movies/2007/02/world_cinema_we.html Steve Swasey, Director of Corporate Communications The mainstream audience still wants to watch the films on DVD, Swasey contends, "which will be the preferred delivery method for at least 5-7 years." [Who thinks mail-order physical DVD will own rental until 2012 to 2014?]

Netflix - HBO coming to airline video-on-demand seatbacks

Submitted by Rick Hanley (not verified) on February 19, 2007 - 7:08am.

One of dozens of inroads being made that reduce DVD usage: '''''''''''''' The New York Times (nytimes.com) February 19, 2007 With HBO’s Help, the In-Flight Entertainment Is About to Get Sharper By NOAM COHEN …Under an agreement between Delta Air Lines and HBO, planes in the airline’s fleet that are fitted with video-on-demand seatbacks will have a dedicated HBO channel offering movies and 40 to 50 hours of unedited programming from popular series like “The Sopranos,” “Da Ali G Show” and “Deadwood.” Within a year, Delta says, all flights longer than four hours will have the programming, about 400 flights a day. First-class and international BusinessElite customers will get the service free; domestic economy-class customers will be charged $5 for a feature film and $2 an episode for TV shows. According to HBO, Delta paid a licensing fee and will share revenue with the network…