Q&A: Reed Hastings
EmptyAfter spending a summer in boot camp with the Marines, Reed Hastings decided to join the Peace Corp. for two years in Swaziland. It was just the first of a series of adventurous decisions that saw the New England native head west to Stanford, then start his first company, Pure Software, at age 31. After selling it six years later, Hastings founded Netflix in 1998 and has defied the odds (not to mention stiff competition from Blockbuster and Walmart) to grow the company to more than 10 million subscribers and 2,000 employees at its Los Gatos, Calif., headquarters and 100 distribution centers nationwide. Despite the DVD infrastructure, Hastings sees the company's future in Web streaming and personalization -- using the more than 2 billion movie ratings submitted by subscribers to help them find movies they are more likely to enjoy. Hastings recently sat down in Netflix's Beverly Hills offices with The Hollywood Reporter's Matthew Belloni and Paul Bond.
The Hollywood Reporter: How does a guy go from the Marines to the Peace Corps to serial entrepreneur to now changing the way Hollywood gets its product to consumers?
Reed Hastings: Well, it wasn't really the Marines. It was six weeks one summer. Things that attract my attention are inefficiencies and trying to figure out how to do things different. I was a Peace Corps high school math teacher. The lucky break of my life was getting into Stanford in computer science; I got a master's degree. And there were all these people walking around, like Bill Joy, that had built companies, and you look at him and you're like, "Geez, if that guy can do it, I can do it." The little-known fact about most entrepreneurs is they have tons of stupid ideas and then occasionally one works and then they regard it as very insightful, but in fact they just tried a lot of things until one works.
THR: What are some of the stupid ideas you've had?
Hastings: The foot mouse is a good example. We wrote a whole business plan for a foot mouse where you could type all the time and control the mouse with your foot. We had this whole elaborate plan and how it was going to revolutionize the market. (Laughs) The original concept for Netflix was VHS by mail for a $12 video rental, and I was all excited about that. A venture capitalist that I met with told me that it was such a stupid idea, that I was crazy, and then a couple months after that I was still talking about it and a friend told me about DVD.
THR: Your background is tech-oriented. How was the transition to dealing with Hollywood studios and that culture?
Hastings: The key was, at first we didn't have to deal with Hollywood. For the first couple months we just bought DVDs from Best Buy and then we graduated to Baker & Taylor and then once (chief content officer) Ted Sarandos came in we started buying directly from studios and eventually getting revenue-share deals.
THR: So you've never had any desire to socialize in Hollywood or to interact with the creative community?
Hastings: No. We're a retailer. What we're trying to do is make consumers happier. When most people watch movies today, one out of five movies they absolutely love. What we're trying to do is shift that to two out of five (because) it will increase movie viewing substantially. How are we doing that? Personalization. The average Netflix subscriber has rated about 200 movies for us so we are able to really tailor the content for them. We want people to watch movies that they end up loving. Then we deliver those movies by streaming, by DVD, by television, by anything. But the core of what we're trying to do is be this Web site where you figure out what you want to watch and you're more likely to choose movies that you'll end up loving.
THR: By better connecting people to movies they will like, do you think that you guys are affecting the movies that are getting made?
Hastings: Yes, because if you take a small movie that does really well for us, it can make a difference for the filmmaker, so they get to go on and make their second film. Take "Nice Guys Sleep Alone" (1999). It was at the U.S. Comedy Arts Festival and Ted saw it and said we should carry it, and a lot of people rented it and it turned out to be a little sleeper hit for us. From that, the director (Stu Pollard) got enough funding to make his second film.
What's the most popular film at Netflix?
Hastings: "Crash" is still No. 1 of all time rentals. If you look at our top 50, it's a very surprising list. "Hotel Rwanda," a tiny $25 million boxoffice film, is No. 12 of all time.
THR: That's the point. Is the next "Hotel Rwanda" more likely to get made because of what kind of impact you guys are having?
Hastings: Presumably. What we say is: There are no bad movies, there are just movies that are great for only a few people. It's slightly oversimplified, but our view is if you make a movie, we will find the audience for it.
THR: Does that argument help you to get better deal terms when you're dealing with the studios?
Hastings: That argument is not that persuasive to them, but the variant of it is -- we're buying "Hotel Rwanda" if we know it's going to be a sleeper hit. And we say we would normally buy 25,000 but if you give us a deal we'll buy 50,000. And they're like, "50,000? You're going to buy 50,000 of this movie?"
THR: Take us through a normal day for you.
Hastings: There's a fair amount of variation. Get up early, work out, walk the dogs, try to have breakfast with the kids -- I hardly ever have breakfast meetings -- then three nights a week I have dinners or some business-related thing. Meetings. I'll meet with the head of operations once a week or once every other week and go through open issues. The issue I'm most involved with is personalization of the Web site -- back to that core thing I talked about. How do we help people choose better?
THR: Who do you admire in the business world?
Hastings: Jack Welch, for sure. The guy that I've learned most from but never met is Jim Collins, who wrote those books "Good to Great," and before that a book called "Beyond Entrepreneurship." I re-read it every year; just a fantastic book for first-time entrepreneurs.
THR: How about filmmakers?
Hastings: When Darren Aronofsky did the one with Ellen Burstyn ...
THR: "Requiem for a Dream."
Hastings: Right. When I watched that six or seven years ago, I was blown away because he was 31, I think. And I watched "Pi" before that and I didn't really get it. It's too far out there for me. I was like, how can the same guy two years later do something incredibly different?
THR: Why was Blockbuster not able to put you out of business?
Hastings: Viacom didn't let them compete with us in the early days. When you have a new attacker, you can't let them run for too long, and they let us run for five years. We launched in '99, they launched (DVDs by mail) in 2004. And that really hurt them, because Viacom wouldn't let them spend money against us.
THR: And by then it was too late?
Hastings: No, but then they spun Blockbuster off in 2003 and Block geared up right away to attack us, but Viacom kissed them with $1 billion of debt-- took $1 billion out in cash. Without that debt, you might be writing a very different story about how this all worked out, because that debt has been hanging over them. Once the banks get a piece of you, it really just crushes you. The simplistic story is Blockbuster fails. But I think the deeper reality is the problem of being a subsidiary. Viacom didn't let them out, and once they let them out they saddled them with all that debt.
THR: So Sumner Redstone gets the blame?
Hastings: Yeah. We love him for it. Don't get me wrong.
THR: What do you see right now as the biggest threat to your business?
Hastings: Redbox, the $1 DVD kiosks, is on a tear. They'll be up to 20,000 locations at the end of this year, when Blockbuster never had more than 6,000 domestic stores. We see it in our exit surveys of where people are going to go. It's our fastest-growing competitor. It's really scary.
THR: So what's the strategy?
Hastings: There's not a lot we can do about it. The problem is they're really cheapening the video rental perception. It's $1 for a new release rental. So that hurts VOD, it hurts subscription, it hurts all of us, because that's a great deal for the consumer.
THR: Except it doesn't hurt library titles, right?
Hastings: That's true, it's really new release-focused. But we have a lot of new release renters that are going there. They will ride the DVD wave. In streaming they won't be a player, so to some degree they're a contained threat. But if they get their economics better and better, and they're in Starbucks, they could be a big share in the market.
THR: Do you look forward to the day when streaming replaces DVD?
Hastings: No. In streaming, anyone can do the mechanics of it. It'd be a very competitive market. The difference is in the DVD world, of all our revenue -- a third of it goes to studios, a third of it goes to the post office and a third is for us. The gross margin is about 33%. In streaming, two-thirds will go to the studio, the post office will get none, and we'll get a third. It'll look more like you would expect pay television or some of these other things to look like, where a majority of the revenue goes to the studios.
THR: How far are we away from "any movie, any time"?
Hastings: Ten years. A long time. Because the studios rightfully want to protect (their content). Think of it as hardcover paperback for books. You don't want to publish in paperback at the same time as hardcover. The paperback is subscription VOD. They want to protect and monetize the higher-end formats like PPV and DVD purchase. That's sensible.
THR: How often do you watch movies?
Hastings: It varies. I peak up at Sundance. I've gotten addicted to Sundance and I'll watch a ton of movies there. I guess on average 10 a month, or something.
THR: What happened with Red Envelope, your aborted effort to get into film production and acquisition?
Hastings: It lost a lot of money. We had the idea that, at least for small films, we could be direct buyers. But it's better for us to go through the small specialty studios than to do it ourselves.
THR: What do you do in your downtime?
Hastings: Snowboarding, mountain biking, kid stuff. I keep fantasizing that I'm going to get into cooking, but I haven't done that yet.
THR: You don't maintain an office. Why?
Hastings: Everything I need is on my laptop, and I'll work in different parts of the buildings on different days -- sit outside, sit inside, sit in the conference room, sit in the lunchroom. I prefer it rather than having a cocoon.
THR: How much has your experience in the Peace Corps informed your career?
Hastings: I was at a rural high school in the northwest corner of Swaziland. It's the perfect 22-year-old adventure. I had great kids, very motivated kids, teaching high school math. I got a lot of satisfaction from the kids and the classes, and then you have school vacation, so you have time to hitchhike all over Africa.
THR: And now you're still involved in education issues.
Hastings: Yeah. I was on the state board of education. I still do a lot of philanthropy and some politics around it, mostly around charter schools.
THR: But after five years on the board you weren't reconfirmed.
Hastings: Some of the senators thought I wasn't respectful enough of bilingual education because I was trying to get rules in place that you had to do at least half the day in English in the bilingual programs, and they didn't think that was appropriate.
THR: Why did you stand your ground on that issue?
Hastings: Because English is the gateway skill. If you have good English skills, you have a better chance of doing well in middle school and high school. You can participate in a broader economic life in America, like go to college.
THR: Could you see yourself getting into politics?
Hastings: No. I've been around those guys enough to know what a totally different skill set it is. I would be lousy at it. The goal in politics is to never displease anyone too much, try to get along with everyone. I'm more like the pointy-headed intellectual. I like telling everyone why they're wrong. I'm not a big Democrat or Republican. I'm registered Dem, but I've voted and donated to as many Republicans, probably.
THR: How would you describe your management style?
Hastings: Constantly evolving. Seeking to inspire rather than control. I think of it as, not management but trying to be leadership instead of management. It's being smart enough about setting the right context so great work happens.
THR: Where is an area you think you could be better at?
Hastings: I'm not very good at all the small talk: how's your family, how's your kids. I forget people's spouse's names. All that stuff that's really good to have people feel you care. It's not that I don't care; it's just that I have a terrible memory for that stuff.
THR: Do you feel like you're an outsider in Hollywood?
Hastings: I feel like an insider in home video, but an outsider to production. The few times I've been on set, it's like, 'Whoa, this is weird.' I feel like an outsider on a set. But with home video, I feel they're straightforward, creative, aggressive, thoughtful businesspeople like me. In other words, there's a lot of cultural similarity.
THR: What's something the studios do that annoys you?
Hastings: You know, they're businesspeople. Like the Blockbuster guys, I respect them. They may take the opposite position, and maybe they're always trying to kill us, but it doesn't mean I'm annoyed by them.
THR: But people who negotiate with the studios sometimes feel they're too protective of content to strike creative deals. Do you, in trying to push content in an evolving medium, find they're too squeamish?
Hastings: No. I'm hard-pressed to point to decisions I might have done differently on their side. Our job is to make the studios money and to make consumers happy, and we succeed if we can do both simultaneously. It's easy to do one or the other. It's easy to make consumers happy if you're a pirate content site, like Pirate Bay. Or it's easy to make studios happy if you charge consumers a fortune, but you won't grow very much. The magic is to find models where you're adding enough value that you're making studios a lot of money and making consumers happy with the deal they got.
THR: Studios are nervous about whether Blu-ray will be adopted by the masses. Do you find that Netflix subscribers are transitioning over?
Hastings: Our Blu-ray adoption is rocking. We went from 1% to 3% to about 5% over Christmas. Now it's up to around 9%.
THR: But DVD sales are flattening and that's really hurting studios. How can they reverse the slide?
Hastings: It's the economy. DVD sales are down in the U.K, they're down in Canada, they're down in the U.S. And car sales are down, too.
THR: Is it the economy or is it just a maturing market?
Hastings: It's the economy. Without the economic shortfall, they'd be doing fine. It might be 2% growth instead of 10%, but it wouldn't be shrinking like it is.
THR: What can Hollywood learn from the way you run Netflix?
Hastings: The studios have such a hard business. In Silicon Valley, we think of a $20 million investment as big. A $100 million investment is massive! To continually make multi-$100 million investments -- it's unbelievable to me how hard their business is. That's probably why there are still the six; it's so hard for anyone else to get big now.
THR: Are you surprised at your success?
Hastings: Bit by bit. I'm not surprised with this year's success, but if you'd asked us at 100,000 subs, which was at the end of 2000, "Do you think you'd get to a million?" We'd be like, I don't know; maybe half a million. When we got to a million in '03, it's like oh my God, this is huge. And if you'd asked us then about 10 million, I'd be like, "You're crazy! It's so unlikely." Then when we had 5 million, we were able to start thinking about 10 million or 20 million. What we've proven is our imagination is twice as big as the reality, but not 10 times bigger.