Netflix CEO talks content and caps

Netflix is adjusting its offerings to help Canadian customers deal with internet usage limits. CEO Reed Hastings explains what the future has in store for the company in Canada.
Netflix CEO Reed Hastings

Since its expansion into Canada last September, online video streaming provider Netflix has been stirring up debate over the country's internet services.

Netflix, which offers unlimited movies and television shows for a monthly fee, has proven to be wildly successful in the United States, amassing more than 20 million customers.

In Canada, however, Netflix has been dealing with a few roadblocks. On the one hand, its content selection is relatively small compared to what's available in the United States. Moreover, many Canadians are constrained in how much they can use Netflix because of comparably small internet usage limits.

This week, Netflix took steps to address both issues. The company announced an exclusive deal with Paramount that will bring more than 350 movies to the service, including some new features such as Iron Man 2. Netflix also introduced variable video quality settings, which allow Canadian customers to use less of their monthly data allotment by lowering their picture quality.

Chief executive Reed Hastings discussed the two issues with He says that despite the bumps in the road, the company is still on track to sign up a million customers by the summer and hit profitability in Canada this year. Can you explain how your content acquisition works? You deal with agencies that act as clearing houses and with content producers themselves.

Hastings: It really depends on who owns the rights right now. In Paramount's case we went directly to them but at other times someone will have the distribution rights for Canada so we'll go through that intermediary and that works fine too. What we try to do is get more and more content for the service and it really just depends on the subscriber growth. The more subscribers we get the more we can afford to get more content. Can you talk about costs?

Hastings: We can't talk about it on a per-title basis but we said we'd be break even at about a million subscribers. From that you can calculate that we'd have about $8 million a month in revenue. A little bit of [costs] is marketing but most of it is content. Where's the sweet spot with content, though? Obviously people would prefer to have new stuff, but it's more expensive to acquire than the old stuff.

Hastings: It depends. There's some great older stuff. We try to balance the costs with how much it's going to get watched, so if we think something is going to get watched a lot, then we'll try to get it and pay for it. Often new stuff gets watched a lot but sometimes older stuff gets watched a lot, too. Heroes [for example] is a couple of years old but it's a great TV show that gets watched a lot. Do you drop stuff if it doesn't get watched?

Hastings: It depends on the pricing. It's a ratio to the price, so if it's a low enough cost then no. Is licensing content in Canada different than in the U.S.? Some of the TV networks hold rights to shows or movies here, so do you have additional hoops to jump through?

Hastings: It's not a ton different, it's a little different. Again some of the content we'll get directly from the producer while other content… we've got Mad Men in Canada but not in the U.S., and that's because somebody else has the Canadian rights and has licensed it to us. We're visible enough that if you have content to license then you can typically call us up and we'll make you an offer. What about vertical integration where TV networks are also ISPs and they own the content rights? Is that a problem for you?

Hastings: It's mostly an issue when it comes to the internet, with the caps. When we first announced Netflix you saw that Rogers lowered their caps. Vertical integration that makes the internet very expensive in Canada is not good for us and it's not good for Canadians. But is the integration a problem when it comes to content licensing? Some of the rights owners compete with you. Is it a roadblock for you?

Hastings: Not particularly. We can pay them a lot of money or we can't. If we can then they'll license it to us. We're just launching an original series, House of Cards, next year so you could call that a bit of vertical integration. I don't think the channel owning content is a problem. How much of a threat do you think you are to TV providers? Are you complementary to them or are you a direct threat?

Hastings: In the U.S. we've gone from zero streaming [customers] to over 20 million subscribers streaming and virtually no one has cancelled their cable so it's pretty clearly complementary. We're basically an additional channel that people who are into content subscribe to. How up to date are you with what's been going on with the usage-based billing situation? There were some new filings on Monday in the latest round of the debate.

Hastings: Caps have been part of major ISPs for a number of years and it only blew up when Bell tried to require its wholesalers, independent ISPs that were competitive with them, to not offer unlimited. What the recent Bell action [this week] is saying is that, 'Okay, we'll let them do unlimited but they'll have to pay us per gigabyte at something like 20 cents per gigabyte.' It's still way above the cost. We think the cost is around a penny a gigabyte. I think what they're trying to do is calm down the fuss about it so they can continue to charge a lot for the internet. It's a shame really because in a lot of countries… if you look at the U.S., for about $40 a month you get 20-megabit [speed] service with a cap of 250 gigabytes. That's where, say, Australia is going. It started out with caps and they keep rising and rising. You don't see caps through much of Europe on the wired side. Hopefully the caps will rise dramatically to the 200 or 300 gigabyte level. And now Bell is raising the price of its retail internet services. Is that the wrong move at the wrong time for them?

Hastings: They have a lot of market power. There's not that much competition for them. It's hugely profitable and it's unfortunate for citizens because they have to pay a lot and don't get unlimited. What's the thinking behind offering the different levels of streaming quality? Some commenters have suggested that Canada's caps are forcing you to be innovative.

Hastings: We realized we should try to find a sweet spot because of the capping that was a little more conservative, and we think we've done that. We've got a setting where for most consumers it looks great and you get 30 hours of viewing for nine gigabytes. For almost everybody, it gets under the cap. In terms of what people are saying about the innovation, that's true a little bit but mostly it's not innovation in the right direction. Additional bandwidth doesn't cost anything and so you'd like to have great high-definition content… Caps are an inefficient way to influence congestion because congestion only really happens around peak times, like Friday and Saturday evenings. Outside of that, the residential pipes are relatively empty and it costs the ISPs zero to have people using the internet. If you want to focus on congestion, you could look at peak pricing and things like that, not caps. Caps are a great way to raise revenue because they can charge people more. The average Canadian internet user has a cap of 50 or 60 gigabytes, so if they subscribe to Netflix they either can't use it a lot or have to opt for a lower-quality setting. Relative to U.S. subscribers, should your fees therefore be lower here since Canadians don't get the same experience?

Hastings: The problem with that is then we'd get less content for the service and most people tell us they really want [us to] improve the content. When you look at our new 'good' tier on the video quality, it's really quite impressive because they're quite close visually. [Our] $7.99 is a great price so really the problem is the caps, not the pricing. Is this a practical move for customers or is it an effort to stoke the fires of discontent with internet providers?

Hastings: No, we wouldn't involve the consumers in that. This is to make it so that many fewer Canadians hit the caps and have overage charges. And we've made it settable so if you're on Telus or Shaw and have essentially unlimited you can flip it to high-def. You've hired some big-wig lobbyists here including former high-level Industry Canada bureaucrats. Is this a necessity here that you don't find in the U.S.?

Hastings: No, we also have lobbyists in the U.S. around net neutrality and related issues. The large incumbents, like Bell here and Comcast there, have a lot of interests and they lobby, so if you're not also there it's not a good thing. You want to be involved. Unlimited internet is good for Netflix and it's good for society so we're doing our little bit to move that forward. That's why we do it.