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Interview with Reed Hastings, CEO of Netflix

Netflix was the first DVD subscription service, upsetting the multi-billion dollar rental business that was owned by Blockbuster Video. Reed Hastings talks about how he identified this market opportunity and grew it into a multi-million dollar business.

Interview conducted by Nathan C. Kaiser on Friday, February 1, 2002 in Los Gatos, CA.

I am here today with Reed Hastings, CEO and Founder of NetFlix.com. Can you start off by giving us an overview of your business model?

We offer an entertainment subscription service to consumers for $20 per month. This service allows for our customers to rent as many DVDs per month as they want. There are no associated late fees or due dates.

How did you initially come up with the idea for Netflix?
Mostly due to my own frustration with late fees. Once when returning a single movie, I was forced to pay a $40 late fee, and I knew that I wasn?t alone in having racked up such large charges.
Is the monthly subscription service the sole revenue model for NetFlix.com?
Yes, it has been phenomenally successful. In under two and a half years we have signed up over half a million subscribers. NetFlix is one of the largest and fastest growing subscription services on the Internet. Our customers are passionate about NetFlix, getting what they want, not having due dates and of course movies.
Mr. Hastings, does your model also incorporate the ability for your customers to purchase the DVDs?
Because most individuals do not to purchase a used disc we have set up a strategic partnership with BestBuy.com to ship a brand new copy.

What type of partnership have you created with BestBuy.com?

It is a very dynamic partnership, where we drive revenue to BestBuy.com and they promote our service in their stores as well. BestBuy.com is one of our most important and successful partners because of this.
Can you give us an overview of the costs associated with your model?

We focus on how to maintain very low costs, so that we can keep our costs low, and provide an incredible bargain to our customers. With over 500,000 subscribers we are now cash flow positive, and we continue to invest in how to optimize the service.
What were the key issues you faced in starting the business and growing it to where you are today?
The model is different than what people are used to. Most people?s reaction up front is confusion. They aren?t used to a rental by mail model, and are not sure how it works. They are used to picking it up on Friday night and taking it back on Saturday afternoon. Once we show them the advantages of ordering in advance, and creating a list of movies in their queue, all without a due date, they come around quite quickly.
It requires a large change in consumer behavior?

Exactly. On the other hand it is quite hard for a competitor to replicate this model, and it is a very unique proposition.

Mr. Hastings, how did you go about educating the customers on the advantages of your model?
We offer consumers a free trial period, so that they can experience the service first hand. That allows us to get over a lot of the hurdles.
Once they see the clear advantages they are quite willing to sign up. How have you been able to convert a significant amount of your free trial customers to full paying customers?
Well, in comparison to other markets that haven?t been able to convert customers to a pay model, it all depends upon how much value to the consumer. If you take a free service today, it is very difficult to associate that service with definable value in the customers mind. In our case if you aren?t using NetFlix you are forced to go to the theatre, rent at Blockbuster, or pay for Pay-per-View. They are currently paying for the alternative, and we offer a clear, convenient, and cost-saving alternative.
What type of marketing initiatives have you done to grow your customer base, and which ones were most successful for you?
The core focus has been inspired by Starbuck. Very similar to growing the brand one cup at a time. Which requires focusing on a great consumer experience. We can run any number of TV ads, but the service is too different to market in a 30 second spot. Focusing on a great consumer experience has enabled us to grow organically.

What has been the growth in your customer base month to month?

Since we launched, we have grown annually at greater than 50%.
Are you looking to maintain your focus on this market, or are you looking to expand into video-on-demand and other areas?

Whether we mail something on a disc, or download something to the consumer, it is irrelevant to us. We plan on providing the interface that consumers use.
What is the total number of DVDs provided on your site?
We offer a selection of over 10,000 different titles. We try and keep every movie that has ever been made in stock. There are no DVDs that we do not carry.
What type of corporate culture do you wish to create NetFlix?

We are really focused on providing a great consumer experience. Tuning our model, investing more into it. It is a culture that is driven by consumer satisfaction numbers.

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