Skip to main content

The Globe and Mail

For Netflix founder Reed Hastings, the show must go online

Illustration of Reed Hastings, founder and chief executive officer, Netflix Inc.

ANTHONY JENKINS/THE GLOBE AND MAIL

For the bogeyman, Reed Hastings doesn't look all that scary.

Ever since Netflix Inc. made its debut in Canada 21/2 years ago, traditional broadcasters have used the streaming video site's presence to justify a strategy of buying specialty channels and sports franchises in a bid to control content.

They're doing this even though Netflix has a subscriber base in Canada that's a fraction as large as cable and satellite companies, and has been beset by its share of missteps and controversies – including an ill-conceived (and later abandoned) restructuring plan in 2011 that helped drive the stock price from nearly $300 (U.S.) to $63.

Story continues below advertisement

Yet Canadian broadcasters warn that Netflix and similar unregulated online services will steal consumers away from the country's cable and satellite operators, which are required to air Canadian content and also hand over a portion of their revenues to fund Canadian productions.

Twice in the past year, executives from BCE Inc. and Astral Media Inc. appeared in front of Canada's broadcast regulator to suggest that the survival of their media divisions depended on their $3-billion merger being approved. (That the deal was given the green light on Thursday by the Canadian Radio-television and Telecommunications Commission suggests the regulator is acknowledging the challenge conventional broadcasters say is presented by so-called over-the-top content providers that don't have to worry about the country's broadcast regulations and can focus entirely on driving down costs.)

They don't often mention Mr. Hastings by name. They don't even like to mention his company's name.

But they say Netflix is a major threat – and on this day, Mr. Hastings is in a 17th-floor suite at Toronto's Ritz-Carlton hotel, individually meeting with a handful of journalists who have waited months for a few minutes with him.

He opens the door himself, dressed in a vaguely cowboyish shirt, a pair of jeans and a simple pair of brown shoes. Despite the dire warnings from Canadian executives, he doesn't have horns.

And he must have left his pitchfork in Los Gatos, Calif., because the only thing he's carrying around is a pot of coffee that he's offering to me and the two media relations helpers who sit quietly on the couch and appear to take better notes than I do.

"You know what's great?" he asks after a few minutes of small talk. "Sometimes it's a new competitor like Netflix that gets the existing guys to wake up and do better."

Story continues below advertisement

There are about 12 million Canadian households with traditional television subscriptions. And while the pace of growth has slowed to a crawl, the industry is still adding subscribers annually (unlike in the United States).

But cord cutting is definitely happening – subscribers are slowly making the move toward alternative delivery systems to gain access to their favourite programming.

An estimated two million Canadians have signed up for Netflix for $7.99 (Canadian) a month, and the company says the rate is accelerating as consumers become more comfortable with the technology needed to stream video into homes. (Worldwide, the service has 36 million users.)

Companies such as Vidéotron Ltée and Rogers Communications Inc. have tried to stop the migration by building similar services of their own. Netflix has anticipated the rise of competition, and has countered by producing its own exclusive programming it hopes will lure viewers and keep them watching once they are done binge-watching shows such as Arrested Development, Hemlock Grove and House of Cards.

"We don't just want to license, we want to develop and build and look more like a television network," said Mr. Hastings, whose company posted a $2.7-million profit in the last quarter. "We have to stay on our toes – it would be tragic for us to be Netscape and invent a model and then get run over by the big guys."

His foray into production comes with some risk – House of Cards was well received, but critics have been lukewarm to Hemlock Grove and the resurrected Arrested Development (even if fans have given it high ratings).

Story continues below advertisement

There's no guarantee someone will keep their subscription after they watch an exclusive Netflix series, a danger considering every episode is made available at the same time so that viewers can watch at their own pace.

"We've spent a lot of time getting the content right, so we feel good about it," he says.

"If we do a couple of dozen originals and don't have some splatters, we're not being aggressive enough. If we do a lot of content and if we're going to innovate and push the edge, we can't be afraid of that."

But as Mr. Hastings is well aware on this visit to Canada, the biggest setback to his company so far was a decision that had its roots here. Netflix started as a mail-order DVD business in the United States, a business that investors understand and with which they remain comfortable.

Canada was its first expansion market, and he made the decision to rely solely on digital subscriptions in this country and forgo the hard-copy DVD experience. He always suspected the company would make the transition to digital, and felt the time had come to make the switch.

"We were in computer science and saw how networks worked," he says. "That's why we named it Netflix and not DVDbymail.com"

Canada was a test market for a streaming-only service, and it performed above expectations. In 2011, Mr. Hastings used that as a cue to split the U.S. company and increase the cost for DVD rentals, and was promptly hammered by investors who cut in half the value of the company's shares. After two months of punishment on the markets, he reversed his decision and apologized.

"In hindsight, I slid into arrogance based upon past success," he wrote. "I want to acknowledge and thank our many members that stuck with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly."

It's telling he chose to apologize in a memo. The 52-year-old computer scientist is far more comfortable with the written word than he is with public speaking, and only commits to a handful of keynote addresses a year in an industry that thrives on trade shows and swanky product launches that turn executives into celebrities.

He approaches speaking as a problem to solve, studying tapes of popular TED Talks and trying to figure out what makes ones speaker effective and another a bore. He's concluded that humour is by far the most important component and he worries his messages will be lost as he's forced to entertain rather than inform.

"Writing is more disciplined," he says, going on to provide a quick history of the written word from its origins in what is now Iraq 10,000 years ago to modern means of communication.

"As a human I can enjoy a performance, but I'm not good at that. I could get better, I suppose, but the live-action part takes away from the clarity."

Well, writing isn't always the best way to convey a message, either.

Mr. Hastings ran afoul of American securities regulators last summer for a Facebook post to his 200,000 followers in which he boastfully announced Netflix had streamed more than a billion hours of content in one month for the first time. After alleging he had violated selective disclosure rules, the U.S. Securities and Exchange Commission eventually said that it was okay for executives to announce news through social media, but the investigation was another distraction from the company's aggressive growth strategy.

So, balancing enthusiasm and discipline is likely to remain one of Mr. Hastings' biggest challenges, something he acknowledges as he delivers a low-key, sit-down keynote to a cavernous (and half-empty) room at the Canada 3.0 conference in downtown Toronto.

"If you don't have rules and regulations, then you'd better have really talented people," he says. "There's not a safety net."

Netflix expanded rapidly at a time when a net wasn't a necessity, at least when it came to content (it now has about 2,200 employees).

Its first content deal was in 2008, when conventional networks weren't worrying themselves about online rights, and getting in early has allowed the company to get a head start on competitors.

But as broadcast executives look to keep their customers from cutting their cords, they are digging in on rights and insisting that the shows they buy for the conventional networks come with digital rights as well.

Mr. Hastings acknowledges the competition could drive up the price, as streaming companies such as his must pay more for content.

This could ultimately jack up prices for consumers, although he has no plans to start that debate again any time soon. Still, Mr. Hastings has no intention of letting his rivals outbid Netflix for rights.

"We can bid on new shows and so can others. What's great for content producers is there are a lot of new bidders," he says, before delivering a message to the broadcast executives who see him as a challenge.

"To compete with us, you have to win the bidding. In each of our markets, there are a broad set of competitors – but the biggest is just improved television."

Of course, he'd make a terrible bogeyman if he just left it at that. And as we continue to ignore the food that was brought in mid-conversation, he finally allows himself a little shot at the cable industry that he's lined up against.

"Linear television won't go away," he says. "It's just that less and less people will use it."

CURRICULUM VITAE

BEGINNINGS

Born Oct. 8, 1960 in Boston, Mass.; Age 52.

Married with two children.

EDUCATION

BA in mathematics from Bowdoin College (1983); MSc in computer science from Stanford University (1988).

CAREER

Founded Netflix, 1997

Co-founder of BookRenter.com

CEO, Technology Network, 1998-1999

CEO, Pure Atria Corp., 1991-1997

Director of Facebook and Startup America Partnership

VERBATIM

On the future of content: What we see is linear TV has been very successful … but that it's ripe for replacement. With linear TV, you don't get control, have to block off time to watch a show you care about. In an on-demand world, you just get to click and enjoy it wherever and whenever you want.

On the pace of change: The classic situation is you overestimate the short term and say everything will be fixed by next year, and underestimate the long term on what happens over a decade. It was only 15 years ago, we were all on dial-up.

On bandwidth caps: Nowhere else in world is that true. In Mexico, they have great uncapped Internet, and you only see that with some providers here. Hopefully people realize the marginal cost of an incremental gigabyte is very low. Costs a lot to build, but to use it a little bit more is just a few upgrades on some switches.

Report an error Licensing Options
Comments

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨