Netflix’s Reed Hastings: ‘Thank God’ Blockbuster Didn’t Buy Us

It’s hard to imagine that 20 years ago Netflix co-founder Reed Hastings and then-CFO Barry McCarthy sat in the Dallas corporate headquarters of Blockbuster Video begging the video store giant to buy the upstart by-mail DVD rental service for $50 million.

As the story goes, Blockbuster CEO John Antioco and other executives practically laughed Hastings and McCarthy out of the building. Blockbuster at the the time was a $5 billion company operating about 9,000 video stores worldwide. Netflix, by comparison, was running TV spots with Ryan Seacrest pitching consumers the concept of DVD movies in the mail. Subscription streaming video-on-demand (and Roku) was still a pipedream.

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Of course, Hastings today is the one laughing as the once mighty Blockbuster brand has been reduced to a singular independent store moonlighting as an Airbnb in Bend, Ore. Hasting is also mindful that Netflix dodged a corporate crossroad that could have significantly changed his life as well as the modern home entertainment ecosystem as we know it.

“Well, now I say thank God that they didn’t want to go ahead [with the deal],” Hastings told Yahoo Finance plugging his co-authored book, “No Rules Rules: Netflix and the Culture of Reinvention,” during an episode of “Influencers With Andy Serwer,” a weekly series featuring business, political, and entertainment leaders. “But you know, at the time, [Blockbuster was] so formidable and even later, when we went public, we were $50 million in revenue, and they were $5 billion, so a hundred times larger than us.”

Indeed, had Blockbuster acquired Netflix, it likely would have rebranded the upstart by-mail disc business. The million-dollar question remains whether the Blockbuster brass would have been receptive to SVOD and its impact on video stores. If not, the subscription streaming video business model might have died on the vine; binge-viewing left to TV on DVD boxed sets; co-CEO Ted Sarandos overseeing Blockbuster video stores; and HBO Max, Amazon Prime Video, Disney+ or Peacock just science-fiction.

“For our first decade, [Blockbuster] was such a big gorilla over our future,” Hastings said. “It was a number of things that made it possible for us to thrive, and eventually then have the chance to move into streaming.”

Today, Netflix has more than 193 million paid subscribers worldwide, and a Wall Street market cap around $223.5 billion.

Reed Hastings Discusses ‘Netflix Keeper Test’ in New Book

Netflix co-founder Reed Hastings has observed much in the service’s meteoric rise from by-mail DVD rental company to global online TV platform and movie studio.

In a new book, No Rules Rules: Netflix and the Culture of Reinvention, co-authored by Erin Meyer, Hastings recounts how his and other executives’ (such as co-CEO Ted Sarandos) thinking outside the box and unorthodox company culture spearheaded the SVOD behemoth, including eschewing the traditional way movies and TV shows are made and distributed. Think binge-viewing and by-passing theatrical distribution, among other non-traditional moves.

A key management strategy disclosed in the book, dubbed “Netflix Keeper Test,” involves monitoring executives and employees’ performance in an unusual way. The policy reportedly contributed to the departure of CFO David Wells in 2018 and subsequent hiring of former Activision Blizzard CFO Spencer Neumann in 2019.

In an interview with Variety discussing the book, Hastings said the test revolves around the question: Would you keep an employee if they wanted to leave the company?

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Hastings said Wells was a very competent CFO when it came to numbers and fiscal policy, but “not hungry” for entertainment. He said Wells’ “resignation” afforded him the opportunity to hire an entertainment CFO.

“That’s a tough one, because your heart cares for the person and the’’re great,” Hastings said. “But your head is like, ‘We could be a better company if we had an entertainment CFO.'”

Hastings admitted the “Keeper Test” could be intimidating to some executives. Indeed, co-author Meyer wrote about one Netflix director who hadn’t unpacked their boxes after one year on the job. Hastings said the “test” is no different than what any professional athlete deals with facing a career-ending injury on every play.

“We have to hire the psychological type that can put that aside and who aspires to work with great colleagues and that that’s their real love, is the quality of their colleagues or the consistency of that, versus the job security,” Hastings said.

Notably, Hastings, in the book, discusses his ill-fated decision to spin off the DVD rental business as Qwikster in 2011 — a move that contributed to Netflix shares plummeting 75% and calls for Hastings’ firing. Nearly 20 years later, Netflix continues to rent movie discs despite the fact package media’s fiscal impact (and subscriber tally) has all but been removed from the company’s financials.

Reed Hastings Quashes Retirement Scuttlebutt: ‘I’m in for a Decade’

Don’t expect to see Netflix co-founder Reed Hastings exit the subscription streaming video service until 2030, according to comments the new co-CEO made on the July 16 pre-recorded earnings webcast.

With Netflix announcing that longtime executive Ted Sarandos would share the CEO position while retaining his chief content officer title, scuttlebutt suggested Hastings had one foot out the door.

With a net worth of $5.5 billion and proactive interests in public education and social causes, there isn’t much reason for the 59-year-old Hastings to continue overseeing day-to-day operations of the by-mail DVD rental service-turned-SVOD behemoth he co-launched with software executive Marc Randolph in 1997.

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But that’s precisely what Hastings intends to do, working full-time alongside Sarandos for the next 10 years.

“Let me be really clear on that: I’m in for a decade,” he said on the webcast. “As co-CEO, it’s two of us full-time, it’s not like a part-time deal. It’s definitely broadening the management team. It will be great to have some help as we expand and grow.”

Hastings said he see no changes how Netflix is run over the next few years, having worked with both Sarandos and Greg Peters for years. Peters, who was elevated to COO and speaks five languages, helped launch Netflix Japan in 2015.

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Sarandos said he has worked together with Hastings for more than 20 years — a relationship he doesn’t see changing with his promotion and co-title.

“[Reed has] been an unbelievable role model, a source of inspiration for me,” Sarandos said. “We’ve navigated some of the toughest decisions the company has made over those years, from mailing DVDs all over the U.S., to [streaming video] all over the world.”

Hastings said Netflix a few years ago was largely a premium TV service. Now, he says the service is “really good” in movies, unscripted programming, “emerging” animation and “very strong” in local language shows.

“It’s incredible the expansion Ted’s pulled off over the past five years,” Hastings said. “Think of [the next 10 years as] more consistent with the past than different [going forward]. The beautiful thing … is we’ve got a great model. We’ve just got to make it better.”

Netflix Names Ted Sarandos Co-CEO; Hits Another Fiscal Home Run, Adding Record 10M Subs, Revenue Up 25%

Netflix July 16 named veteran executive Ted Sarandos co-CEO with co-founder Reed Hastings. Sarandos, who has been Netflix since its beginning, is the current chief content officer — a position he will continue. The former home video executive now joins the company’s board of directors. Greg Peters, chief product officer, adds chief operating officer to his resumé.

“Having watched Reed and Ted work together for so long, the board and I are confident this is the right step to evolve Netflix’s management structure so that we can continue to best serve our members and shareholders for years to come,” Jay Hoag, lead independent director, said in a statement.

Meanwhile, Netflix continues to be immune to economic challenges posed by the coronavirus pandemic. The SVOD pioneer said it added 10 million subscribers in the second quarter, ended June 30. It now has more than 192 million subs worldwide. Netflix had projected 7.5 million net new subs and 190.36 million globally — up 25.6% from the previous-year period.

Netflix added 2.94 million subs in the U.S. and Canada, compared to a loss of 130,000 subs in the previous-year period. The service added 2.75 million subs Europe, the Middle East and Africa, versus 1.69 million last year. It added 1.75 million subs in Latin America, compared with 340,000 in 2019; and the SVOD added 2.66 million subs from 800,000 last year in Asia and Pacific Rim countries.

How strong is Netflix’s sub base? The net subscriber additions included a small percentage of subs Netflix canceled due to non-use of the service.

Revenue skyrocketed nearly 25% to $6.14 billion from $4.9 billion in the previous-year period. Net income reached record $720 million, compared with income of $271 million last year.

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Indeed, Netflix in the first half of 2020 saw “significant pull-forward” of subscriber growth with 26 million paid net adds, compared with 12 million the prior year.

“We live in uncertain times with restrictions on what we can do socially and many people are turning to entertainment for relaxation, connection, comfort and stimulation,” CEO Reed Hastings and CFO Spencer Neumann said in an understatement in the shareholder letter.

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The executives said they expect less growth for the second half of 2020 compared to the prior year — with just 2.5 million net sub adds in Q3 (ending Sept. 30) and 195.45 subs worldwide. The streamer added 6.8 million subs in the prior-year period.

“We’re expecting paid net adds will be down year over year in the second half as our strong first half performance likely pulled forward some demand from the second half of the year,” Hastings and Neumann wrote.

The executives said that due to long production lead times, 2020 plans for launching original shows and movies continue to be largely intact. For 2021, Netflix expects the current paused productions will lead to a more second half weighted content slate in terms of big titles.

“We anticipate the total number of originals for the full year will still be higher than 2020,” they wrote.

Recent acquisitions include The Trial of the Chicago 7​ from Aaron Sorkin and ​previously reported The SpongeBob Movie: Sponge on the Run​ (global excluding U.S. and China). Netflix also acquired nearly completed seasons of unreleased original series like ​”Cobra Kai”​(seasons 1, 2 and a brand new season 3) and ​”Emily in Paris,” s​tarring Lily Collins.

“The pandemic and pauses in production are impacting our competitors and suppliers similarly,” Hastings and Neumann wrote. “With our large library of thousands of titles and strong recommendations, we believe our member satisfaction will remain high.”

Reed Hastings, Wife Donating $120 Million to Black Institutions

Netflix co-founder/CEO Reed Hastings and his wife, Patty Quillin, are donating $120 million to educational institutions targeting students of color. The contributions include $40 million each to the United Negro College Fund and private colleges Spelman and Morehouse in Atlanta. Hastings disclosed the donations in an interview this week with CNBC.

“There are many good places to donate, but the [historically black colleges and universities] are 150 years old, incredibly resilient, producing an amazing number of black graduates,” Hastings said.

The by-mail disc rental/SVOD pioneer said he and his wife were moved by the George Floyd death by Minneapolis police, ongoing societal racism as well as the disproportionate suffering in the black community as a result of the coronavirus.

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“The amount of tragedy really did get us to focus and say, ‘let’s do something now that will be supportive of these great institutions and give people some sense of hope,’” Hastings said. “This moment is not the first time that racism has reared its, you know, terribly ugly head. We want to help draw attention to the [historically black colleges and universities], to them being part of the solution for America, and for black children to aspire to”.

Hastings, who reportedly has a net worth around $4.8 billion due to his 1.3% stake in Netflix, has long been an advocate for education. After a stint in the Peace Corp. in Africa teaching high school math in Swaziland, Hastings pursued a silicon career in tech before launching Netflix. Along the way, he’s been a big contributor to charter schools, including spending almost $9 million campaigning for select school measures and political candidates. In 2016 Hastings pledged a $100 million philanthropic fund for children’s education.

The Day Netflix’s Fiscal Call Became Irrelevant — to Netflix

Michael Morris, an analyst with Guggenheim Securities, was in a no-win position. As the Wall Street expert on tap April 21 to question Netflix executives on strong quarterly results (more than double projected sub growth) favorably impacted by the coronavirus, Morris was met with what appeared to be a collective air of guilt and concern. It was not a time to gloat or high-five success.

Indeed, Netflix added nearly 16 million subscribers worldwide in the first three months of the year — about 7 million more than revised Wall Street estimates and 9 million more than what Netflix had expected.

At a time when many media companies are scrambling to find funds, and some movie theaters are facing bankruptcy, Netflix has seen its stock reach record highs — briefly valuing the company higher than The Walt Disney Co.

CEO Reed Hastings, CFO Spenser Neumann, CCO Ted Sarandos, chief product officer Greg Peters, and Spencer Wang, VP, finance & investor relations, seemed to be in no mood to discuss the robust quarter, pricing, sub growth or balance sheet at a time when an ongoing pandemic devastates many of its markets globally.

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“It’s an incredible tragedy for the world,” Hastings said about COVID-19. “Everyone is wrestling with the implications, both on health, on hunger, poverty. And we, too, are really unsure of what the future brings.”

“It’s been humbling to be a place that people around the world in a time like this turn to for some entertainment for escape,” Peters said.

Neumann said Netflix was fortunate to be running smoothly during industry-wide shutdowns and quarantined employees, while doing the “best we can” to keep employees and production crews safe, healthy and taken care of.

“That’s been our primary focus,” he said.

Hastings said he and the rest of the company remained as uncertain about the business future in a COVID-19 universe, adding that distributing entertainment through the Internet wasn’t slowing.

“People want entertainment,” he said. “They want to be able to escape and connect, whether times are difficult or joyous. Will Internet entertainment be more and more important over the next five years? Nothing has changed in that.”

When Morris attempted to ask a question about subscription pricing and how it might be implemented in a non-virus environment, Peters wasn’t biting.

“At this point, we’re not even thinking about price increases,” he said. “What’s going on around the world is dominating our thoughts and our considerations. So, we’re really just focused on that for this period.”

When Morris flipped from asking about a price hike to a price cut with so many people out of work or furloughed, Peters deferred to Neumann, who reiterated that it “really [wasn’t the] time for us to be thinking about price changes. We haven’t lived through anything like this. So it’s so hard to tell.”

Sarandos said Netflix was deep into production for its 2021 original content slate, underscoring the fact the service has no content shortages while production is shutdown.

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Indeed, Netflix’s original true crime documentary “Tiger King” has proven to be major hit, tracking 65 million subscriber households since its March 20 launch.

“We don’t anticipate moving the schedule around much and certainly not in 2020,” Sarandos said. When asked whether Netflix would incorporate “episode spacing” rather than making all episodes of an original series available at launch, Sarandos said release strategies are being tweaked all the time.

He said the “Love is Blind” dating show featured staggered episodes while the competition series “Too Hot to Handle” was released all at once.

“Customers have spoken loud and clear that they really like the option of the all-at-once model,” Sarandos said. “So, I don’t see us moving away from that meaningfully.”

The executive lauded Netflix’s partnership with Disney-owned ESPN on the just-launched Chicago Bulls/Michael Jordan NBA basketball documentary The Last Dance, which the two companies have worked together on for several years. Netflix and ESPN streamed and aired the first two of 10 episodes beginning April 19.

“It’s been a win-win for us and ESPN, and a great win for basketball fans who’ve been very hungry for new programming,” Sarandos said.

Hastings said Netflix has resumed production in Iceland and South Korea, using those situations to learn how best to implement production in other parts of the world as shelter-in-place restrictions are lifted.

“We’re taking some of those key learnings about how we run those productions today and applying that to our plans to re-start our productions around the world,” Hastings said.

Netflix Reducing Streaming Bit Rates 25% Across Europe

As one of the largest distributors of digital data across high-speed networks, Netflix has agreed to reduce its streaming bit rates in Europe over the next 30 days as the region grapples with the coronavirus pandemic that has now exceeded China in the number  of infections and deaths.

The move comes after CEO Reed Hastings met with European Commissioner Thierry Breton about Netflix reducing its strain on European networks.

“Following the discussions between Commissioner Thierry Breton and Reed Hastings — and given the extraordinary challenges raised by the coronavirus — Netflix has decided to begin reducing bit rates across all our streams in Europe for 30 days,” Netflix said in an email. “We estimate that this will reduce Netflix traffic on European networks by around 25% while also ensuring a good quality service for our members.”

With mandatory at-home quarantine in some countries, people have turned to the Internet for work and school. At the same time, Netflix has more than 106 million subscribers outside the United States. Its standard definition videos reportedly consume about 1GB of data per hour, while HD videos eat up 3GB of data per hour. Video consumption accounts for about 70% of bandwidth used across European networks.

Akamai reports its networks are experiencing 50% more Web traffic than previously used during this time period. CEO Tom Leighton told Business Insider the company’s peak traffic load in Q1 is twice what it was during the same period last year.

“I think we’ll see more acceleration due to the fact that you have so many more people working from home and you have, kids out of school and spending more time at home,” Leighton said.

 

Netflix’s Reed Hastings Meeting With European Union to Discuss Bandwidth Issues During Virus Pandemic

With much of Europe under quarantine due to widespread outbreaks of the coronavirus, the European Union is calling on streaming video services such as Netflix and Amazon Prime Video to curtail offering content in high definition.

The EU encompasses more than 450 million people, many of whom are home-bound as local governments and health officials battle to contain further spread of COVID-19, which has seen Europe surpass China in the number of infections and deaths.

With people turning to over-the-top video, demands on local ISPs and networks could exceed capacity, according to European Commissioner Thierry Breton, who tweeted “#SwitchtoStandard definition when HD is not necessary.”

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Breton reportedly met Netflix CEO Reed Hastings on March 18 about the issue and is scheduled to do the same today. Netflix, in a statement to CNN Business, said the service already limits streaming to network capacities, including housing content closer to subs in each country.

“Commissioner Breton is right to highlight the importance of ensuring that the internet continues to run smoothly during this critical time,” a Netflix spokesperson said. “We’ve been focused on network efficiency for many years, including providing our open connect service for free to telecommunications companies.”

By 2024, about 63 million Europeans are projected to have a Netflix subscription — up from 40 million in 2018. Netflix had 106 million international subs at the end of 2019, in addition to 61 million in the United States.

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Netflix Opening Italian Office in Rome

Netflix continues its European charm offensive, reportedly setting up Italian operations (with 30 employees) in Rome — a week after doing the same in Paris. Both regional headquarters include increased investment in local content production, in addition to paying taxes.

“Since the launch of the service in Italy in 2015 we have been welcomed with enthusiasm by many Italian subscribers and have had the good fortune of working with a wide range of talents, some well-established while others emerging,” Kelly Luegenbiehl, VP of international originals, told Variety in a statement.

Netflix co-founder/CEO Reed Hastings last October suggested the streaming pioneer would be expanding regional operations from its main European headquarters in Amsterdam.

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The office relocations also amount to an effort by Netflix to curry favor with local politicians who have accused the service of not paying taxes. With the establishment of localized workforces, Netflix will now be paying all appropriate taxes.

Prosecutors in Milan last October said Netflix should pay local taxes despite the fact the service had no physical presence streaming content to 1.4 million Italian subscribers in the country.

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Netflix Italian originals include “Suburra: The Series” and “Baby,” pending witchcraft series “Luna Nera,” all helmed by female directors.

Netflix CFO: Disney+ Not More Popular Outside the U.S.

With Netflix citing increased fourth-quarter (ended Dec. 31, 2019) domestic churn among existing subscribers as a response to new SVOD service launches from Disney and Apple, concern is growing about the impact of Disney’s accelerated SVOD launch plans in Europe in March.

Indeed, Netflix added 420,000 subscribers in the U.S. in the quarter, which was down from 600,000 projected. Outside the U.S., Netflix said it has seen a more “muted impact” from competitive launches in Canada, Australia and Holland.

“As always, we are working hard to improve our service to combat these factors and push net adds higher over time,” executive wrote in the shareholder letter.

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Speaking Jan. 21 on the pre-recorded fiscal interview, CFO Spencer Neumann said that while Disney remains a global brand, its streaming service remains largely focused on catalog programming with a few original shows other than the “Star Wars” spinoff “The Mandalorian.”

“[Disney is] not more popular than they are in the U.S. anywhere else in the world,” Neumann said.

CEO Reed Hastings contends the rise of rival SVOD services is having more of an impact on pay-TV than Netflix in particular.

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“Remember that we compete a lot for time with YouTube,” Hastings said. “And it’s not dollars because that’s ad supported. But we compete very broadly for viewing and as [previously] mentioned our viewing on a per-member basis is up. And that’s because our content is getting better. Our service is getting better. And that’s all coming out of linear TV.”