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Summary:

TV is fundamentally changing from a linear delivery model to a world in which apps compete with each other, and Netflix is spending billions to be part of that future.

Reed Hastings of Netflix at NewTeeVee Live 2010 in San Francisco

Netflix CEO Reed Hastings laid out an ambitious plan for Netflix’s future in a paper published on the company’s investor relations site Wednesday that paints Netflix as one of the driving forces behind a transition from linear television to a world of internet-delivered on-demand content.

The paper repeated some key points Hastings has made it the past, but also included a number of noteworthy new insights, including some data points on how Netflix spends its money.

Notably, Hastings said that Netflix is now spending over $2 billion a year on the licensing and creation of content. The company is spending another $350 million a year on improving its service and apps, including improvements to the streaming quality and customer service. And it is spending over $450 million per year on marketing in all of its markets around the world.

Here are some other key highlights of the paper:

On the future of TV

People love TV viewing, but they hate linear TV, including DVRs and cable VOD services, argued Hastings: “The linear TV channel model is ripe for replacement.” Stepping up to replace it are apps from companies like Netflix, HBO and ESPN, which deliver programming to multiple screens.

Technical advances, including 4k streaming and personalized advertising, will speed up the transition from linear TV to app-based on demand programming, and TV Everywhere will make it easier for cable networks to transition into this new world. And eventually, all of this will fundamentally change how TV is delivered, he said:

“Eventually, as linear TV is viewed less, the spectrum it now uses on cable and fiber will be reallocated to expanding data transmission. Satellite TV subscribers will be fewer, and mostly be in places where high-speed Internet (cable or fiber) is not available. The importance of highspeed Internet will increase.”

On Netflix’s focus

Hastings repeated in the paper that Netflix doesn’t want to compete with cable, but just wants to become one more channel — or app — for consumers to choose from. That also means that the company will focus on a few key areas, and for example not venture into ad-supported programming:

“We don’t and can’t compete on breadth with Comcast, Sky, Amazon, Apple, Microsoft, Sony, or Google. For us to be hugely successful we have to be a focused passion brand. Starbucks, not 7-Eleven. Southwest, not United. HBO, not Dish.”

For Hastings, this isn’t just about doing the things at which Netflix excels. It’s also about offering consumers a clear idea what they can expect from the service, which is key to get them to tune in to what he described as “moments of truth”:

“Those decision moments are, say, on Thursday 7:15 pm or Monday 2:40 am when our member wants to relax, enjoy a shared experience with friends and family, or is just bored. They could play a video game, surf the web, read a magazine, channel surf their MVPD/DVR system, buy a pay-per-view movie, put on a DVD, turn on Hulu or Amazon Prime Instant Video, or they could tap on Netflix. We want our members to choose Netflix in these moments of truth.”

On licensing

Hastings also shared some details about the company’s approach towards licensing, which has been shifting more and more towards exclusives. Data is guiding decisions on what to license, explained Hastings:

“We might pay, for example, $200,000 for a 4 year exclusive subscription video-on-demand (SVOD) license for a given title. At the time of renewal, we evaluate how much the title has been viewed as well as member rating feedback to determine how much we are willing to pay. How many similar titles we have is also a consideration.”

He didn’t mention it by name, but this reliance on data could be one of the reasons why Netflix decided to not renew a big licensing pact with Viacom. The company revealed earlier this week that its partnership with the cable programmer is about to expire in May. Netflix is now in discussions with Viacom to license individual shows instead.

The paper also pointed out that Netflix has fundamentally changed the licensing of TV shows in particular:

“It wasn’t easy for cable and broadcast networks to syndicate serialized storytelling to others, and we’ve pushed the price up considerably.”

On HBO

Hastings has long maintained that HBO is its biggest competitor. The company revealed Monday that it now has more domestic subscribers than the cable channel, and Hastings repeated in the paper that he wants to significantly outgrow HBO:

“We have more content, more viewing, a broader brand proposition, are on-demand, on all devices, and are less expensive, so we estimate that we can be 2 to 3 times larger than current linear-HBO, or 60-90 million domestic members.”

However, Hastings isn’t ready to count HBO out yet — and in fact argued that the competition from Netflix will actually help make HBO better as well:

“While we are passing HBO in domestic members in 2013, it will be several years before we are peers with them in terms of Original programming, Emmy awards, and international members. It wouldn’t be surprising to us if HBO does their best work and achieves their highest growth over the next decade, spurred on by the Netflix competition and the Internet TV opportunity.”

  1. chimimimusic@gmail.com Wednesday, April 24, 2013

    if the future is based solely on subscribers and VOD what happens to netflix if no one responds to their original programming? Will their licensing plan provide subs who have no interest in their original programming? hmmm….

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  2. I guess your average joe yes. Me, I love my dvr. But then aagain it’s an htpc. 6 tuner 2TB drive running on MediaPortal. True whole home dvr. Since I use an antenna I don’t have to worry about Network spats or if CBS shows are on Hulu or not. I have acess to the network shows that interest me OnDemand.

    Since it’s a pc I also have access to any streaming service which includes sports leagues, youtube, hulu, netflix, etc. . No restrictions like on certain STBs.

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  3. I don’t want another HBO. I want 1 place where I can go and pay to view my TV and movies add free. At one point it seemed like netFlix might be that place. Over the last year they have been loudly proclaiming that they would not be that place. With all the major player moving more towards exclusives and bickering that bright vision seems increasingly less likely.

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  4. No one I know like Netflix their quality is the worst of the services I have tried (cable on demand, DVR, AppleTv etc), their interface is not great a does not offer previews, and their programing is the worst – with the exception of bad tv programs (can be fun to watch but not something to build a brand on. My kids watch it as it is free (I pay for it) and they do not have cable. But they aspire to get cable and a DVR.

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    1. If no one you know likes Netflix, your sample set would be at odds with their financials.

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  5. The hard reality about Netflix right now is that it’s programming is very uneven and unsatisfying. The movies are mostly grade Z or shopworn classics, and the series are mostly tired reruns. While I still go to Netflix at those “moments of truth”, I’m usually disappointed.

    I usually move on to Amazon or Hulu Plus, or cable VOD, where for a couple of dollars I can watch something I really want to invest my time in. Or my DVR, which is incrementally free, and by definition tailor-made for me.

    Convenience and ubiquity alone are not going to do it. The third leg of the stool, consistently high-quality programming, is missing so far from Netflix. I know this is expensive, but if you want to play with the big boys, you’re going to have to invest more than $50,000 a year per title. Try $250,000 or more per episode, like HBO, AMC and the broadcast networks. I know it sounds outrageous, but you’ve got to pay to play if you want my vote at the “moment of truth”.

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  6. their financials are nothing but cooked books. They hide and decieve on a scale never seen since Enron.

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  7. One thing the Netflicks guy has right is the difference between linear TV and nonlinear TV.

    The internet is nonlinear, and so shall TV be.. as well.

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  8. Linda M. Holliday Thursday, April 25, 2013

    THEE most broken thing about cable is Discovery–find what to watch. Cable does not respect how big of a disaster their UI is. It’s not a “C” experience, it’s an “F.” Both Netflix and HBO excel at this.

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    1. Netflix’s UI for streaming content is horribly primitive. Trying to browse through movies from a specific actor, director, country, or decade is a pain in the tail, involving long periods of tedious scrolling. Also there is no effective way of sorting the queue.. And finally the history only stores the last 3 programs watched, leaving it to the user to try to remember anything viewed before that.

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  9. linear and non linear tv are made to stay alive together not for technical issues but because they respond to two different human beings desires: to be part of what is happening now and to find what they want when they want it.

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  10. Reed Hastings has a smarter view of the future than most people give him credit for. The diversity of programs offered on Netflix is stunning, though the lack of current blockbuster movies and tv series sends the hoi polloi into hysterics of “nothing to watch”. As long as Netflix remains commercial free, reasonably priced and as hiccup free as anyone can be using the internet, the subscribers will keep growing. The problem with the films offered is that many content owners are asking pretty big fees that could cause prices to rise, and collapse the whole model.

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