The future of TV, according to Netflix CEO Reed Hastings

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.”

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