Spring 2007

Straight to DVD

Netflix Chief Content Officer Ted Sarandos tells Quarterly editor James Greenberg how the company's niche marketing is a good thing for directors.

Ted Sarandos1. Let’s start with some numbers. How many subscribers does Netflix have? How many titles? And what percentage of the DVD rental business is now done online?

We’ve got 75,000 titles. Through the first quarter of 2007, there are 6.3 million subscribers. And online rental for 2007 is projected to be over 36 percent.

2. Netflix recently entered the download arena. Do you see that as an option that will eventually replace DVD rental as we know it?

The install base of DVD players is near 100 percent of TV households and it’s a very compelling product. It’s very well-distributed, very low cost and as portable as the promise of electronically delivered files. I think downloading is going to be an increasing part of the business over time, but I would not be surprised if DVD would dominate entertainment distribution for the next 10 to 15 years.

3. Online downloading on Netflix does not allow for viewing on television. Is that necessary for this to be a viable business model?

I think watching long-form content on a computer is not in the mainstream. The technology to get Internet to the television may be very close. But the consumer demand for it and the install base of television sets that would work with that technology has got to change. The TV that you bought a couple of years ago may not be compatible with the Internet-to-television technology. Keep in mind that the living room scene evolves very slowly.

4. Does that mean that downloading of content will remain a niche market for now?

I believe so. Our intent on launching the ‘instant viewing’ feature on our site was to give subscribers a taste of what that digital-delivered content would be like. On Netflix, you push ‘play’ and it just starts. I think downloading, with all the complexities and file management that it basically requires the consumer to do, is out of step with what’s happening online today. There’s a lot of talk and a lot of noise around download-to-own, where you can download a file instead of buying a DVD, but, then again, you’re shifting all the work to the consumer and that downloaded file is no more portable than their DVD is. So I think the product has to be both a value to the consumer and make more money for the studio, and that’s generally when these things really take off. And in this model, it achieves neither.

5. So it’s not there yet?

There’s no question in 100 years everything’s going to be delivered digitally. The question is: is it going to be in the next five years or the next 10 years? The true successes in any business are the people who time it right. Don’t over invest too soon and don’t get in too late.

6. Netflix has said that shrinking windows between theatrical and DVD are ‘unstoppable’ and that long windows are bad for the studios. What do you see happening?

Why it’s bad for the studios is that it’s just inefficient. Most people watch most movies on DVD. For theatrical films, you’re spending $30 million on marketing a product that isn’t available to most of the country. And, it’s also in the gap between access and awareness that piracy comes in. So the quicker to market in a broader sense, the less likely the instance of piracy and you’re more likely to have a good return on your marketing dollars. I think there’s a day-and-date model for most of the output that makes sense. I also think that there’s a longer window of 30-45 days that’s perfectly appropriate for event-driven titles.

7. Netflix has moved into theatrical distribution with Red Envelope and put money into some films. Are there plans to become more involved in that area?

It’s very small what we’ve done in that space. It’s primarily been an acquisition model, and we primarily want to continue that way because I think there are a lot of great films that get produced that never get distributed. And we add the most value as a distributor.

8. Would you say that indie films have benefited the most from Netflix and other online rental opportunities?

Definitely. Our ability to reach a very fragmented audience, in an economically feasible way, is what has brought a lot of attention to small indie films. For example, we released Sherrybaby and the documentary This Film Is Not Yet Rated on DVD in January and more than half a million Netflix subscribers had those movies in their queue on the release date. That’s a little less than 10 percent of our total subscribers seeing films that collectively did less than $500,000 at the box office. For independent directors, it’s a way to get their films seen, even if they’re unable to or can’t afford all the traditional things that a film has to have to get picked up at a film festival or to get broadly distributed by a studio.

9. So how does a service like Netflix benefit directors?

Well, what’s interesting is when the merchandising is taste-based, what you find out is that directors are a core driver of why people want to see a movie. The director of a film is much more a dependable predictor of people’s taste [than the stars]. If you like Zodiac, you probably like all of David Fincher’s movies. So the director becomes the rock star on Netflix because we can readdress that base every time.

10. How can this opportunity translate into what is often most difficult for a director—raising money to make a movie?

We can become a proof-point for a director that people want to see his or her work. What everyone’s looking for is downside protection when they finance a project. And if there’s a belief that there’s no downstream revenue from, say, a black-and-white movie, and the director wants to make his movie in black and white, they can point to Netflix and say, ‘Look at Good Night, and Good Luck. Millions of people have watched this movie on Netflix.’ The downstream revenues for foreign-language films or specialty films in general are becoming more and more constrained as media outlets continue to consolidate and homogenize the offering. Directors, I think, are going to find themselves in a position where, if they’re not making those kinds of formulaic movies, they’re going to have a hard time getting their films financed and produced. And what we’re saying is, if you make a great film, we can find the audience. I like the idea that, over time, directors outside of a handful of key directors will actually have a way to have a stronger voice, and get their films made and seen. You don’t have to be a rock star director to get out there. As access and data become more ingrained and people become more net-centric, directors have a lot to gain. In most cases, people worry that technology is going to displace workers. The beauty of technology in this case is that it only serves the artist. It only serves the filmmaker.

10 Questions

Question and answer sessions with prominent figures outside the Guild about current creative and business issues.

More from this issue