The Netflix boss is prepared to make a loss to take on his rival, LoveFilm, and find the middle ground between the BBC iPlayer and Sky


Reed Hastings is the man who will finish off HMV, the DVD business – and maybe, one day, take on BSkyB. Not that the gently spoken Californian looks like a revolutionary – but the company he helped found, Netflix, will change the nature of film and television.

Or at least how we consume it, with its £5.99-a-month, all-you-can-watch streaming film and television service, available via computer, or more conveniently, via any type of games console, straight into the living-room set. Spend five minutes using Netflix and it is obvious that all the things that were on DVD will soon be consumed this way – press a button and video starts playing within a few seconds and the quality, if not high definition, matches standard definition down an ordinary broadband connection. The problem, though, is making sure that the content is good enough.

The chief executive is pinning early hopes on Breaking Bad, a gritty US drama in which a chemistry teacher with terminal cancer sets up a crystal meth lab, which was barely noticed when it aired on 5USA, although for all its merits it might not exactly be classified as family entertainment. There is recent archive content from the BBC (Top Gear, 13 seasons), Channel 4 (on the off-chance you haven't seen The IT Crowd), ITV (Secret Diary of a Call Girl) and various film studios including the small MGM and Lionsgate – but it takes time to break into a new country.

Netflix dates back to 1998, when it was founded as a mail-order DVD business, but Hastings says the company always planned to get into digital distribution. "That's why we called it Netflix and not DVD by mail," he says, although the former is also more catchy. The introduction of a $7.99-a-month, streaming content down the phone line service, came in November 2010, and since then subscription growth has increased rapidly.

The company counts just over 21m homes in the United States as customers, and has become in its a way a commissioning broadcaster – buying up a Kevin Spacey remake of House of Cards and part-funding the return of the Jason Bateman cult comedy Arrested Development. It prompted excitable talk that people would "cut the cord", and drop their cable TV subscription in favour of signing up to one television and programming library. The low-key Hastings is careful to reset expectations, however.

"Almost nobody has cut the cord in the US. HBO has been steady at 30 million subscribers," he says, adding that at the price on offer it is an additional service – in effect a standalone, add-on to the television service in the home. In the UK, the price is £5.99 a month, but Hastings recognises the British market is more competitive, with the BBC iPlayer well established at the free end, while Sky, at the pay end, has a grip on the six major Hollywood studios, of which more later. Plus, for good measure, there is LoveFilm which has also evolved from DVD-by-post to streaming movies and, at £4.99 a month and with the fresh ownership of Amazon, is not to be dismissed.

"Sky has been the leading firm in the market for a long time, and everybody," meaning the broadcasters and content owners, would, he says, "welcome some competition to Sky." He argues that pricing may help, saying "we're £10 a month less than Sky" and that there is a "big swath of consumers willing to pay at £5.99". But simple arithmetic allied with optimism is not quite enough, as the company's investors have already concluded after the move into the UK and Ireland was announced. The stock, already under pressure after Netflix upped the price of its postal service, plunged by a third because Netflix had to admit it would become unprofitable as a result of the unspecified investment into the UK.

"We'll get back to global profitability after this expansion," Hastings says, noting that Netflix will be profitable for the as yet unreported fourth quarter. But then the company will make a "Q1 loss on a P and L [profit and loss] basis. There will be other losses thereafter; we told Wall Street that we'd run a loss for all of 2012." Hastings won't say how much launching in Britain costs, but the results give something of a flavour: the last reported quarterly profit was $62m net and for the first nine months of the year $192m. So was the collapse in the share price worth it? "Our investors generally know what they are doing, and investing in it. They are investing for the long term, we're trying to build a multimillion subscriber business," he observes, although the reference to long term is telling when the prevailing direction over the past six months has been south.

If this sounds expensive, Hastings points to Canada as a model of success – the first place Netflix went to when it left home a year and a half ago. In a year, more than 10% of Canadian homes signed up. "We expect to be profitable within two years of launch, we have 1.5 million subscribers," Hastings says, although brand awareness was stronger in North America than it is here. Netflix in Canada also began with a modest library of content, but already the company has been in a chase to sign up content in Britain, often head to head with LoveFilm. Not surprisingly, Hastings says his arrival has led to "a renaissance for the smaller studios" as people pursue the archive they can acquire easily – although he points out most of LoveFilm's 2 million declared subscribers must be postal customers because its streaming service only emerged last year. But Hastings is not the rhetorically aggressive type – he observes that LoveFilm is a "good competitor and a rival".

The hard part, though, will be breaking the entrenched position of Sky, which controls the rights to show films for what is known as the "first pay window", which runs from about six months to 21 months after a movie is released in the cinemas. These are the films, that is, on the Sky Movie channels. Any deals with the major studios, at least for now, would be for movies about two years after their release date – roughly the same time that they begin to appear on free-to-air television. The market is under review by the Competition Commission, but Hastings, if a little glibly, believes he can muscle his way in with the power of money. "We're not particularly invested in the regulation, we're mostly focused on how can we be the top bidder," he says. But he observes that Netflix "didn't have any [first pay window] deals in Canada" and the company seems to get going well enough over there.

He tells a similar story about commissioning television – throwing down the gauntlet to the likes of BBC and Channel 4. It's not yet the moment for Netflix to be wading in to create some high concept (or otherwise) drama for the British market, but that's the theory. "Many people will subscribe to us and LoveFilm, Sky Atlantic," he says, "put it like that and we're a channel." If, though, Netflix wants to woo British producers, it will have to wait until the evening to get the deals underway – the company plans to run the British operation from Silicon Valley in the belief that is more efficient. It may work, although if technology is a global sport, television, at least, tends to be more local.

"In the US, HBO is a very aggressive service," he says, and Netflix seems to exist alongside the Time Warner-owned premium channel. "In the UK, we are programming our service with lots of content that's not on Sky Atlantic. We think of Sky as a very good broadcaster, we're really good at internet TV, and that's what gives us an edge. Sky is not on game consoles, although they are on iPad." But what he may not have considered is that while the US is a large media market able to support a wide variety of players, it has proved harder over here for many pay-TV businesses to prosper, whether ITV Digital or TopUpTV. Even Virgin Media primarily markets itself as a broadband service.

Netflix resists the comparison to the music subscription service Spotify, not least because in film and television it is not possible for one company to control all the rights on its service – although Sky's dominance of Hollywood films shows it is possible to try. A music service such as Spotify can have in its library every single song released from a music major, and find itself competing with another service that has the same catalogue on offer. But Netflix has made it possible to integrate with Facebook so that when you log in you can see what's popular with your friends, the next step in television-internet integration that after a lifetime of hype is finally coming to the set in the living room.

Not surprisingly, Hastings wants to argue that his company represents everything that will be interesting in television, before predicting the end, if not of BBC1, then of all the lightly watched channels on the outer reaches of the TV guide. "I think there will be 20 years of evolution from linear broadcast to internet television. In 20 years from now we will all be able to click and watch TV. Broadcast TV is like the landline of 20 years ago. I think of us as like mobile – today all of the interesting things are happening in mobile."

source: guardian.co.uk/media/2012/jan/15/reed-hastings-netflix-interview