Netflix: Download limits a near-term concern

Netflix, the online video streaming service, made its long-awaited debut in Canada on Wednesday. The service offers unlimited streaming of movies and television shows for $7.99 a month through devices such as the Apple iPad, Microsoft Xbox, Sony PlayStation 3 and Nintendo Wii.

Co-founder and chief executive Reed Hastings discussed the difference in offerings between Canada and the United States, and the disparity in how much customers in each country can use the service because of download limits, with CBC News:

CBC: There's a big difference in the content available in Canada and the U.S. In the U.S., you have considerably more television shows from the big networks, but not here. Can you explain why that is?

Hastings: It's two parts: it's a licensing issue and it's budget. There are some shows in reverse that we have here that we don't have in the U.S., like Mad Men. As an example, the rights holder in Canada for Mad Men was willing to take our money for that show but in the states, they haven't been. They perceive they have other options. In the reverse, for [something like] Dexter we've been able to do a deal with the rights holder in the U.S. but not in Canada. Think of it as a mix back and forth. But the big driver is how much can we spend? The more that we can spend, the more we can license. The hope is that we can get the word out with Canadians about what a great value this is — $7.99 a month for unlimited viewing — and if lots of people subscribe, than we're able to put more money in the content and make the service better.

CBC: With licensing, generally speaking it's the studios that own the rights to shows and movies, while in Canada it's the networks. If you want the rights to Desperate Housewives in Canada, you have to speak to CTV, while in the U.S. it's ABC/Disney, right?

Hastings: Yeah. With films it's a little more scattered, but that's generally how it works. Ultimately, the monies flow to the producers of the content, and there may be different intermediaries and affiliates, but basically when we put new money into the system and essentially bid up the price on the content, that's good for the content producers. They like that and we'll be able to get more content over time.

CBC: Is the lower price in Canada ($7.99 versus $8.99 in the United States) a recognition that you don't have as much content available?

Hastings: In the states, it's in combination with DVD [rentals], so it's certainly a recognition that we don't have DVD with it [in Canada]. In terms of streaming content, it's really great content. It's more than any one person can watch, so we feel really good about the Canadian content we've got.

CBC: When other similar services have launched here, they've had projections on how many titles they wanted to add on a monthly basis. Do you have any similar concrete goals?

Hastings: No, and one of the reasons we don't is that title counts can be so misleading. You can add thousands of titles that no one wants to watch and then put out good press releases. The real focus is getting content that people want to watch and that's manifest in subscriber growth, so if we program the service really well and have lots of great content at this incredibly low price, then we'll succeed.

CBC: Many Canadians had hopes and expectations that Netflix could replace their cable and satellite service, but given the dearth of television shows available, that doesn't seem to be the case as of yet. What do you say to those who are disappointed?

Hastings: We don't have any sports content, we don't have any reality show content, current seasons in television we generally don't have, so you're right, it's not a substitute for cable. It's not priced as a substitute — it's so much cheaper. You don't get something that's about one-tenth of the cost and have it be an effective substitute. At this cost, it's more of a supplement. The example I use is that we're more like a motorcyle and cable is more like a car. People use a motorcycle and they also have a car. They use the motorcycle sometimes when the weather's good, and it's fun and joyful and doesn't cost as much as a car. It's not quite as useful, but there's still a great market for it. That's Netflix. For people who love movies and TV shows, and who want the on-demand experience, it doesn't cost that much to also get Netflix. We're not an effective cable competitor.

CBC: Do you hope to eventually get those shows from the big networks eventually, and how soon might it happen?

Hastings: Yeah, we've got a large number of shows from those networks and we'll just continue to expand those. It'll take a couple of years, and it'll take a couple of years for broadband to grow and for the caps to get a lot bigger. It'll take a couple years for us to make the service better with a lot more content. This is the beginning of the growth of internet television and it's really targeted at people who have already got an Xbox or a PS3 and they're into movies and TV shows. That's the first market, and it'll expand from there.

CBC: You touched on the download caps. In the U.S., internet subscribers typically get hundreds of gigabytes of usage, if not unlimited, while here in Canada, it's usually closer to 50 or 60. How much did you study that before deciding to launch here?

Hastings: In the states, it's almost completely unlimited and the lowest cap I've ever heard of is 250 gigabytes, so it's essentially uncapped. In the near term it's a point of concern but if you look at how the situation was five years ago, the caps were a lot lower, the bandwidth was a lot lower. If you look 10 years ago, it was dial-up. Every five years, broadband is making great progress and in another five years, I'm sure it will be much better — more bandwidth, more fibre, higher caps. The underlying trend line is good. Again, as we said, we'll just have to see month by month, does it turn into an issue, and if so, what can we do about it?

CBC: But the trend in both countries seems to be the reverse, that the caps are getting lower and lower. Five years ago, it was unlimited in the U.S., but Comcast recently lowered that to 250 gigabytes. It's especially true in mobile, where unlimited caps are now being limited. In Canada, the typical mobile user has about 500 megabytes of usage. Are you relying on competition between providers to change this?

Hastings: There's two categories, so you're certainly right in mobile. [At first] there wasn't much data use in mobile because there weren't many applications, and then with the iPhone and video streaming, data use in mobile exploded. [Cellphone providers] have a very constrained network because they only have certain spectrum licensed so they've been forced to do these caps, like AT&T at two gigabytes in the states. I would say you're right that the trend line there is toward caps because there wasn't any data usage. The only reason there weren't caps before is because there was no data usage. In the Comcast case, they put it in [a 250-gigabyte limit] two years ago and it's never been a problem for anyone we've ever talked to. Caps filter out anyone who's doing online backups and using a terabyte, but for any practical usage, including incredible amounts of video usage from our service, no one approaches their cap. A very high cap is the same as no cap, so it seems like a pretty good situation in the states and I think what we'll see is… as there is video data that makes people excited, more will sign up for broadband and it could be very positive. It doesn't actually cost the ISPs very much to deliver the data.

CBC: Are services like yours and Hulu's dependent on a decent state of competition between broadband providers?

Hastings: We're reliant on good broadband and that can come about through good competition, through good regulation. It can come about in a variety of ways.

CBC: Your service seems to compete with the video offerings on Apple's iTunes, Microsoft's Xbox and Sony's PlayStation. How did you convince them to let Netflix on to their devices?

Hastings: We don't actually compete on a content basis. What Xbox Live or the PlayStation movie service have is the newest releases, which are on a pay-per-view at about $3 or $4 to watch the movie because it's brand new. We don't have any of that content but our content is varied and vast. On a per-content-item, there's no conflict. You could say for time, there's always competition but that's true against video games and a wide range of things. The reason they're comfortable with us on our their service is because we are so good at the catalogue side.

CBC: But in the U.S. at least, you do compete with them for television episodes.

Hastings: That can be true in that the content that we have can be on iTunes, but very few people will pay $2 an episode for the three-year-old season. If you weigh it by revenue, they don't see any conflict, which is why Apple was comfortable with integrating us into the Apple TV.