WHEN: TODAY, THURSDAY, January 24, 2013
WHERE: CNBC'S BUSINESS DAY PROGRAMMING
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Netflix CEO Reed Hastings. Excerpts of the interview will run throughout CNBC's Business Day programming today. Video clips of the interview will be available on CNBC.com.
All references must be sourced to CNBC.
JULIA BOORSTIN: I'm Julia Boorstin reporting from Netflix's headquarters in Los Gatos, California, where Netflix just beat expectations. The stock went soaring 33% after hours. And I'm joined now for an exclusive interview by Netflix CEO Reed Hastings. Reed, thanks so much for talking to us today.
REED HASTINGS: Thank you, Julia. It's great to be here. It's so exciting. I mean we grew by nearly ten million streaming members last year. So it's just very exciting.
JULIA BOORSTIN: So really drove the upside surprise this quarter?
REED HASTINGS: You know, in the holiday period, it's incredible, just-- I think how many tablets and smart TVs sold. And everybody gets home and they turn them on. And-- every screen now is connected to the internet. And it just makes things like Netflix, internet TV, so great. You can watch-- you know, so much. And you can watch it when you want.
JULIA BOORSTIN: And is this really about the trend towards mobile devices? How much of your viewing is happening on mobile?
REED HASTINGS: You know, it's definitely helped by mobile devices. But it's just as big with smart TV's. And you get a big internet connected screen on the wall. So I would say it's more like its internet connected screens which, you know, all screens are becoming-- internet connected.
JULIA BOORSTIN: And-- tell me a little bit about the sort of U.S. and internationally. 'Cause I know both in the U.S. and internationally, the streaming numbers were higher than expected.
REED HASTINGS: Yeah, that's right. In the U.S. now we're over 27 million members. And international, we grew, from the beginning of the year, about two million to over six million-- adding new countries. We launched in the U.K. We launched in Ireland. We launched in the four Nordics. So we've just had great success. People around the world-- want internet streaming. They all use You Tube. They want great premium content. And so the internet is a very global phenomenon.
JULIA BOORSTIN: But what is happening with your legacy DVD business?
REED HASTINGS: Well, DVD is continuing. It's very strong. It's about eight million members now. And anybody in the U.S. who wants DVD can get it, DVD.Netflix.com. So we're keeping that running really well. But more and more, people are-- you know, going into streaming.
JULIA BOORSTIN: What's your outlook for 2013?
REED HASTINGS: Well, for this quarter, we've got very specific financial guidance. But for the year, we're not guiding. We're generally just saying, "We're excited about it." The-- there's-- a lot of new original content we've got. Like, House of Cards is coming February first.
And there are two really unique things about that. One is it's the first television show ever done by David Fincher. So-- you know, your expectations cannot be high enough. I mean it's just an incredible show. And then second, we're releasing all 13 episodes, the entire season one, all at once, on February first. So our members can watch it at their own pleasure, at their own leisure. It's just-- a better way.
JULIA BOORSTIN: The binge viewing phenomenon, as we've discussed. So-- in the past couple quarters, your revenue and your earnings per share have hovered in the same range. And obviously this quarter it was a great quarter in terms of subscriber additions. But what's going to make the next couple of quarters different? How is Netflix as a division and Netflix as a business going to be different in 2013?
REED HASTINGS: Well, if you look over the last year-- we grew from the beginning of the year to the end of the year nearly ten million streaming subscribers. And what we want to do is just keep making the service better and better. And so some quarters we come in a little above forecast, on some quarters, a little below. That's more of a forecasting issue than a business issue. And, really, what's happening is internet TV, this click and watch, the control you have, being able to watch on an iPad, all of those things are just very powerful. And more and more people are doing that.
JULIA BOORSTIN: But so are you changing Netflix and sort of what Netflix is to react to the explosion of devices?
REED HASTINGS: Yeah, absolutely. So when you look at all the devices-- we're in all of them. And you can watch. And it's so easy. And then we're really changing by adding exclusive, original content. So not only House of Cards but Arrested Development-- Empire Grove-- Hemlock Grove, sorry. So Orange is the New Black. Just amazing new shows.
JULIA BOORSTIN: You-- and-- content is a big focus of yours, obviously. You just struck this-- this big deal with Disney, another with Warner Brothers. Brother you're dropping some of your other content deals. What is the strategy here?
REED HASTINGS: Well, our strategy is to always be dropping some and adding some to make our content mix better and better and keep a very low price. And so you'll see us continue that, dropping some, adding some, to make the total service better and better.
JULIA BOORSTIN: But to strike deals with a studio like Disney in the same window as a Starz or HBO is-- or Showtime, that's not a low price proposition for you. What is your-- what is your plan here?
REED HASTINGS: Well, we've got so many subscribers, and continuing to get more, that we're able to afford those deals. So we've got more subscribers, say, than Starz ever had. And that allow us to afford to big investments.
JULIA BOORSTIN: And can you afford to continue to make those kinds of big deals? Or-- are you going to have to raise your prices?
REED HASTINGS: No, we're really focusing on growing our membership. And that's what really helps. We're very happy with the $7.99 price that's continued to fuel our growth. And the more subscribers we get then the more content we can afford.
JULIA BOORSTIN: And so no plans to raise your prices any time in the near future?
REED HASTINGS: No plans.
JULIA BOORSTIN: You-- mentioned Starz. But tell me a little bit about your competition and how you view your competition. Amazon and Red Box are both investing a huge amount in premium content. And how are you going to distinguish Netflix when there are some of these-- new players in the field?
REED HASTINGS: Well, if you look at all the content that's really popular on Netflix, okay, the main content that's really exciting, like the top hundred TV. shows, the top hundred (NOISE) movies by viewing, by what people are actually watching, then very little of it is on these other services. You know, a third, a tenth. I just-- you know a tiny fraction.
So, you know, people go to those competitors if they want a lot less than Netflix, which aren't many people. And we're continuing to gain momentum, to gain members, and to gain content. But ultimately what I think will happen is Hulu will do its own exclusives, Amazon will do its own original exclusives. And that we three will be like different channels, like ABC, CBS and NBC, or like Showtime and HBO. And there'll be a lot of room for us all to succeed, each doing our own content.
JULIA BOORSTIN: And so what's the Netflix brand, then, if you're competing with these other-- new internet TV. networks?
REED HASTINGS: We're the pioneer. We're the one that figured out how to make internet TV. work for people, how to have a high definition stream, how to have incredible content, how to have low prices. So what we're really focused on is being the best at it partially 'cause it's the only thing we do.
JULIA BOORSTIN: You were the pioneer. But what are you now, now that you have all these deep pocketed rivals? How has the growth of these deep pocketed rivals changed your strategy?
REED HASTINGS: You know what's amazing is we're out-spending those deep pocketing rivals in this area. So we're spending more on content than anybody else is for the internet. And that's why we won the Disney deal.
JULIA BOORSTIN: So you have said in the past that HBO is your biggest rival. Is it still your biggest rival?
REED HASTINGS: Absolutely. I mean HBO's an incredible company. They've developed so much content over the years. They pioneered so much. You look at what they did with HBO Go, way ahead of everybody else. They're just an incredible company. And-- you know, the two of us will both produce a lot of shows. It'll be a long time till we catch up with them in terms of Emmys. But we definitely look at them as-- inspiration.
JULIA BOORSTIN: And so what's your strategy to compete with them for subscribers?
REED HASTINGS: Well, we don't even try to compete-- I mean I'm an HBO subscriber. And you know, they-- a lot of their employees subscribe to Netflix. So, you know, we both have different shows, so we both want to produce great shows. And then we're like two different channels that compete like-- two buddies running.
JULIA BOORSTIN: And do you see a world where all these internet TV. channels and traditional TV. channels compete on the same playing field for content, for subscribers, for everything?
REED HASTINGS: Well, it's starting to happen now-- where-- we compete broadly with different networks. Sometimes we do deals that really help an existing cable network like AMC. So we've done an incredible deal with them where we promote the back seasons of-- Breaking Bad. They have the new season. And that helps build the audience for the new season. So that's a nice win-win.
JULIA BOORSTIN: Eighteen months ago you split up the DVD and the streaming business and you hiked prices and you sparked huge customer uproar, and your stock plummeted. What have you learned from that experience?
REED HASTINGS: Well, out of the Qwikster experience, we learned a lot. We learned that, yes, you can be too slow. But you can also be too fast. And we just were too aggressive about going towards streaming. And for us-- we just got too focused on streaming, streaming, streaming. And-- you know, we stepped back. We cancelled the Qwikster. We want to keep the DVD experience great for all those members. And then they'll move to streaming at their own time, at their own pleasure, not with us forcing it.
JULIA BOORSTIN: That was described by many as a sort of customer service debacle. How has that changed the way you run the business?
REED HASTINGS: Well, it's made us a little-- more thoughtful and-- more, you know, "Are you sure? Should we check?" You know, a little more careful. Just as you would probably expect. But if we look over ten years, what's interesting is we've done a lot of bold moves. I mean getting into DVD and fighting Blockbuster all those years, and getting into streaming, getting into international.
And it's the same-- you know, we're a swing-for-the-fences company. We want to do great things. And, you know, occasionally, if you swing for the fences, you're going to strike out. And Qwikster was that strike-out. But we're still swinging for the fences. I mean House of Cards? It's an incredible, big production. And-- you know, you just have to move forward.
JULIA BOORSTIN: And you feel like you've earned back that good relationship with your customers?
REED HASTINGS: Partially. I mean I think we're on-- you know, customers want to see us continue to stay on the good path and do, you know, amazing new work. And we're doing that. We're not all the way back. But, you know, we're part way back. And-- that's a good thing.
JULIA BOORSTIN: What will it take to get all the way back?
REED HASTINGS: I think-- do some incredible exclusive, original shows. When Arrested Development season four comes up, I think that'll be-- a big marker.
JULIA BOORSTIN: So let's talk about this investment in original content. You're investing a lot of money in original content. It's been estimated $100 million for House of Cards. What will it take for that investment to pay off? Do you think you'll see a direct impact on subscriber numbers?
REED HASTINGS: Yeah, absolutely. I mean when we look at it, there's two big ways we think about the success. One is how many of our members enjoy House of Cards? And by "enjoy," I mean joy (SIC) the whole season. They're just so excited by it, they watch it all the way through.
And then, amongst non-members, or people who are not yet members, it's have they heard about House of Cards? Do they know it's on Netflix? And are they excited about it? 'Cause that's one more reason to join Netflix. And for some people, it'll be the tipping function that gets them to join. For other people, it sets a base. And then, when they hear about some other show, then they're finally going to join Netflix. So it helps us both with members and non-members.
JULIA BOORSTIN: This is going to be a big year for you for original content. At what point will you see the investment in these shows really hit the-- subscriber numbers?
REED HASTINGS: Well, it-- in-- we'll measure it. You know, this is the first time we've done original content. So we're not building it into our forecast. And then, you know, if it really hits, that'll be upside. And it may be that it hits slowly. It may be that it hits quickly. It's just the first time we've done it. And so there's-- you know, no good way to estimate that. But we feel very good about how it's improving our relationships.
JULIA BOORSTIN: And how much of your investment will shift into original content as opposed to studio deals?
REED HASTINGS: That'll depend on how well we do. To the degree that everybody loves these shows, you know, then we'll do a lot more of them. To the degree that, you know, it's a nice little thing, then we won't do as many. So we're pretty optimistic. But we want to wait and see what the-- what the real data shows.
JULIA BOORSTIN: Now the other big area of focus is international. You say you're not planning to launch any new international markets in the first half of the year. So what are your international expansion plans?
REED HASTINGS: Well, we're in 40 countries now around the world. All of Latin America, U.K., Ireland, the Nordics, Canada. So we're very excited about that. And for the next six months, we're just going to focus on this originals. And the-- amazing thing about the originals is we launched them the same day, February first, everywhere in the world that we operate. So they don't have to wait.
I mean, you know, people in-- in-- Norway and Brazil, they're so frustrated by having to wait for content. And that's what aids piracy, too. So we're releasing it all at once. That's our big focus over the next six months. And then we'll get back to the rhythm of-- opening new markets.
JULIA BOORSTIN: And do you expect to see a lot of your earnings growth down the line coming over-- from overseas?
REED HASTINGS: Absolutely. I mean the U.S. is-- very successful for us, generates-- a lot of earnings. But over time-- you know, the world's a very big place. And about 80% of You Tube usage is not in the U.S.. And-- it was-- 83% of Skype revenue is not in the U.S.. And so, when you think about the internet generally, you should think about it as, you know, it's one fifth the U.S. and it's four fifths not in the U.S.. But it's going to be a very long time till we get to those numbers.
JULIA BOORSTIN: You adopted a poison pill to protect against Carl Icahn. Where do things stand with him now?
REED HASTINGS: Well, Carl Icahn's been-- investor. He came in about $58 about-- 90 days ago. So he's done very well by his investment. And he's a very savvy investor. We've had several constructive discussions about how to grow a-- bigger business for Netflix and how to make it a stronger business. And he had been on the Blockbuster board for five years. So he, you know, really-- knows a lot about our industry. So they've continued to be constructive conversations.
JULIA BOORSTIN: Has he given you any advice that you're going to take?
REED HASTINGS: I'll-- not-- get into more of it. But I would say, in general, I found him to be, you know, really quite knowledgeable and constructive-- about our area.
JULIA BOORSTIN: A question about what it's like to run a company in this internet age. You very controversially posted some information on Facebook to your subscribers-- of which I'm one of them. And then you received a Wells Notice from the S.E.C.. And then you responded to that. What do you think about this question of whether posting on Facebook counts as public disclosure?
REED HASTINGS: Well, we'll see how that works out. I mean it's normal for government to be kind of one beat behind, you know, where things are going. And-- you know, (NOISE) that-- that happens. So-- you know, we'll see how that works through. Basically-- we're very-- principled about sharing information-- being very transparent, having that be equal access. And Reg FD's about protecting the small investor. And what they don't want to do is give special information, say, to Carl Icahn or to someone else.
And going wide with Facebook, you know, where I've got hundreds-- and Facebook has a public mode that I use that's going to hundreds of thousands of subscribers, is very much in the interest of the little investor. So we feel very good about it. And-- I think the regulatory process will---- work out those things.
JULIA BOORSTIN: So you think Facebook and Twitter are changing-- governance.
REED HASTINGS: Well, they're-- changing communication vehicles. I mean for many years, you couldn't post something on a blog and have it count on Reg FD. And, you know, eventually, they caught up with the modern world. And-- again, it's normal for government to be one step behind, and probably healthy. You know, it's probably not a good thing for government to be on the cutting edge of these things. So then-- that's okay. And, you know, we were just in those crosshairs where it'll be the learning example. You know, and that's fine.
JULIA BOORSTIN: On the earnings call, you talked quite a bit about the shift in consumer behavior as well as the new devices. Where do you see Netflix a year from now? What kind of company will Netflix be as consumers and devices shift even more?
REED HASTINGS: Well, a year from now is not that far ahead. I mean we'll be--
JULIA BOORSTIN: Five years from now?
REED HASTINGS: --very similar to where we are today. When you get into five and ten years, it gets very exciting. Because the kinds of electronics that you're going to have, whether that's a Google Glasses, whether that's-- you know, I mean think of whatever-- the iPhone Five is now. Think of what the iPhone Ten could be. I mean it could be amazing, right? Hard to imagine, it could be so amazing.
And so imagine that as your remote control for the world. You open the doors in your house, the garage. You pick your TV. shows right there. You know, and it just plays, it follows you around. It's your personal electronics concierge. All of that is coming together in this-- portable electronic-- world. And it's driven by the competition between, you know, Microsoft and Google and Apple and on the smart phone category. And all the rest of us are benefiting from that.
JULIA BOORSTIN: How will an Apple TV. change your business, if there is an-- mysterious Apple TV.. I'm not talking about the one that already exists.
REED HASTINGS: Yeah, Apple TV's been-- you know, around for about five years. And we've been on it for four years. And it's been a great growth vehicle-- for us and working well for Apple. Whether they put a screen on it, you know, is kind of up to them. They tend to only do things when they've got an amazingly better product-- than what comes before it. They don't tend to do the, you know, "Let's do something small." So I think they're waiting, they're looking. And-- they're pretty amazing that way.
JULIA BOORSTIN: One final question about streaming versus DVDs. A lot of our-- colleagues have been complaining. They're Netflix subscribers, but they complain that all the best content is only on DVD. And they don't want to wait, they want to have the instant gratification of streaming. And when will the streaming content be as good as the DVD content? How do you address that frustration?
REED HASTINGS: We have to get-- back to our 60 or 90 million subscribers to be able to afford all that content and to out-bid everybody else. So it's coming. We just have to grow and grow. And we've got way more content than anybody else does. But it's not enough, and we know that. And we want to see everything on streaming, too.
JULIA BOORSTIN: Great. Well, that seems like a good note to end on, Reed Hastings, CEO of Netflix, thanks so much for talking to us. I'm Julia Boorstin reporting from Netflix headquarters in Los Gatos, California.
JULIA BOORSTIN: You suffered from a couple of very well documented outages. How do you address this issue and the fact that you are reliant on Amazon, which is, in-- some ways, a competitor?
REED HASTINGS: Well, we had one brief outage, unfortunately, on-- Christmas Eve. So-- if there's a silver lining in, it's that people spend time with their families (CHUCKLE) instead of watching. But it is unfortunate. And, you know, its part of the growing pains. And as we grow-- some of that's going to happen. But we are working hard so that it doesn't happen again.
JULIA BOORSTIN: Does that mean-- not being reliant on Amazon?
REED HASTINGS: No, Amazon-- AWS-- their web services is an amazing service. We've been very happy with it. And-- no change on that.
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