WHEN: TODAY, TUESDAY, JULY 23RD
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. All references must be sourced to CNBC.
JULIA BOORSTIN: I'm Julia Boorstin, reporting from Netflix headquarters, the company just reported better than expected quarterly earnings, beating Wall Street expectations by 9¢ a share. But the stock is trading lower after hours. We're joined now by Netflix C.E.O. Reed Hastings. Reed, thanks so much for talking to us today--
REED HASTINGS: My pleasure.
JULIA BOORSTIN: So tell us a little bit about why you didn't add more subscribers in this c-- current second quarter, and a little bit about your projections. They came in lower than Wall Street expected. That seems to be the reason why the stock is moving down.
REED HASTINGS: You know, we had a tremendous quarter. We added more net ads than a year ago. We're continuing to grow in the U.S. Twenty-six percent growth over a year ago,internationally, up 155% from a year ago. There's always ups and downs in the short term in the stock price. But the big picture is great. A year ago, we were at $80. Now we're over $250. Five years ago, we were at $30, so we're feeling great about the long term.
JULIA BOORSTIN: So big picture, there's always a lot of attention on your subscriber numbers,particularly those U.S.-streaming subscribers. You came in kind of at the mid end of your projec-- in-- in the middle of your projections. Why didn't you hit the high end of your projections?
REED HASTINGS: Well, we try to forecast so that we hit the mid end. So I think what we should do is say we've got forecasters. And they're getting better and better. And we try to always hit the middle.
JULIA BOORSTIN: But you did say you saw an uptick in the second quarter thanks to Arrested Development. What does that look like? What does that mean for a company that does not release ratings?
REED HASTINGS: That means on the day that Arrested released, we saw more growth than we expected. And so we could notice that because it was the particular day that Arrested came out-- which is great for us because Arrested's an already-developed brand. But in the scheme of things, we just want to have great shows like Arrested and Orange Is the New Black,Hemlock Grove,that's what we focus on.
JULIA BOORSTIN: Can you tell us how many people signed up the day that Arrested Development came out?
REED HASTINGS: A lot of people signed up that day. It was really exciting.
JULIA BOORSTIN: So-- you mentioned your originals, you obviously have Arrested Development, but then you have others like Orange Is the New Black.How are these originals impacting your expectations for the third quarter?
REED HASTINGS: Well, they're built into our expectations for the third quarter. The originals is, you know,one part of our programming, and then we've got tremendous licensed content, Walking Dead and Breaking Bad and a huge number of movies. So we've got just so much content, it's exciting.
JULIA BOORSTIN: But are you seeing the originals having a direct impact on subscriber additions?
REED HASTINGS: Other than Arrested Development,they're really building. So we started with season one of House of Cards, Hemlock Grove, now Orange. And really as we get to seasons two, three, and four, we may see more of that.
JULIA BOORSTIN: How do you calculate the return on investment of the original shows?
REED HASTINGS: Same way we do with licensed shows-- how much viewing is it getting, what are the ratings of it, how do people love it. So it's the same-- view we have for building great content in the service.
JULIA BOORSTIN: Now your content costs are significant. How do you plan to cover your off-balance-sheet-content costs and how long will it take to pay those costs off?
REED HASTINGS: Yeah, well you're spending over $2 billion a year on content now-- around the world. I mean, it's really a big number. And it's continuing to grow as we're able to get more and more content. And how we pay it off is we have-- you know, nearly 38 million members-- paying about $8 a month. And that's enough money to pay for all that content.
JULIA BOORSTIN: Does that mean that you're going to need to raise prices though? Or-- shift strategy or have a secondary offering and in-- in order to pay it off?
REED HASTINGS: No, our model works great as is. At US$7.99, our U.S. market is growing great, slightly faster than last year, which is exciting. International is growing hugely, so we feel great about our current price point. And we just want to get more and more content.
JULIA BOORSTIN: So $8 a month, though, wouldn't you drive more subscribers at a lower price or have higher profits at a higher price? Are you committed to s-- sticking to $8 a month?
REED HASTINGS: Yeah, the$7.99 price point that we have now is the same one we introduced streaming at in 2010. We've had the same price point for the last three years, and it's worked really well for us.
JULIA BOORSTIN: Now in your investor note, you warned about market saturation. But you say that the b--potential market is at least twice the current size. So why warn about market saturation? Should we take some meaning from that?
REED HASTINGS: Well, you should take meaning from it that we always think about it. We think about, you know, when will we get so big that it'll be harder to grow, and we're really excited that we're continuing to grow faster. But basically, we're paid to worry, and we do a lot of that.
JULIA BOORSTIN: But does that mean that you actually think the potential market is lower than maybe you once did?
REED HASTINGS: Well, we --gave it wide range, 60 million to 90 million. Of course, there's a big difference. We'd like to be at the high end of that, not the low end of that.
JULIA BOORSTIN: Now speaking of wide range, for the third quarter, you gave a pretty wide range in terms of your projected earnings. Why is that and what'll it take for you to hit the high end of that range?
REED HASTINGS: Just great execution on-- U.S. and on our international business is the main focus. And we're continuing to grow the top line at just-- amazing rates.
JULIA BOORSTIN: Now a question about competition. A couple months ago, you told me that Hulu would be a more fierce rival for Netflix if it were independent than if it were bought out by a big, say, cable or satellite TV provider. In fact, the owners decided to take your advice. They held onto it and they invested $750 million, which will go into license content and original content. What does that mean for Netflix?
REED HASTINGS: Well, just to clarify, you're teasing that they took my advice. They didn't ask for my advice and we didn't offer any--
JULIA BOORSTIN: But the-- but no, but what I mean by that is that they're creating what will be a m-- you know, more powerful competitor to Netflix than if they had sold it to someone else. So does this mean that this is-- going to be a formidable competitor to Netflix now?
REED HASTINGS: Well, Hulu's been a competitor for five years-- so has Amazon. They both have about the same viewing share. And it's great to have the competition because it validates the whole internet streaming. And people will subscribe to multiple of the services like they do of Starz and Showtime and HBO on linear.
JULIA BOORSTIN: We see Amazon ramping up its spending on both originals and licensed content. We have Hulu now with this war chest of $750 million. Do you think these two companies and their-- the amount of cash they're willing to spend will either drive up costs or steal subscribers?
REED HASTINGS: I don't think they'll steal subscribers, 'cause people-- we have different content than they do. I think what'll happen is they'll do great work and we'll do great work.Think of the political drama category. Of course, we have House of Cards, a fantastic show, but Hulu has an original show called Battleground-- which is quite interesting and good. Amazon is funding one-- Alpha House with John Goodman that looks quite promising. So I think more shows is better. And-- they don't steal from each other, they built on each other.
JULIA BOORSTIN: As there are more players in this space and more competitors, how does Netflix want to distinguish itself?
REED HASTINGS: As having incredible content and incredible service, that you click and watch and it just plays instantly. So it-- it's all about the service and the content.
JULIA BOORSTIN: But will there be a specific brand? Some type of content that Netflix is more known for than, say, your competitors? Is there an area that you really want to double down on to make Netflix's sort of s-- central s-- focus?
REED HASTINGS: Absolutely.Enjoyable content. That's what we want to double down on. And so we really focus on getting-- amazing content like our new show, Orange Is the New Black-- which is so strong that we actually renewed it before it debuted. You never see that in television. But we looked at it, and we said, "This is amazing work." And of course the initial reception is matching that.
JULIA BOORSTIN: So with these original shows, what determines if something is a hit?
REED HASTINGS: How much it gets viewed and how highly it gets rated. So we're just seeing phenomenal results across all our originals. And they're difficult sectors. Hemlock Grove is a younger, more horror-- oriented audience-- Orange may cross over many sectors-- House of Cards is a more elite-- taste, political drama. So, you know,it's quite a bit of variety.
JULIA BOORSTIN: And would you say that all five, I suppose including-- Lily hammer--
REED HASTINGS: Lily hammer,yeah.
JULIA BOORSTIN: --all five have been hits?
REED HASTINGS: The key testis whether we renew it for a second season. And on that basis, four out of five are already done. That is we've renewed for a second season. And Arrested Development, we'd love to go to a season five. Not sure if it will happen.
JULIA BOORSTIN: Interesting.Although you eluded to it in your investor note that you would like to.
REED HASTINGS: That's right.We definitely would-- well, who wouldn't, you know--
JULIA BOORSTIN: Yes.
REED HASTINGS: But-- it's been a great success for us.
JULIA BOORSTIN: So if four out of five have been hits, how can you maintain that kind of track record--with your originals? I mean, that's a pretty good track record so far.
REED HASTINGS: It's a very high bar. And we probably shouldn't maintain it. We should probably be more adventurous. So we should have some failures, or we're not being adventurous enough. So we'll continue to build on that, as long as most of them are great successes.
JULIA BOORSTIN: We're turning to Amazon. Amazon's ramping up to a billion dollars in annual spend. And Amazon can use its Prime Instant Streaming as a loss leader. Netflix can't. How do you compete with that?
REED HASTINGS: Well, we compete very successfully 'cause we have content that they don't have. And they have content, frankly, that we don't have. And so they're really just like two different channels, ABC and CBS. I mean, they compete a little bit for viewing and time, but it's not direct competition. People will watch shows from both us and Hulu and Amazon. And by the way, the one with the most content is-- cable and satellite. And they're continuing to get watched.
JULIA BOORSTIN: I notice that you said on Facebook the other day-- "The Albanian Army just took it up a notch." I have to ask about this. Do you consider yourself a more formidable threat now to HBO than you once were?
REED HASTINGS: I really don't think we're a threat to them. Jeff Bewkes, the C.E.O. is a tremendous leader and a great comedian. And he joked-- several years ago that we were "as irrelevant as the Albanian Army." And so it's a bit of tongue-in-cheeks poofing back and forth. But, I mean, they do great content, I'm an HBO subscriber and I love the service. And-- you know, we're friendly rivals.
JULIA BOORSTIN: You send that in the past year, both HBO's biggest fan and its biggest rival. Do you think that's still the case?
REED HASTINGS: I don't know if I'm the biggest fan, they have some pretty hard-core people. But-- I'm certainly-- a fan. And I think they'll do, you know, just some of the best work of their life over the next decade. We will do great work. And the rivalry's good for both of us.
JULIA BOORSTIN: What does the future of Netflix look like? Does it look more like a cable channel like an HBO or more like a distributor? Where is Netflix's future?
REED HASTINGS: Well, we're really focused on keeping this independent, $7.99 service with just more and more content. And so we'll keep adding licensed content like Walking Dead and Breaking Bad and movies,and we'll continue to add-- original content. So just getting better and better.
JULIA BOORSTIN: Why not offer a video on Demand? Why send people over to iTunes or Amazon if they want to offer-- buy something on demand?
REED HASTINGS: You know, we have-- all our content is on demand. But in terms of offering pay-per-view movies from-- that they can offer, it's 'cause we don't do it any better. You know, iTunes does a great job on it, Amazon, Vudu, Best Buy has a service, Sony has a service, Microsoft has a service, and they all do a good job at it. So why should we add to that? We focus where we can do an even better job.
JULIA BOORSTIN: Your business has shifted so much over the past decade from DVDs to streaming, now you have originals, what's the next thing?
REED HASTINGS: Yeah, I used to spend all my time on postal equipment looking at bending stresses and trying to figure out the right polycarbonates to use, and now it's all streaming. But when you think about the next thing, it's probably a very long time away,because streaming is going to be around for a long time and the Internet's going to be around for a long time.
JULIA BOORSTIN: But you talked about the addition of new formats, documentaries, would you ever move into some live programming? A news show, a talk show, something like that?
REED HASTINGS: For right now,we're really focused on continuing to build on our success on licensed content and originals and movies and TV shows. We are adding documentaries, some comedy specials. So we're, you know, continuing to move. But it will be constant and steady.
JULIA BOORSTIN: And is live programming something you'd ever experiment with?
REED HASTINGS: Not in the near term. I don't think we add enough special value to that. We really like content that you can watch on your own schedule-- watch it on demand. That's really the focus for us.
JULIA BOORSTIN: Now internationally, tell me what your strategy is. At what point will you-- I mean, right now, you're prioritizing growing market share over profits. At what point will that change?
REED HASTINGS: I'm not sure it does change. We'll continue to invest in international and we've seen just great take-up internationally. I mentioned we were up 155% in Q2 over a year ago. So the international growth is phenomenal. Because people around the world have internet, want to watch services like Netflix, and we've got great content. So we're very excited. And our first market that we expanded into internationally, Canada, is already profitable for us. So we're on a tear there and very excited.
JULIA BOORSTIN: What's the next market other than Canada which could show profitability?
REED HASTINGS: Well, we haven't broken out the individual countries 'cause we're in such a competitive battle around the world with different players. So we no longer break it out per country. But the next country that we're going to launch in is in the Netherlands,about half the size of Canada, and-- a great market for us.
JULIA BOORSTIN: And-- looking forward, though, can you tell me anything about sort of your strategy internationally? Obviously you're investing in growth and that means without profits. But at what point will you start to prioritize the profitability of that international business?
REED HASTINGS: Well, as soon as we're profitable in our current markets, we would tend to expand into more markets. So as long as there's great growth opportunities for us that continue to expand, I think the right strategy for us is to keep moving forward, keep opening new countries. You know, it's only going to get more expensive to launch in a new country, not less expensive. So we should do it as soon as we can.
JULIA BOORSTIN: So what's next after the Netherlands?
REED HASTINGS: Well, we'll look at that. We'll see-- you know, how successful we are there, we're-- very excited about it. And we're looking at-- countries all over the world.
JULIA BOORSTIN: Tell me a little bit about your DVD business. Some consumers are complaining that you're letting your DVD business atrophy. Are you going to shut it down?
REED HASTINGS: Oh, our DVD business has been really successful. We've got some of the best-- metrics that we've ever had in terms of ship on time, in terms of minimum damage-- we're continuing to improve it and invest in the DVD business. We've got over seven million members who love the DVD business. It's got great selection. It's got every movie, every TV show ever on DVD. And that's something that no streaming service can offer. So it's got a unique value proposition and it'll go on for many, many years.
JULIA BOORSTIN: So will you continue to invest in making new films available and building that service for those subscribers?
REED HASTINGS: You know, we don't have to specifically make things available, the publishers put them on DVD and then we pick them up in that way. And so it's-- the DVD business is going great.
JULIA BOORSTIN: So looking at the performance of the stock right now after earnings that beat expectations,what do you think the biggest misperception is in Netflix right now?
REED HASTINGS: Well, I think Netflix is probably reasonably perceived. I mean, the stock's up dramatically from a year ago. As a I mentioned, it's at $80. So it's hard for me to complain that we're, you know, only up 3X from a year ago.
JULIA BOORSTIN: Will the stock be able to maintain these kind of gains?
REED HASTINGS: That's hard to tell. You'll have to-- go see my crystal ball.
JULIA BOORSTIN: Okay, well I think that's probably a good note to end on. Reed Hastings, C.E.O. of Netflix, thanks so much for joining us today. We really appreciate it.
REED HASTINGS: Thank you.
JULIA BOORSTIN: I'm Julia Boorstin, reporting from Netflix headquarters in Los Gatos, California.
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