WHEN: Wednesday, October 15th
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Netflix CEO Reed Hastings. Excerpts of the interview will air throughout CNBC's Business Day programming tomorrow, Thursday, October 16th. Following is a link to the story on CNBC.com: http://www.cnbc.com/id/102091798?trknav=homestack:topnews:4.
All references must be sourced to CNBC.
JULIA BOORSTIN: Reed, thanks so much for joining us to talk about your earnings.
REED HASTINGS: It's a pleasure.
JULIA BOORSTIN: The revenue right in line with expectations earnings better than expected, but your subscriber numbers came up short, shorter than Wall Street expected, but also shorter than you forecasted. Why the 700,000 subscriber shortfall?
REED HASTINGS: You know, we've had such great growth over the years we get addicted sometimes to beating our own numbers. For the last three quarters, we underestimated our growth and over performed. This quarter, it was the other side. We estimated too high, we came in below that. But we added three million subscribers in the quarter. It's pretty tremendous. I mean, a million subscribers a month. We're expecting to add four million in Q4. So the big picture about people moving to internet TV, it's as strong as ever, and you heard that with some of the great and interesting news from HBO.
JULIA BOORSTIN: Before we get to the HBO news, I just want to drill down to why the Q3 subscriber additions were less than expected and also why you expect them to continue to be less in Q4. Is it competition?
REED HASTINGS: Our best sense is it's an effect of our price increase back in May. With a little bit higher prices, you get a little bit fewer subscribers. So that's our sense of it. But we can't be 100% sure. We had so much benefit from Orange in Q2 and the early Q3, but that's what we think.
JULIA BOORSTIN: You really think just a dollar price increase would make that big of a difference?
REED HASTINGS: Well, it's a very small difference on the total. Again, you know, where you grew to over 37 million U.S. subscribers, so we did think we'd be a little bit higher, so you know, we didn't miss in that sense, but we think it's from the basically a little bit harder on the price.
JULIA BOORSTIN: Does this change your strategy going forward? Any plans to change how you price both in the U.S. and overseas?
REED HASTINGS: No. What we've seen is with Orange and with the other content that we have that we can overwhelm those price effects, that we can do – just have to be a little bit better. And so we're really excited about Marco Polo coming out December 12th, you know, big, new show for us. And then next year, oh my gosh, we've got so much great content coming up.
JULIA BOORSTIN: So as you mentioned, HBO announced it's going to launch a standalone streaming service, a direct competitor to Netflix. How big of a threat is this?
REED HASTINGS: Well, it's a fantastic replay. You know, you will remember when Blockbuster, used to say, "We just did stores, and we don't need to do that by-mail thing." And then finally they did the by-mail thing, and you know, we're so excited, we haven't had real head-to-head competition since those Blockbuster days. And HBO, I mean, what great company, what great content. You know, like, "Veep" is one of my favorite shows. I probably shouldn't say that. But it's great. And so you know, the fact that they're coming online comes back to Ted's originals – Ted Sarandos's comment of, "It's up to us to become HBO before they become us." Now we are both in the game and it's going to be such an exciting couple of years.
JULIA BOORSTIN: Exciting for me for sure reporting on your business. But it must be a little scary for you. I mean, HBO's a bigger company, globally. They have a lot of content. How do you think you're going to keep up with them? I mean, is it going to be a problem?
REED HASTINGS: Yeah, they're awesome. I mean, you know, we got 31 Emmy nominations, incredible, they've got 99. You know, we have 53 million members, they have 120 million. So you know, they are significantly bigger than us. But we're growing. And, you know what, honestly, I think many people will subscribe to both services. We'll probably both do really well.
JULIA BOORSTIN: But if people have to choose between the two of them, do you think they're going to choose HBO over Netflix?
REED HASTINGS: No way. They're going to choose Netflix.
JULIA BOORSTIN: Now, what do you think their service is going to look like? Is it going to be priced like Netflix? Is it going to be very similar?
REED HASTINGS: You know, I really don't have an idea. It could be $9.99, it could be $19.99. You know, it's really up to them. I think they're still just figuring out some of that. In the Nordics where they've been running a standalone service, competing with us directly they are basically on top of our pricing in the Nordics. So you know, probably something pretty close to us.
JULIA BOORSTIN: And you're really not scared? Not concerned?
REED HASTINGS: No, it's exciting. I mean, again, you know, we compete with them like baseball and football compete. I mean, you know, people who are really into sports watch both. Are involved in both. We have different shows. So you know, I think it's going to be a great couple of years. And really what's happening is all of entertainment is moving online. I mean, we've been alone singing this online song. And now Starz a couple days ago announced that they were doing an online service internationally, HBO is doing it domestically. And I think we're going to see more and more networks realize, you know, online is the future.
JULIA BOORSTIN: All of this new direct competition, does that change your strategy?
REED HASTINGS: Not a bit. You know, we've been anticipating this. There was a big New York Times article three years ago where we said, "HBO's going to be the big competitor for us in the long term." And, you know, now it's really coming forth. So we've been getting ready for this day and you know, it'll be very exciting. And great for consumers, really.
JULIA BOORSTIN: Let's talk about international expansion. You launched a couple of new European markets just very recently. How is it going so far?
REED HASTINGS: It's been a great launch. I mean, we're getting better and better at this creating you know, a big phenomena. We were all over the press. And we've got deals now with Deutsche Telekom and Orange and SFR, which are the big cable companies there. Much sooner – I mean, we certainly haven't gotten any big ones in the U.S., and now we've got big ones in the U.K. and now Germany and France.
JULIA BOORSTIN: Can you tell us how many new subscribers you have since launching in Germany and France?
REED HASTINGS: No, we don't break out international at all. So we'll just stick to internationals, you know, showing great growth, over two million subscribers in the quarter.
JULIA BOORSTIN: You waited so long before launching these recent new markets overseas. Will we see you continue to launch in new markets faster and faster? Or are you going to slow it down again?
REED HASTINGS: No, our plan is to continue to invest aggressively, because international's been so successful. If you look at all of our prior markets from Canada four years ago through Netherlands one year ago as a whole, they're already profitable. I mean, we just launched in the last one to four years. And in combination already profitable. So there's great opportunity. And we're expanding as just as fast as we can.
JULIA BOORSTIN: You made a couple big announcements about movies, an Adam Sandler deal. Also an IMAX release with the Weinsteins. Why this big push into movies?
REED HASTINGS: Well, we'd been doing so well in TV shows and serialized drama, like Orange Is the New Black, House of Cards, then we expanded to talk shows with Chelsea Handler, we're expanding into animated comedy with BoJack Horseman. And for us, movies is just a great new form of content. And the first one with Crouching Tiger that's an epic, beautiful, 4K, you know, IMAX and Netflix 4K. And the Adam Sandler series, it's really building out the brand. And Adam Sandler has a bunch of passionate fans. It's not everybody, but it's a really strong group of passionate fans. And for him to commit to do four films for Netflix over the next couple years, I think it's just going to be exciting for both of us.
JULIA BOORSTIN: Tell me about this IMAX field. Why is it important for you to collapse those windows, those release windows?
REED HASTINGS: It's not particularly. It's important for us to give consumers what they want. And consumers around the world, they're tired of waiting. Why? With TV shows, it comes on Netflix, I can see it right away. But on movies, I have to wait for months and months as it's doing the theatrical run. And we wanted to provide consumers what they want. We're not anti-theater. All the theaters that want to carry Crouching Tiger can do so. It's not exclusive. You know, they mostly will reject us probably. But-- we're really excited about the IMAX partnership because of the real epic filming and the scale of what the Weinsteins have done.
JULIA BOORSTIN: Do you have any other theatrical releases in the future? Anything else like that planned?
REED HASTINGS: Nothing to announce. But yeah, we've got some neat stuff we're working on.
JULIA BOORSTIN: Now, in terms of the movies like the Adam Sandler deal, he's a notoriously high-paid actor. He's a big movie star, he gets huge pay checks. Is this a big investment for you? Isn't it a little bit riskier than something like Orange Is the New Black, which where you can produce seasons worth of content without those high-priced stars?
REED HASTINGS: You know, we've got some pretty big stars in House of Cards. So we're used to figuring out how to pay the stars, what they command in the marketplace, and producing content that's great for the Netflix brand. And that's what we're trying to pull off with Adam Sandler, really let him be himself tell some great stories. And if he pulls that off in combination with us you know, it's just revolutionary because it's globally available everywhere at the same moment. So, you know, we're pretty excited about that.
JULIA BOORSTIN: Analyst Rich Greenfield predicts you will hit 100 million streaming subscribers by 2017. What do you think?
REED HASTINGS: I think he's a great analyst.
JULIA BOORSTIN: Tell me about your content cost. There is a rather scary-looking chart in your earnings report showing free cash flow declining precipitously. How concerned should investors be about rising content costs?
REED HASTINGS: Well, it can look scary, and that's kind of why we put it in there, is we want to make sure everyone understands that when we were only in licensed content, we pretty much pay as we go. But once you start producing content, you're paying up front. So you use more cash. Now, we've raised two rounds of debt over the past two years. We've got a very low debt equity ratio. So we've got plenty of capacity to continue to finance incredible new originals. And our cost of capital is lower than many of these independent producers.
JULIA BOORSTIN: Your stock had been up so dramatically, obviously you took a big hit today. Do you think your stock is overvalued?
REED HASTINGS: It's always hard to say. It goes up, and it goes down. And what we keep trying to focus on, of course, is what we can influence, how our subscribers feel, do they get the content we want, can we grow and expand and then we got to let the stock market sort out the prices.
JULIA BOORSTIN: But in the past, you've been a little bit wary about the stock price. Are you feeling more confident in it now that it has had its post-earnings drop today?
REED HASTINGS: No, I've realized that I don't have differential insight. You know, so it's hard for me to figure out what it trades on exactly. And so that's why we come back, like most management teams, and really focus on, you know, the things that we can affect in terms of the business.
JULIA BOORSTIN: You've branched out into so many new categories, comedies, talk shows, kids. You have a huge amount of content in kids now. It seems like you're in every category except for news and sports. What's next? Are you moving to news and sports?
REED HASTINGS: Well, news and sports are huge categories. We're also not in music videos, self help. I mean, there's lots of other categories. But no. No plans and we have so far to go in movies and TV shows, so much we want to do. We are really that and even our talk show is about entertainment, about movies and TV shows. So it's really focused on that core.
JULIA BOORSTIN: And just a quick final question, you came out in objection to the Comcast/Time Warner cable merger. How concerned are you now? Do you think it's going to go through?
REED HASTINGS: It's really hard to tell. I think from six months ago, there's much more, many more people believing that it might not go through. That there's very big questions about that, particularly around broadband, net neutrality, and the internet. So we're making some progress with those arguments.
JULIA BOORSTIN: Great. Reed Hastings, thanks so much for joining us.
REED HASTINGS: Thank you.
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