Interview Part 1: Netflix’s Hastings Aims To Challenge BSkyB

Netflix (NSDQ: NFLX) fancies bidding against News Corp-controlled BSkyB (NYSE: BSY) for Hollywood movies and TV shows, even though international roll-out losses are set to exceed $70 million this quarter alone, CEO Reed Hastings tells paidContent.

http://www.youtube.com/v/DTOR0aHFjyM?version=3&hl=en_US

Challenging BSkyB

“Sky Movies and Sky Atlantic are the big competitors,” Hastings told me, playing down the threat from Amazon’s incumbent UK movie and TV service Lovefilm.

UK anti-trust authorities may be about to grant Sky’s rivals an opportunity by breaking up its exclusive first-run pay TV rights with six Hollywood studios. “It could make it easier for us to bid,” Hastings said. “But we could also just bid against them. We are not dependent on whatever the Competition Commission does.”

Out-bidding Sky could be cash-intensive. “Yes, but that’s why the studios like us,” Hastings added, hinting that Netflix can dig deep for licenses.

UK opportunity

Hastings explained the UK opportunity: “Over-the-top is established. When we launched Canada a year and a half ago, people were like ‘Stream-what?’ But, here, because of iPlayer being so successful, the whole notion of click-and-watch internet video is very popular already.”

Still, Netflix won’t employ any local staff for its overseas countries. “We’re doing this all out of California,” Hastings told me. “It’s just like Skype can serve the world from Luxembourg – it’s amazing what you can do on the internet now.” Even so, the service is spending “tens of millions” on today’s UK and Ireland launch, much of it on marketing the unfamiliar brand and on content licenses.

International losses

Now in 45 countries after Canada and Latin America, global expansion is set to push Netflix in to the black throughout 2012, and Hastings is not committing to a return to profit in 2013, nor a first UK profit by year three. “We’ll see how it goes,” he said. “We’re not really focused on the short-term profits, we’re focused on the long-term market opportunity.”

Q4 non-U.S. losses were projected to reach $60 to $70 million. “That’ll grow”, Hastings said, explaining why Netflix raised $400 million in private finance recently: “You never want your suppliers to be nervous about payment. So it’s better to raise a bunch of money. It didn’t cost us that much. Then the suppliers are not nervous at all. We don’t expect to ever need it. But that’s when you want to raise it.”

Content line-up

For its UK and Ireland launch, Netflix has movies rights in the first-run subscription window from Lionsgate (NYSE: LGF), MGM and Momentum; further deals with Miramax, Paramount (NYSE: VIA), Sony (NYSE: SNE) Pictures Entertainment and Twentieth Century Fox; (NSDQ: NWS) plus archive TV from BBC Worldwide, ITV (LSE: ITV), Channel 4, All3Media, CBS (NYSE: CBS) and Viacom.

“Sky Movies and Sky Atlantic have been so strong, it’s been very difficult to compete with them,” Hastings conceded. “But now, with over-the-top, it creates an opportunity for someone to come in. It’s not that we’re going to beat them – but at least we can provide them some good competition.”

Netflix vs Lovefilm

“Love,” as Hastings calls Amazon’s Lovefilm, “has two million DVD-by-post subscribers and they just launched streaming-only this week, so essentially we’re starting in the same place, we’re talking about no streaming subscribers, it’s a great opportunity for us both to grow.” In fact, Lovefilm today claimed “hundreds of thousands” of customers for its online-only new Lovefilm Instant tier, despite not making it public until today.

“We overlap on some content. On the BBC series Top Gear, they license three series, and we license 13. We have a bunch of American TV like Breaking Bad; they have hardly any. We both have a set of movies and they’re all exclusive. So it may be that people subscribe to both – their £4.99 and our £5.99 service – and use them both together.”

Just as Hulu controls networks’ new catch-up TV in the U.S., UK broadcasters prefer to offer latest on-demand via their own-brand services. Though the remaining content is archive fare, Hastings touts “complete-season” access for many shows as a selling point. But Netflix will not yet consider funding original UK programming as it now does in the States, he says.

“Sky has all the big studios so you might say it’s impossible to launch a service. But, with the Moneyball strategy, we’re able to get lots of other content – it’s so much now in pieces that we can have a winning service.”

The future of TV

The long-term opportunity Hastings is shooting for, beyond all the short-term losses, is era-defining.

“There’s a complete change coming from broadcast video, which has been dominant for 60 years, to become on-demand, click-and-watch, over-the-top,” he said. “The smart TV revloution is just beginning.”

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