How Netflix is dragging Hollywood into a global, one-market future

Two top Netflix execs talk about wrangling with Hollywood, how they measure success and the future of the platform

Netflix Chief Product Officer Neil Hunt

Netflix Chief Product Officer Neil Hunt. (Jasper Jacobs/AFP/Getty)

There’s no doubt that Netflix was among the biggest newsmakers at the Consumer Electronics Show in Las Vegas a few weeks ago. The streaming company made a big splash with an announcement that it was expanding to a further 130 countries, bringing its grand total to nearly 200.

Along with a few other journalists, I had the chance to sit down at CES for a chat with Neil Hunt, Netflix’s chief product officer, and vice-president of content acquisition Elizabeth Bradley, about what the expansion means for the future of Netflix and streaming video in general.

We talked about a broad range of topics, from how the company differentiates itself across its territories to the 4K and high-dynamic range (HDR) technology it’s pushing, the vagaries of country-level licensing for a global entertainment business, and how to measure success outside of the traditional TV ratings game.

Why aren’t you launching in China yet?

Hunt: China is a much more complicated market because we have to get licenses and permission from the Chinese government, we have to work with a local partner.

We chose to separate that from launching in 130 countries because that’s tricky enough. We do anticipate launching in China, hopefully soon, within the next few months.

How different would Netflix look there compared to countries that don’t have those restrictions?

Hunt: We hope to launch something that looks very similar, but we’re not at that point yet.

Is adding 130 countries going to increase your power in dealing with studios for global rights to content?

Bradley: We obviously have put a large emphasis on making Netflix original series where we are the commissioner globally, so we can offer the same package on the same day around the world.

When you license a show that the studios have already put into multiple windows around the world, it’s challenging to try and sync those up on the same day. But the studios are our partners in these shows… we’re making shows with all of them. So it doesn’t necessarily change [that relationship].

The studios are moving along with us in how they distribute. I don’t know if I’d phrase it that we’re stronger.

The element we’re really excited about is that if you think about Bollywood content, it mostly resonated in India. There really are no platforms in Sweden [for example] that offer it, and that’s something we can do. The anime market is big in Japan and we can help bolster that content around the world.

Hunt: That’s putting the power in the hands of the producers because they have a much wider audience to reach. There’s growth and development for everyone.

Do you have to get local content in each country to make it attractive for subscribers there?

Bradley: Great storytellers tend to resonate across markets so it wasn’t as if we went to Korea and licensed content only for Korea and nowhere else.

It’s pretty consistent in the type of offering we’re going after. There’s differences in what’s available, but we’re pretty conscious of having shows that resonate everywhere.

You can buy something like Breaking Bad and be sure that’s going to work in every territory.

Are you going to prioritize 4K over HDR, or vice versa?

Hunt: The strategy is to provide 4K with and without HDR and to provide HDR at a variety of different resolutions, starting well below 4K.

HDR requires about 20% more bandwidth than the equivalent resolution of non-HDR. Somebody who has a six-megabit DSL connection, for example, is probably able to get 720p and maybe full HD [1080p] HDR, but they won’t get 4K with or without HDR.

Do you think customers care about HDR?

Hunt: We’ve had many increments in pixel resolution over the years and that’s great, but the marginal returns in moving up to 4K aren’t as great as the earlier steps. Equivalently, we have not had improvements in dynamic range or colour space at nearly the [same] pace and scope.

This is really the first step toward improving the picture in pixel depth and colour space. I think it’s going to be more important and more relevant to more people than moving to a higher resolution.

In the past you’ve said it could take five years for 4K to go mainstream. Is that still your timeframe or do you see it accelerating?

Hunt: I think I said last year that three to five years until more than half the devices sold will be 4K. I think I stand by that.

I think I also said three to five years until most content is produced with 4K in mind. I’d stand by that too, although it could be accelerating. It’s in that magnitude.

I think you can count on a similar three-to-five-year growth period for HDR devices.

Are you seeing big growth in the number of customers signing up to your 4K service?

Hunt: Yes we are, that’s a gratifying outcome. We have well over two million households that engage with Netflix with a 4K device and an increasing number of those who are buying the 4K package, although I won’t say what number. It’s definitely a growth area for us.

Can you clarify CEO Reed Hastings’ comments about the Adam Sandler movie, The Ridiculous 6, being Netflix’s most-viewed film?

Bradley: It’s been out for about 30 days, so relative to other titles in their first 30 days, it’s our top-performing feature.

We obviously made a big bet with making four pictures with Adam Sandler because we feel that he will resonate.

So do Netflix’s star ratings have any bearing on their popularity? That movie has one star.

Hunt: The star ratings are driven by our members based on how much they enjoy the content. The version that you see is based on people who have similar tastes to you and how they’d rate it. It’s not an average, it’s an average of people like you.

If it’s one star, then you and I are close together because we’re not Adam Sandler fans, which is fine.

The problem with stars is that people tend to use them to represent quality rather than enjoyment. Sandler is a classic case of something that can be perceived as low-brow, but can actually be quite fun to watch. How do you put stars on that?

We’re experimenting with a like/dislike signal and a per-cent match, so this is an 86-per-cent match for your tastes and interests. It may better capture the enjoyment factor.

How much are your decisions to license such content based on data versus the traditional way that networks acquire content?

Bradley: It’s way more weighted toward the first one, we don’t necessarily think of the way that traditional TV networks go about it.

We look at the data and that’s why we made the bet on Adam Sandler. Every film we’ve had in different countries continues to resonate. Critics don’t ever seem to like his films but that’s not what’s driving it.

How much better has your understanding of viewer data become since House of Cards?

Bradley: What our original series have been very conscious of is what can we license in the market based on what’s traditionally been available on linear networks and what are they not making?

Orange is the New Black is very different than what’s been on linear, Sense8 is something that would have had a hard time on linear, Grace and Frankie for people over 65.

We’ve been very conscious of trying to keep the diversity and that’s what we’ve learned from the data.

How do measure success of your shows and movies?

Bradley: We look at the viewing, on a couple different levels. How quickly do you watch it, how long do you watch, if you have a series do you watch all 10 or do you leave after two?

We have the ability to take a piece of content and better direct it to an audience that’s going to like it. We don’t have to have huge box office hit type films or big shows that get the best ratings on a Sunday night because we have the ability to target to the right audience for everything. We can better monetize smaller shows.

Hunt: We measure hours, but that’s not it because that’s way too crude. We measure valued hours.

Somebody who doesn’t watch very much presumably puts more value on the hours that they do watch than someone who’s watching a hundred hours a month.

We’re able to measure the contribution of valued hours in a way that matches well to the business value of how it attracts your attention and the economic value of that customer.

There’s a lot of sophistication that we’ve developed over the last few years to develop that data and interpret it into metrics that inform the buying.

It seems like you’re pushing your own original content more than your licensed content?

Hunt: We have a problem to solve with originals. With licensed content we can leverage the awareness that’s been generated from someone else’s marketing campaign. With an original we have to build that awareness from scratch. It requires a bigger presentation, maybe more frequent repetition to get over that hurdle.

The primary metric driving all of our choices and presentation is customer attention. If we overweight our originals and you end up choosing something that’s less good for you than licensed content, you may or may not churn off. Somebody like you will churn off and it’ll be reflected in the metrics and we’ll realize we’ve overstepped.

Conversely, if we don’t push originals hard enough and you end up choosing licensed content instead when an original might have been a better choice, not only might we potentially damage retention, we won’t get the advantage of an original as something that only Netflix has.

There’s tradeoffs on both sides and we try to balance it. We’ve found we definitely can go too far, but we also have to push quite hard to overcome the lack of awareness, so that may be why you see things frequently.

How is it that Canada is the only country that’s getting Star Wars: The Force Awakens in 2016?

Bradley: In the feature film business, there’s currently a windowing structure that exists from the studios. We have what’s called the “Pay 1” window, which is seven to eight months after the theatrical run. We have that deal with Disney in Canada [for December], and we’re picking up that deal in the U.S. in January.

It’s a real challenge. Movie licensing is not global and we’re a global company. The way you get around that is you make your own movies, which is what we’re doing to help motivate that [change].

So to go back to the earlier question: will this pressure the studios to license movies globally?

Bradley: [Head of content acquisition Ted Sarandos] said it beautifully: we’re not anti-theatre, we’re pro-movies. We’re just trying to give that to consumers. Everyone is just listening to what customers want. There’s no reason customers in Thailand should wait longer than customers in Ireland.

Hunt: If you have a property and you space it out over time in countries, the consumer behaviour is that they want it anyway and they’re going to find it somehow.

If you release it all over all at once in a cheap, easy-to-access, quality manner, we demonstrate that you can reduce piracy in general.

The data from Australia is that we reduced BitTorrent traffic by 17% over the first few months after launching. You reduce that opportunity.

So is the end goal to be able to access the same content from anywhere in the world?

Hunt: That certainly is a huge ambition. It may take 10 or 20 years or forever to happen, but we’d love to get there.

If you have the same content in each country, doesn’t that risk Netflix being homogenous?

Hunt: On the contrary. If you think of any one channel or network or broadcaster in any particular country, it’s very homogenous. It doesn’t address a broad audience. It addresses a subset of that audience.

Look at HBO and you can tell what theme it has. It’s gritty and it’s a mid-age audience. It’s not kids and it’s not 50-year-olds. That’s great, but Netflix is a platform that can deliver that content, and kids content and Grace and Frankie and Bloodline to the slightly older audience.

By using the recommendations, we can present one set of content to you and another set to your parents and another set to your kids, so we can address all those markets.

Do you have any idea on what the price ceiling is for Netflix yet?

Hunt: Median consumers in the countries that we’re in right now consume 30-ish, sometimes 40 hours a month. That’s a big number.

If you take $8 and divide it by 30 hours, it’s a few cents an hour. Compare that with renting a DVD from the local rental store or almost any other form of entertainment and you would conclude that Netflix is significantly cheaper than most.

In terms of a price ceiling, I don’t think we’re near it. On the other hand, we get tremendous traction for being a very good value to consumers so I don’t think you should expect to see it race upwards.

Are you doing any experiments with live event streaming that you can tell us about?

Hunt: We are not doing experiments with live. We think one of the values of Internet television is that it’s at the time you want to watch it, not at the time it was broadcast. Traditional broadcast does a rather good job with live so we’d be playing somebody else’s game and not the game we play well.

The move we’re about to make is the Chelsea Handler talk show and the Beastmaster game show*, both of those will be not live, but not 10-year properties either. That gets to a shorter lifetime and more frequently updated. We’ll see how that goes. [*This show has not yet been officially announced by Netflix.]

But it’s unlikely we’d want to get into live in the short term.

Have you thought about adding social components that let viewers watch together at the same time?

Hunt: Yes, we’ve played with social components for a long time and we’ve had three major attempts at it. None of them have worked well so we’ve retired them all.

The social piece we have is the generic sharing panel that lets you post to Facebook and Tweet and so on. There’s too much effort for people to invest in building a new and differentiated social network to share their show recommendations and not just piggy back on the tools they’ve got.

There are also too many concerns about privacy. Some sort of automatic linkage is just toxic. We’ve experimented and explored and it doesn’t work. If you want to share, you hit the Facebook button and it shares to the people you want to share with.

Do you think Steven Avery is innocent?

Hunt: I don’t presume to know. I haven’t watched [Making a Murderer] yet.

You’re the only one in the world.

Hunt: Not everything appeals to everyone. I watched a few minutes and decided to go back to Jessica Jones.