BOB GARFIELD: Last year, Netflix spent about a quarter of its 1.4 billion dollars of revenue sending little red DVD envelopes back and forth through the mail. That’s why it would rather stream movies directly to your computer, a service it now offers for a limited number of titles. But most people don't like watching movies on their computers, and feeding a film from a computer to a TV is possible, but kind of complicated? So Netflix made deals with Samsung and Microsoft and LG to put Netflix’s software into game consoles, and TVs and DVD players, to make it absurdly easy for you to stream one of its movies directly onto your flat screen. It’s far cheaper for Netflix - no postage - more convenient for you - no waiting - and terrifying for the cable companies, which are also in the business of delivering movies to your TV. As reporter Daniel Roth explains in the October issue of Wired, if Netflix can cut the same content deals with Hollywood as Comcast and Time Warner have, this could be the beginning of the end for the cable companies.
DANIEL ROTH: The entire entertainment industry is built around the idea that you won't be able to go around your cable company. Everyone from Hollywood to Comcast to Cox and Time Warner Cable, they all depend on getting that beautiful monthly subscription bill that you and I pay every month and think there’s no other way around it except to pay it. What Netflix is doing is figuring out a way around that.
BOB GARFIELD: Let's talk about the Hollywood studios for a moment. They have this very sweet arrangement where they premiere a movie theatrically and then after its run there will be a window for Pay-Per-View and then there'll be DVD release and airlines, and I'm not sure exactly the order that these windows open. Netflix streaming of Hollywood films kind of cuts in to their window structure, does it not?
DANIEL ROTH: All that Hollywood cares about is just making sure they get paid as much as they can, as often as they can. And Netflix, by saying you only have to pay them nine dollars a month and you can watch as many movies as you want, it’s not great for Hollywood. They don't like that kind of model.
BOB GARFIELD: They sell a la carte, Netflix is selling an all-you-can-eat buffet.
DANIEL ROTH: Exactly. So Netflix’s way around this was that they went to a little pay-TV channel called Starz – it’s like an HBO or Showtime – and Netflix said, we are a distributor of content, just like Cox is and just like Time Warner Cable is, why don't you just start showing your movies over Netflix streaming, Netflix to people’s TV? Starz looked at their contracts and said, you’re right, we can do this. It was a total loophole. And now when you go onto Netflix, you can get a lot of near-first-run movies that Starz has access to, that the movie studios never realized would be shown in this sort of on-demand, all-you-can-eat way that Netflix is doing it; they just snuck in through Starz’ window.
BOB GARFIELD: Now, I can just see [LAUGHS] the Fiji water just, you know, being crushed in the Hollywood executive’s hands. I could just [MAKES CRUSHING SOUND]. How have they dealt with Netflix’ ingenious little exploitation of that loophole?
DANIEL ROTH: My understanding is that they've gone back to Starz and said, this cannot happen again. And Netflix always knew that this was not a permanent solution. But they have used this time to go up to Hollywood and say, we are willing to pay for these movies, just slot us into your windows, and the more people that sign up for Netflix and the more that we can move people away from the postal service, all that money is going to be channeled to you, Hollywood. And Hollywood likes that storyline.
BOB GARFIELD: Cable companies are still enormous, and they have a lot of clout in the marketplace, but if people stop paying the half or more than half of their cable bills that go towards TV programming, doesn't that pretty much, you know, at a minimum, cut the cable Goliath down to size?
DANIEL ROTH: Cable companies typically get about 60 percent of their revenue from the TV bill. If they lost that, they would be entirely different companies. They would be what in the industry they call “dumb pipes,” just deliverers of bits. That’s the future we're talking about, taking this all the way to its logical end.
BOB GARFIELD: Daniel Roth is a senior reporter for Wired Magazine. Ted Sarandos is Chief Content Officer for Netflix. Ted, welcome to OTM.
TED SARANDOS: Glad to be here. Thank you.
BOB GARFIELD: So to hear Dan Roth tell it, Netflix is going to take over the world and unseat cable and change the landscape for movies and other video entirely.
TED SARANDOS: Well, the people who own content, the people who own distribution like the status quo, but at the end of the day, satellite, telco, cable, VHS tapes, DVDs, video-on-demand, all of these things have done nothing but grow the consumer appetite and consumption of filmed entertainment.
BOB GARFIELD: I don't think that Hollywood has much to fear. They just have a different distribution channel.
TED SARANDOS: Right.
BOB GARFIELD: I am a little concerned about the other distribution channels, chief among them, cable, which seems that, given a service like yours, is kind of an unnecessary middleman that charges a lot of money to be in the middle.
TED SARANDOS: Well, you know, I think that the choices that consumers make around content, a big chunk of that has a lot to do with live television, with watching sports, watching news, watching water-cooler content. Cable and broadcast television is really great at the, you know, kind of one-to-many broadcasting, and the Internet is superior mostly at the one-to-one piece. And at the prices that Netflix offers all this great content, you really don't have to cancel too many things in your spending to fit us in.
BOB GARFIELD: Tell me if I'm wrong. I'm hearing resistance to the notion that somehow the cable business model is in jeopardy at your hands, and yet you haven't really told me why they shouldn't be scared out of their wits. I don't know that live sports and the occasional awards ceremony is going to be enough to keep broadcast and cable TV alive, especially if live sports start selling directly to the consumer, too, as I expect the NFL and Major League Baseball will continue to do -
TED SARANDOS: Sure.
BOB GARFIELD: - as much as they can.
TED SARANDOS: Well, why I think we fit nicely in the ecosystem, instead of destroying the ecosystem, is the percentage of consumers in America who are watching content online has doubled over the last two years. That’s from Pew Internet. And if you look at that, you should see some deterioration in linear television, and, in fact, at the last reporting, linear television hours are actually up a little bit. As an example, as part of your Netflix subscription you have access to practically the entire primetime lineup of the Disney Channel. Everything that’s on the air on Disney, the next day you can watch it on Netflix. We've had that for over a year, and on the most recent rating period the Disney Channel ratings are up 11 percent. So that tells me that there is a big segment of the population that values that content delivery system differently than they value us. There’s one catchphrase you hear around the cable world of the “the massive passives,” which is this gigantic population of people that just want to sit down and scroll and find something and watch it. And the on-demand universe does nothing to address that.
BOB GARFIELD: I mean, the reason we're having this conversation is we felt that you guys were nervous that Dan Roth had overstated the case, that he had pitted you against cable in a way that you don't think you are, in fact.
TED SARANDOS: Correct. And, by the way, I mean, you’ll get the impression from talking to cable operators and content owners, too. And then I heard Leslie Moonves just about six months ago say that the DVR is going to be the savior of network television. I mean, this is a device that, you know, less than two years ago everyone was suing to try to stop. So what I challenge content owners and cable satellite executives to think about is what are the things that they're going to be talking about as positive two years from now that they're trying to kill today?
BOB GARFIELD: Ted Sarandos is chief content officer for Netflix.
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BROOKE GLADSTONE: Coming up, why Detroit has become a media magnet.