Netflix's Sarandos: We'll Get Better At Forecasting Sub Behavior

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Netflix, which reduced its U.S. subscriber estimates by 1 million for the current quarter after a dramatic shift in pricing strategy, will "get better" at being able to "precisely forecast and predict the behavior of that many people on fairly radical change," chief content officer Ted Sarandos said at a conference Thursday.

Sarandos, speaking Thursday at the Paley Center's International Council 2011 conference in Los Angeles, had no additional comment on the updated subscriber forecast.

Earlier Thursday, Netflix reduced its previous U.S. subscriber estimates by 1 million for the third quarter of 2011, which ends Sept. 30 -- meaning it expects to lose around 600,000 customers in the States. That's largely the result of a Netflix's elimination of bundled DVD-plus-streaming plans, separating streaming-only service and DVD-by-mail services, amounting to a 60% price hike for some subscribers. The price change went into effect for existing subscribers Sept. 1.

Sarandos said that when Netflix first launched the streaming product four years ago, "what we launched with was not worth paying for most people," so the company offered it as part of the flagship DVD-by-mail plans.

Since then, Netflix has seen many more customers sign up for streaming rather than DVDs. "We were becoming this two-headed monster in a way that put us in an uncomfortable position," Sarandos said. "It was becoming increasingly conflicted within the company."

The DVD business will have a long life, he added, especially for parts of rural America where broadband is unavailable. But, he said, "streaming is the future of our company."

TV programming now accounts for nearly 60% of all video streamed over Netflix, whereas TV shows on DVDs peaked at 18% of viewing, according to Sarandos.

Sarandos downplayed the decision by Starz Entertainment to not renew its deal with Netflix, for a reported $300 million annually. Their current deal expires Feb. 28, 2012.

"Buyers and sellers disagree on values and prices all the time," Sarandos said.

Viewing of Starz content has declined over time, as Netflix has beefed up its streaming library. "When Netflix first did the Starz deal we didn't have as much content, so it was a large portion of what people were watching," Sarandos said.

Netflix is delving into original programming. For example, it bought the exclusive rights to at least 26 episodes of House of Cards starring Kevin Spacey, an adaptation of a BBC miniseries set to debut on the Internet streaming service in late 2012.

"Super-serialized shows are going to end up on HBO, Showtime and Starz -- three guys who don't necessarily want to sell to me," Sarandos said. "So we said, maybe we'll have to develop this content ourselves."

Netflix is "very complementary" to existing cable, satellite and telco TV services, Sarandos reiterated. He said Netflix has no interest in obtaining rights to live sports programming or other linear content like "American Idol, or talk shows, or The Daily Show, or any of that."

"There's no reason, given our economics, why we couldn't be in every cable household [in the U.S.] and worldwide," Sarandos said.

Cable operators also should embrace Netflix because "Netflix is a killer app for broadband. We are very complementary to the most profitable business... for anyone who sells broadband around the world," he said.

Internationally, Netflix's pitch to content owners is that it can help them monetize content that has previously been available in a country only in pirated form. "The distribution has been very broken around the world for a long time," Sarandos said. "We had to create a product that was better than free."

In Canada, he noted, Netflix launched just over a year ago -- when BitTorrent was the largest supplier of digital movie content. Netflix now accounts for more movie viewing in the Great White North and BitTorrent traffic has been declining.

In Latin America and the Caribbean, where Netflix is rolling out its streaming-only service to 43 countries, so far in every market the movie Back to the Future is among the most popular movie. Sarandos attributed that to an ad campaign Nike is running in Mexico around Back to the Future.

But "the first six days of data may be meaningless," he said.