On the Record: Reed Hastings

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The mail-order DVD business is booming, with the two largest competitors, Netflix and Blockbuster, in a heated battle for your dollars (no late fees, though!). To compete with Blockbuster's combination of mail order and bricks-and-mortar stores, Netflix has slashed prices, beefed up customer service, and started offering instant viewing of movies over the Internet. Founder and ceo Reed Hastings spoke with U.S. News reporter Emily Brandon in a movie-themed conference room at Netflix headquarters in Los Gatos, Calif.

In the second quarter, for the first time in Netflix history, you lost customers. What is the No. 1 reason customers cancel their accounts?

The biggest reason customers cancel is they are not using the service much. So if you start with us and watch a bunch of movies and then fall out of the habit and haven't watched a movie for two or three months, then you are very likely to cancel.

Why did you eliminate E-mail-based customer service in favor of a 24-hour call center?

We're generally frustrated in our interactions as consumers with other companies: a combination of long wait times and overseas and unskilled labor. And we realized we can make a real difference to our customers by giving them someone who is highly trained, friendly, and [available] on an almost immediate basis. We decided a few months ago that the best model was to allow the customer to call us directly, to publish the 800 number widely, and to replace the E-mail-oriented system that we had before.

Why did you decide not to outsource your call center?

 We have a large enough scale that there's no particular cost advantage to outsourcing it, because we need a couple hundred representatives who are full time on Netflix. We care about the quality of the customer-support experience as a competitive differentiator and as a statement of who we are as a brand. And to do that, you want to locate domestically and you want to have very-easy-to-get-a-hold-of and friendly people, and that's why we picked Oregon.

What else will you do to compete with Blockbuster?

It is a big competitive battle, and that's kind of what makes it exciting. We're opening more and more DVD distribution centers to provide more Americans overnight delivery. There will be about 50 by the end of the year, covering most of America with overnight delivery. We cover a pretty broad swath of America. We're in nearly every state. We have centers in Hawaii, Alaska, Maine, and Montana. We're not in North Dakota or South Dakota. We move the locations depending on where we can get an inexpensive facility.

Do you have plans to go international?

At some point, we will definitely look at that. For now, the domestic market is very large and a huge opportunity for us. We only have under 7 million subscribers, and there are 110 million U.S. households.

Do you think direct downloading of movies is going to take off soon?

It is very skewed toward younger people. When you talk to people over 30 about watching movies on their laptop, they think you're crazy. When you talk to people 25 and under, it is how they are living life on their laptop, and they are watching tons of video. It works pretty much like YouTube, where you click and watch, except that it is DVD quality. There are a lot of companies that are investing in making the Internet come to the television, though. There will be WiFi television next year with WiFi built right in. There's various new high-definition DVD players that are all Internet equipped. There's game platforms, PlayStation 3 and Xbox 360, that are Internet equipped. We're trying to be a channel in the future of Web television. But it will be quite some time before it equals DVD. We think DVD will be pretty dominant for the next five or 10 years.

What movie is at the top of your queue?

Rome, Season 2 from HBO.