Sumi Das: Neil, thank you for taking the time to speak with us today.
Neil Hunt: Thank you for having me on the show.
Sumi Das: Netflix has 8.7 million customers and fulfills two million DVD orders every day.
Neil Hunt: Right.
Sumi Das: Those are two huge numbers. I'd like you to put those in context for us and tell us the scope of the operations.
Neil Hunt: As you say, two million DVDs a day that's a big number. It's many truck loads. We operate out of 55 distribution centers, dotted around the country. They are positioned so that most of our members can receive their DVDs overnight. It's a big operation, 55 centers, 2 million DVDs. We also have our streaming server network, also in various facilities around the country, so we can deliver streaming movies to all of our subscribers, too.
Sumi Das: You mentioned fifty five distribution centers around the county. I think people are very curious how these distribution centers run. Tell us a little bit about that. Once I place my order, how does that movie end up in my mailbox?
Neil Hunt: Good question. A key observation here is that most of the movies that we ship today arrive back at our facility from a previous renter either today or yesterday. A lot of the software is sophisticated statistical prediction models. As we receive the DVDs in, we can figure out which ones to get ready for shipping out again the same day and which ones we should put aside for storage for the longer term. There is a lot of software that's looking at DVDs and deciding what to do.
Sumi Das: Netflix has been able to defend its territory from competitors like Blockbuster and Wal-Mart, but there are other businesses that want to jump into the ring, so to speak Apple, for example. How is Netflix using IT to stay ahead of the competition?
Neil Hunt: I think the question is relevant as we start to transition from being a purely DVD business into a business that's delivering in hybrid of both DVD and streaming media. Clearly in the streaming space, there is a variety of competitors and we separate the marketplace into three or four different segments. On the one hand, we've got the ad-supported segment. This has traditionally been the province of traditional cable and broadcast networks. As we look to the future, we see companies like Hulu and Google positioned to have a big play in ad-supported media delivery. In particular, Netflix is addressing the subscription rental segment. We see businesses like Apple and Amazon well-positioned to do digital delivery of media and of pay-per-view, or of an electronic cell phone model. Netflix is uniquely positioned to be very strong in subscription electronic delivery. It is a special competence. It's an area that's traditionally been rather separate from either the ad-supported or the sell-through model. It's an area where we get to play to the strengths of our DVD shipping subscription business too.
Sumi Das: It's now possible for people who own Macs that have Intel processors to instantly watch movies thanks to this application, Silverlight. You just made that service available to your customers. What were the challenges for you to adapt that application for your business and to put that platform on the web?
Neil Hunt: The biggest challenge with getting to the Mac platform in general is the question of rights management. It is a little bit of a dirty word with consumers. It's about making sure that the ownership, the rights of the movie owner--the studio--are respected and that we don't provide a vehicle for people to gratuitously take copies of the movie that they have paid for. The key question here was: "What kind of rights management technology would be available for the Mac platform that would let us fulfill our obligations to the studios and gain those licensing rights?" We chose Silverlight because it comes with, as of this year; it comes with "Play Ready," which is technology that encrypts the content on the way to the consumer so that it's protected.
Sumi Das: You have these different ways to stream video to your customers, but at the same time, currently, the model that is most prevalent is that people are receiving DVD discs. At what point do you expect that to change, the scales to tip, and for more people to be streaming video versus ordering DVD discs?
Neil Hunt: The excitement is always pointing to the future technologies. We think that the reality is that DVDs will continue to grow for Netflix for probably at least 5-10 years. We expect to continue to grow our physical shipping operations and continue to spend a lot of energy optimizing and improving that side of the business, even as we pump a lot of new work into delivering the streaming as well.
Sumi Das: Netflix has suffered a couple of outages in 2008. Most recently in August, there was a three day outage that reported cost the company about $6.5 million. We understand that Netflix has a custom-built system. How do you manage that system when you can't turn to an Oracle or an SAP for an upgrade?
Neil Hunt: I point out that Netflix has been shipping DVDs for about ten years, just a little under 3000 shipping days. We missed a couple of days in August--that still represents more than 99.9 percent shipping satisfaction. We do pride ourselves; we do strive for a very high level of service and also for delivering value to our customers. We try to do it on systems that are really optimized from a cost perspective as well. During the outage we were able to bring in our vendors--people such as "You Name"--to help us analyze what had gone wrong, help us figure out the issue. In fact, we've made some changes, we have deployed some new technology, some fixes that have been offered for us that will make sure that we don't suffer this problem again. If fact, it will also make sure that other businesses that are using some of those same technology platforms won't suffer the same rest either. We feel pretty good that we have taken care of the issue and things will be more stable moving forward. It is really one of those lightning strikes in the desert. It happens occasionally. We are not a bank, we are not trying to be 100 percent available for everyone, so we try to offer a great service at a cost profile that's attractive to our customers.
Sumi Das: Netflix really strives to suggest movies that members will love. In fact, that's what it says on the site: "Movies you'll love"--there's a tab right there. How are you able to continuously improve that system? We know you're using recommendations and rating systems, but tell us how that system works?
Neil Hunt: We have a lot of work going on on interest prediction. That's based on popularity, it's based on demographics, it's based on what's hot right now, as well as what we know about how you would enjoy particular things. It also has a lot of factors to consider in terms of freshness. If we have suggested these 10 movies to you yesterday and last week, and you still haven't added it to your queue, then perhaps you already watched it before. Or perhaps you are actually not interested, even though we predict you might be. Maybe you are. In any case those 10 movies aren't going to have traction for you, so let's find a different 10. Let's keep rolling new stuff through. It's a case of tracking what your peers and similar people are watching. It's a case of tracking what was previously shown to you, matching that up with enjoyment, and using that to make a set of predictions that are interesting and relevant.
Sumi Das: What's the next platform? Do you imagine that perhaps video could be streamed to mobile devices, to your cell phone?
Neil Hunt: When we talked to our customers, the television is really where people want to watch movies. We've made significant progress this year, including our streaming client platform, into Blue-Ray players, and we certainly hope to pursue that with other partners through next year and beyond. Fundamentally, digital televisions--there is a big change coming in 2009 with the termination of analog broadcasting, and we see an acceleration of sales of digital televisions into consumers' homes so we see the television as an important platform to begin to add our streaming technology directly into a television. So imagine the television with an Ethernet jack or better, a Wi-Fi connection, that's able to talk directly to the internet and, amongst other services, be able to deliver streaming Netflix directly to that television screen without needing another platform, another box, another device in the house.
Sumi Das: Neil, thank you for taking the time to speak with us today.
Neil Hunt: Thank you for having me on your show. I hope I've provided some interesting insight to your viewers.
Sumi Das: I have been speaking with Neil Hunt, Chief Product Officer for Netflix. For CIO Sessions, I'm Sumi Das. Thanks for watching.
