Future of TV According to Netflix’s Reed Hastings

Reed Hastings, chief executive officer and founder of online video company Netflix (s NFLX), has a pretty clear idea of what the future of video looks like. It needs high-speed fiber broadband; it involves sensors; and it’s all on-demand.
Given his track record of being able to accurately predict the future of video — he called video the killer app of broadband at our NewTeeVee conference in 2009 — it’s easy to buy into what he has to say. He also predicted video would be available as streams on many devices and to many screens over the Internet.
It has been an amazing year for the company. Netflix has seen its subscriber base leap from 14 million to 22 million in the U.S. Its stock has been on a tear, and it has seen rivals such as Blockbuster (s dish) fall by the wayside. It has been painted both as the savior of niche television shows and the destroyer of broadband.
When I think of Netflix, I think of a big data company with a special focus on user interaction and content. Of course, there’s nothing better than getting the lowdown from the man himself to find out what he’s thinking about next. Last week, in a short freewheeling conversation over Skype (Reed does love Skype), he shared his thoughts on the future of television, video and broadband. Here are some excerpts from my conversation.
By topic

On Internet Service Providers & Innovation

In a letter filed with the FCC, Hastings and Netflix were critical of Internet service providers. When I asked if they indeed were the enemies of innovation, he said his criticism isn’t “blanket” criticism, but he’s critical of certain ISP practices such as pay-per-gigabyte (particularly in Canada) and the practice of charging for sending bits into their network.
“Their consumers want Netflix bits and they charge the consumer,” says Hastings. “Comcast (s cmcsa) wants to charge our provider for providing those bits. What they want to do is make money on both ends: consumers and the content end.” He believes Comcast shouldn’t charge for the “entry of our bits into their network.”
Instead, Reed endorses settlement-free peering, but Comcast doesn’t agree. Comcast is currently locked in a bitter dispute with Level 3 Communications (s LVLT), Netflix’s service provider. Hastings points out that Charter Communications (s chtr), a cable broadband provider, practices settlement-free peering. “So, no, we are not making a blanket statement that all ISPs are bad, just certain ISP practices are bad.”
(By the way he does think Comcast has done a great job on its Xfinity app for the web and for the iPad, so he’s not holding any grudges against them.)

On Bandwidth Caps

Last week, Canadian broadband provider Shaw (s sjr) decided to increase its bandwidth caps. According to Reed, this is a step in the right direction because ultimately, it’s good for the Canadian consumer.
Canadian consumers want unlimited Internet, Reed added. (In the U.S., we’ve had unlimited Internet, though some ISP are beginning to impose caps.) He takes heart from the fact that Shaw increased the bandwidth caps and have said it’s going to increase them again.
“The marginal cost of delivering one more gigabyte is a penny,” Hastings added. “I think once you have the fiber installed, it almost doesn’t matter how much [bandwidth] you use.”

On Fiber Broadband & the Future

Over the past twenty years, Internet bandwidth has expanded dramatically, and in the past decade or so, we’ve gone from dial-up to DSL and cable broadband. Now we’re going fiber-to-the-home.
Hastings was super-excited by Google’s (s goog) 1 Gbps Google Access fiber project in Kansas City, Kan. because it would show us “what can be done” with so much low-cost bandwidth. Today, he pointed out that Netflix works just fine with DSL and cable, but “more fiber means there are going to be more high-definition streams” and more on-demand content. “It is much more than a Netflix story. It opens up possibilities for many interactive, immersive applications.”
“What we have got to do is get fiber to everybody’s home just like we got electricity and telephone lines,” said Hastings. “It will happen over a certain number of years.”
Hastings believes the future of broadband is already here, and pointed to countries like Australia, Brazil and Costa Rica, which made fiber broadband to their citizens a top priority. In the U.S., he’s excited by states like Vermont, which are laying fiber for fast connections for its citizens.
When I asked Reed if the fiber deployments were going to be key to Netflix’s future international expansions, he declined to comment and said the company would share its global expansion plans in the second half of 2011.

It’s an All-NewTeeVee World

Fiber broadband is key to the future of companies like Netflix in a world where all video would become “click-and-watch,” and will always be on demand.  “In the next 10 to 20 years, almost all video will become click-and-watch Internet video and consumers will interact with it on a wider range of devices and it will able be on demand,” he predicted. “You will not tune into a certain channel this is broadcasting — and that is the radical change. It will be an on-demand world.”
“Today on the iPad, you install various apps and in two years Samsung televisions will be like that. You can already see bits of that future,” he added. In five years Hastings believes that all televisions sold globally will have a built-in Wi-Fi connection and the television will also be an Internet access device. In this brave new world, Hastings says Netflix is one of the subscription sources for television shows and movies.

On Sensors & the User Experience

When I asked Reed if he thought the click-and-consume metaphor will apply to everything on the network, he said yes and pointed out that in such a world, the difference would be how consumers interact with services defined by the user experience.
He believes the future user interface of not only Netflix, but other applications, will have to become more interactive and will have to take into account inputs from various sensors. “Sensor web is growing, and Netflix will have to integrate it into our experience,” he added.
“Our user interface will be tremendously advanced from where it is today,” Hastings added. “It will talk; it will integrate with sensors; and when you shake your phone, it will give you various shows.”
Reed also said, “It is up to application developers to integrate those sources of data and figure out social video and what social video means.” When I asked him if re-imagining the user experience with various sensor inputs was par for the course going forward, he concurred. Over the next few years, he expects companies like Apple (s aapl), Amazon (s amzn), YouTube (s goog) and Comcast to keep innovating and learning from each others’ experience.

On House of Cards and Its Content Plans?

When I asked Reed if Netflix was getting into the content business, especially with them spending so much money on the House of Cards show, he said the company is in the business of licensing content. It’s not in the business of producing content and reading scripts. “We don’t produce content,” he said.
In the case of House of Cards, he noted they are still licensing the content in certain release windows and certain categories. “It is a riskier license than the ones we have done before, as we know less about the content than say Mad Men, where we can get a pretty tight prediction on how much people will view it,” Hastings added. “It is fair to say we are taking a lot more risk in our licensing but it is different from being a content developer.”