Netflix's Neil Hunt On The Company's New Video Streaming Services

Netflix (NFLX) plans to spend $40 million this year to build out its digital movie-rental business. That's on top of the $5 to $10 million spent last year.

A vast majority of the $40 million will be go toward guarantees to movie studios, said Neil Hunt, Chief Product Officer for Netflix. Here's the rest of my interview with Hunt.

Q: Why $40 MILLION?
Hunt: We are pre-paying to buy content. We needed to make some guarantees on how much (video) was going to be watched. So, we're paying up for guarantees. Engineering is a small component (of the spend).

Q: What percent of households are ready to view Netflix's movie-download service today?
Hunt: We believe our service will be applicable to 75% of our customers. (Netflix ended Q3 2006 with 5.7 million subscribers, and it expects to end the year with 6.3 million subscribers).

Q: I have a Mac at home, so I won't be able to take advantage of this service. When will you be available on Apple's Mac and on a TV?
Hunt: Today, it's a PC platform only, we expect to have all Internet platforms in the future. I can't share details.

Q: How do the economics change for the content owners?
Hunt: It's all about the economics. We're bringing a new window into the mix. In yesterday's world, consumers had the option of buying/renting a DVD, and waiting for ad-supported. We'll see the same segmentation in the electronic world. People pay a higher fee to own the rights to content; they pay a smaller fee for rental, and free for ad-supported. (The question was not really answered here)

Q: Said in another way, what do content owners get paid if a movie is not rented but viewed?
Hunt: We record the fact that a show was watched and we pay them?

Q: Is it the same amount as if a movie was rented?
Hunt: Economics are different.

Q: It's probably a huge cost-savings to stream vs. mail out DVDs, right?
Hunt: In aggregate, we're looking at a $300 million postal bill. As we switch to an online format, that's savings that we can recognize.

Q: In the next month, what cities will be able to get this service?
Hunt: We're not doing it by towns/cities. We're anxious that people get a great experience, so it will be a slow roll out. It'll be roughly a random dice toss.

Q: When you think about the 20 million subscriber goal in 2010, what assumptions are you making?
Hunt: It's an extrapolation of the density of membership we have in San Francisco. We 20% of households in SF. The SF Bay Area has enjoyed overnight shipping service (that's helped drive adoption0. As we rolled out overnight shippig, we've seen accelerated growth. We believe we'll have 20% of all U.S. households.

Q: Finally, why are you better than Apple's (AAPL) movie download business?
Hunt: We're cheaper

Q: How about Amazon's (AMZN) unBox and CinemaNow?
Hunt: The key difference is that we have chosen to be instant, rather than download. You don't have to spend time upfront saying you have to commit resources. With the others, you choose, pay and then watch. With Netflix, you can start playing. You get hours without paying. We call it "Title surfing" -- allows you to flip from title to title. Try something you never heard of.