The Motley Fool: I know in the past I think you have used the word "agnostic." You said that when it comes to the delivery system that Netflix (Nasdaq: NFLX ) is agnostic. But to what extent do you feel that Netflix has put all of its eggs in that DVD basket?
Reed Hastings: Well, I think Netflix is timing the market well. That is, in '99 when we launched the service, the right move was DVD. That has been validated by our growth. We are forecasting over $700 million in revenue this year.
In terms of downloading, we see it evolving slowly but steadily over the next 10 years, and so we will launch an initial version of Internet delivery of movies this year, 2005, and we will continue to fund and subsidize that work at 1 to 2% of revenues every year. It will grow in significance year over year.
Eventually five or 10 years from now, as there are more and more homes with large-scale broadband, more and more content availability, Internet delivery will be a very substantial business.
The Motley Fool: Reed, let's back up a couple of years. Back in 2003 we spoke with you, and we asked you to rank the competitive threats to your business. We presented you with Blockbuster (NYSE: BBI ) , Wal-Mart.com, video-on-demand, and illegal Internet movie downloading and piracy. You said at the time that of those, piracy and illegal downloads was the biggest threat to your business. Do you still feel that way?
Reed Hastings: I do in terms with a long enough time horizon. So over the next quarter or two, investors are more concerned about the DVD rental competition from Blockbuster, but over the next five or 10 years, the question is, will both the legal system and the technology providers work together so that entertainment products are not widely pirated as they are in some countries in the world?
The Motley Fool: Speaking a little more about the competitive threats, it is now 2005, and we have a new list of competitive threats we want to spot you up with.
Reed Hastings: Great.
The Motley Fool: If you could rank kind of in terms of competitive threats to your business, rank these: Amazon (Nasdaq: AMZN ) , Wal-Mart (NYSE: WMT ) , Blockbuster, or Microsoft (Nasdaq: MSFT ) ?
Reed Hastings: Amazon, Wal-Mart; let's see. And the ordering would be.?
The Motley Fool: The most competitive; the biggest competitive threat to your business first.
Reed Hastings: Blockbuster, Amazon, Wal-Mart, and Microsoft last.
The Motley Fool: Now you say Microsoft last, but I am curious. I think of Microsoft with all of its money and all of its resources being able to essentially bet on every horse, and then a company like Netflix or a lot of other companies don't have those resources and you have to bet just on that one horse, and in this case, that horse seems to be DVDs.
Reed Hastings: Yeah, I am persuaded. I would change that to be Blockbuster, Amazon, Microsoft, and then Wal-Mart.
The Motley Fool: And we are having kind of a debate before, as we were putting these questions together, about how Apple (Nasdaq: AAPL ) might fit into that. What is your take on Apple, and do you see them as a competitor given what they are doing with the iPod and video downloading?
Reed Hastings: Well, let's separate the market into two phases. One is the phase of DVD, which peaks in five to 10 years and lasts for 20 to 30 years. Then there is the phase of Internet delivery, which peaks 20 or 30 years from now and lasts for 100 years.
In terms of competition on the DVD rental side, that is Blockbuster, Amazon, Wal-Mart, and that was the ordering I initially gave you. In terms of competition in the long term for the Internet delivery of movies, I would list Yahoo! (Nasdaq: YHOO ) , Apple, Disney, AOL, Microsoft, News Corp, Viacom, all as significant, both threats and opportunities, in addition to the ones you did.
The Motley Fool: OK. As I am sure you have heard, there has been a lot of speculation over the last few months that Amazon might buy Netflix. Can you hesitate and/or laugh nervously if this is true?
Reed Hastings: You know, we are a strong, independent company. We have got a $175 million of cash on the balance sheet, no debt. ... We were cash flow positive last quarter. We are growing extremely fast, and that makes us both an interesting acquisition and interested in staying independent. So fundamentally in any market, it is always about price. So at this point, we are very committed to staying independent and moving forward.
The Motley Fool: OK, so I didn't hear any hesitation or nervous laughter, so I don't quite know what to do with that response. I have got to ask, could you imagine a scenario where Netflix is bought out or, at the very least, merges with another company?
Reed Hastings: I can certainly imagine it because those things happen, especially in entertainment companies, all the time. There has been tremendous consolidation of entertainment companies. I think it is probably more likely as we evolve from DVD into downloading, and it may be at that point, we have 10 or 20 million DVD subscribers, and we realize we have to be part of Viacom or Disney in order to get the right, to make us successful. So I think if it is going to happen, it is more likely at that inflection point than at any other time.
Stay tuned for Part 4 tomorrow. Did you miss an installment or two? Catch up here andhere.
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Mac Greer is radio producer for the Motley Fool Radio Team. Rick Munarriz is a member of David Gardner's Rule Breakersanalytical team, seeking out the next great growth stock early in its stage of defiance.