Pushing the Netflix Envelope

David and Tom Gardner recently interviewed Netflix (: NFLX) CEO Reed Hastings on The Motley Fool Radio Show on NPR. This is the second of four parts.

TMF: Reed, we asked you this earlier this year if you were going to expand into video games or maybe audio books. You didn't seem interested that much in the idea at that point. But emerging services like Gamefly and Audible.com are now doing those things and they seem to be succeeding. Your reaction?

Hastings: We are continuing to watch them and grow the movie markets. We are really focused on the movie market. Again, it is a $10 billion industry and we are only at 3% market penetration, so we are sticking with consistency.

TMF: Your company obtained a patent for the process by which you send DVDs through the mail, though I think it covers sort of the idea of subscribing to a service like Netflix. Am I right about that?

Hastings: Yes, in general terms. It is a little more specific because it has to do with the queue and other elements of our service. Patents are a great thing to get, but mostly defensively. You want to have a series of patents so that if anyone ever sues you, you've got a lot of grounds to countersue them. Fundamentally, we look at the patent and say, "You know, we want to win in the marketplace by building the best service ever." That has been our strategy, continues to be our strategy, and the strategy is working. We have been competing with Blockbuster(: BBI) for a year, with Wal-Mart(NYSE: WMT) for a year. We have continued to exceed all of our growth targets.

TMF: Reed, about your company's red envelope. They are an increasingly recognizable package to U.S. postal workers. Hundreds of thousands of customers open these up each month with delight. Our question for you then, on behalf of some shareholders who may think you are leaving money on the table, when will you sell space on those red envelopes to outside advertisers?

Hastings: Well, if you look at some of the great brands that have been created, Starbucks (Nasdaq: SBUX) is an example. A lot of people would like to advertise in the Starbucks store, but they have been very strong about creating a unique space and a unique brand. That is our philosophy also. We have got a very clean brand. We have got a brand that really represents something special and we don't intend to expand into advertising, no matter what the associated revenues, and it is really focused on, again, creating this pureness and this great brand. We think that is the right strategy to build the most valuable company.

TMF: Who ended up selecting the color red for those envelopes, and was there a debate about it?

Hastings: That was our VP of marketing, Leslie Kilgore, who selected the logo and the color. That has worked out very well for us.

TMF: Do you have any plans to turn your customers into sales people for your business? Is there a Tupperware(NYSE: TUP) model that exists for this sort of company, given that it takes a little bit of time to explain Netflix services to the new customer?

Hastings: You know, that is a great example of where I think we are doing the right thing. That is, we let you tell your friends about the service. You can give your friends a free trial, but we don't pay you to turn your friends in. What we realized is, if you love the service, you will tell your friends about it because you want to. If you don't like the service, you are not going to sell us your friends' names for $20 or $50. So what we should do is not focus on the $20 or $50, but instead focus on building a great service that people rave about and then they will want to tell their friends about it.

TMF: Reed, will Netflix in any way, shape, or form ever offer pornography rentals?

Hastings: Well, it is not something we have ever done in the past couple of years. It is something we don't want to get into. It is a very different market. So I highly doubt it.

Tomorrow: Hastings on threats from Wal-Mart, Blockbuster, Video on Demand, and piracy.