Questions for... Reed Hastings

The Netflix CEO talks to Fortune's Matthew Boyle about the company's Internet strategy, his role on Microsoft's board, and more.

Interview by Matthew Boyle, Fortune writer

(Fortune Magazine) -- When Netflix launched in 1999, it changed the way we rent movies. Today the company boasts nearly seven million members, but rival Blockbuster (Charts, Fortune 500) is gaining ground. Fortune's Matthew Boyle asked founder and CEO Reed Hastings, 46, to answer your questions about Netflix's Internet strategy, his new "listening" role on Microsoft's (Charts, Fortune 500) board, and his biggest strategic regret - taking Netflix (Charts) public too early.

What in your life raised your risk tolerance to the level that you were comfortable starting out on your own? Tom Beamon, Chapel Hill, N.C.

Netflix founder and CEO Reed Hastings
Ben Stein will answer your questions in Fortune's June Investor's Issue. (Pose a question)

I was a Peace Corps volunteer right out of college in rural Africa, in Swaziland. Either that developed my risk tolerance or it was symptomatic of it. But once you have hitchhiked across Africa with ten bucks in your pocket, starting a business doesn't seem too intimidating.

Do you feel that innovative business ideas are created through moments of epiphany, or is it a process of brainstorming? Yury Pishchik, Boston

There's a lot of brainstorming about the nature of the problem that sets the context and gets your juices flowing. But ultimately there is a moment of epiphany when one recognizes the solution. With Netflix, one epiphany was that DVDs by mail could work, and the second was our subscription model with no late fees and a flat fee per month.

If you could change a key strategic decision you made early on in the life of Netflix, what would it be and why? Fermin Rodriguez, Daytona Beach, Fla.

I would say going public later than we did. We went public in 2002, and by publishing our financials we let Blockbuster see that this was a profitable business, and it entered two years later. If we had stayed private for another two to four years, not as many people would have understood how big a business this could be.

In your opinion, do you learn more from failures or successes? Give us an example. Juan Saldivar, Monterrey, Mexico

With failures, you learn one of 99 things to avoid. So they are not that useful. I think it is more useful to learn from others' failures. An example: AOL failed to adapt to the broadband world and clung to its narrowband dial-up specialty.

Name one mentor you had along the way, and explain how you applied what you learned from him or her? Dennis Wisco, Irvine, Calif.

I worked for Audrey MacLean in 1990 when she was CEO at Adaptive Corp. [She is now a professor at Stanford.] From her I learned the value of focus. I learned it is better to do one product well than two products in a mediocre way.

You recently joined Microsoft's board. What is that like, and is there anything we can expect in the way of partnership with the Xbox? Bill McHargue, Milpitas, Calif.

It is tremendously engaging being in the room with Bill Gates and Steve Ballmer for a day or two, four times a year, which helps me understand why and how Microsoft has been so successful for 30 years. At the meetings I am so far mostly in listening mode. It is going to take me quite a while to be an effective contributor at board meetings.

As for partnerships, no. If anything, those partnerships become more difficult, not easier, when you are on the board because you have to generally stay out of any direct negotiations.

I was a recent customer of yours but defected to Blockbuster. Can you explain why your company is the better choice when Blockbuster matches your turnaround time, allows customers to drop off DVDs at branches, and adds the value of free in-store rentals? Ric Watts, Bristol, Tenn.

It depends on the customer. For a customer who enjoys Blockbuster stores, the Blockbuster [Total Access] online program may be a better solution. For people who'd love to never go into a Blockbuster store ever again, then we offer better selection, better tools for choosing movies, and more consistent overnight delivery.

As a subscriber, I like your company's Watch Now offering [which streams video to PCs], but I'd find it truly addictive if I could stream movies to my TV. Any plans to do that? Wade Smith, Seattle

Yes. Our intention is to get Watch Now service to every Internet-connected screen, from cellphones to laptops to Wi-Fi-enabled plasma screens. We want to make it available everywhere over the next several years. The technology is fairly straightforward, but there are very few Internet-connected TVs today.

What about the launch of Apple TV? Chandrachood Ramkumar, Pittsburgh

Apple (Charts, Fortune 500) is mostly focused on digital file ownership - that is, downloading a file at a reasonably high price point, and then one owns the file. As Apple does with music. We are focused on subscription viewing. We are more like HBO in that regard, except that you can choose the movies you want.

Has Netflix considered partnering with Apple, making your vast movie content available via iTunes? David Reynolds, Castro Valley, Calif.

Generally Apple's strategy is not partnering with other companies but controlling all the interfaces, and that has been successful for it in the past.

I stopped my subscription to your service because of your well-documented "throttling" of frequent renters. How can you say you are focused on customer service when you alienate your customers in this way? Bill Greenstein, Seattle

When we are short on new releases, which we try not to be, we believe it's fairest to allocate those new movies to subscribers who have not rented much recently. This upsets heavy users because they are not in the front of the line for new releases. We are straightforward about how it works, but not everyone likes that policy.

Do you foresee venturing overseas soon? Shyaam Deshmukh, Mumbai

Yes. All great companies become global companies over time. But we're probably going to focus on the U.S. for two more years, on our online efforts, and then expand after that.

Describe to me what Netflix looks like five years from now. Todd Gordon, Phoenix

We hope to be much larger, have more subscribers, and be successfully expanding into online video.

What is your favorite movie? Michael Heckenberger, Hampton, Va.

Gloomy Sunday is my favorite over the last four months. It is about a love triangle in Budapest with great sadness and redemption. Thankfully, there are no parallels to Netflix. It is just pure human pathos.

Fortune's Matthew Boyle asks...

Will Video on Demand (VOD) mean the end to Netflix?

We named the company Netflix for a reason; we didn't name it DVDs-by-mail. The opportunity for Netflix online arrives when we can deliver content to the TV without any intermediary device. We're working to make this a reality in 2008, investing $40 million in instant viewing this year alone. And we just hired Anthony Wood, founder of ReplayTV, to head up our efforts.

What was the toughest decision you ever had to make?

In 2004 we were entering the U.K. We'd moved people over, hired others, but ended up closing just before we launched. With Blockbuster attacking, we needed to concentrate on the home market. That decision turned out very well but was heartbreaking.

Last year you launched the Netflix Prize, a contest that asks the public to create new technology to more accurately predict customer preferences. Did you select a winner?

No, we started last October and thought it would take about a year. Over 12,000 teams from 130 countries have entered. It's a real horse race.

Will you hire the winner?

The winner gets $1 million, so he might not need a job. Top of page