Netflix fansite HackingNetflix recently interviewed Netflix’s Chief Content Officer, Ted Sarandos. During the course of the interview, Sarandos discussed the company’s reasoning behind the much-discussed Warner agreement, compared the company to HBO and revealed that it was Netflix that initially approached Warner about the new release delay. Read on for highlights from the interview.

Sarandos on why Netflix entered into a new release delay deal with Warner Home Entertainment
“The most practical reason is that the savings derived from this deal enable us to be in stock completely on day 29. Remember that we’re a subscription service and the way that you manage the economics of a subscription service is to manage the demand of any disc, depending on the economics of the disc. . . What were able to is create a deal with them that gave them a little open running room in terms of creating a sell-through window ahead of rental, for us, and hopefully that they’ll find enough value in that it’ll extend to other retailers and other studios will take note and it’ll extend across other studios as well. The net savings derived from technically creating a better customer experience have been redeployed in additional streaming content for all customers.”

Sarandos on where Netflix’s savings from the deal will be used
“The additional savings will not be spent on Warner streaming content, they’ll be spread across all of our upcoming deals. Specifically in the Warner deal it’s an expansion of their rich catalog titles, Caddyshack, The Matrix 1, 2 & 3, the entire Dirty Harry film collection, the cream of the crop of the movie catalog that Warner Bros. controls the rights to. The money itself is being redeployed across several deals to expand the streaming content; both movies and television shows.”

Sarandos on comparing Netflix to HBO
“We are much more like HBO than we are Blockbuster online; we are a pure subscription service. Other pure subscription services don’t have any movies on the DVD street date or 6 months after. We will have it, but in a slightly different window. Availability windows have been so fluid in the last 18 months, moving out and moving back, that I don’t know if the Netflix subscriber is going to feel it specifically. . . The demand for any particular title among our subscriber base is not that big. Most people over time become much less sensitized to street date, ‘cause it’s in their queue and they have a high comfort level they’re going to get it, and the speed at which they get it is variable.”

Sarandos on whether he thinks Redbox and/or Blockbuster will make similar delayed release deals
“I can’t speak so much for Blockbuster because we are considered to be a value chain, both Blockbuster and Redbox are in the same camp in that way, a low cost alternative to transactional rental. Blockbuster, because they command so much per transaction, and they give the studios a pretty big share of that, there’s not a lot of economic incentive for the studios or Blockbuster to move that window in-store, so I’m not sure about that one.

It could be that the studios generally see rental as a deterrent to sell-through, so by creating a small window can lift sell-through by a couple of percentage points, and for studios DVD is the most profitable transaction they make. So if they can swing the sell-though market up by a couple of points without dramatically hurting the rental experience, it’s a great win for studios and it’s a great win for rental in that we can enjoy better margins, and create a better customer experience by plowing those additional monies into service enhancements like streaming.”

Sarandos on the origins of the Netflix/WB deal
“We brought this to Warner Bros. over a year ago.  The ability to rent a DVD on DVD street date is something that the studios tolerate because it’s a business practice protected by law in the first sale doctrine. Anyone can go to Wal-Mart, buy a DVD, open a video store, and rent it. No studio can stop you from getting content if they don’t like your business model. There’s not much hope that they’re going to reverse that legislation, they’ve have tried to many times over the past 30 years. I went to the studios and said that we know you hate the first sale doctrine, and you’re probably not going to legislate your way out of it, and you can’t impose retailers out of it, so why don’t you incent me to create the window?”

Sarandos on customer retention and customer reaction to the deal
“We think we’ve created a net-positive customer experience. It’s a little complicated, but we think it’s net-positive for subscribers. If you joined Netflix specifically to rent new releases in the first week of release, you’re probably pretty frustrated because we’re generally not in stock on the first week of street date for everybody, we’re about managing the demand on the disc over the life of the disc. We never really positioned new releases on street date as core to our consumer proposition, much more about all you can eat and low, low prices, in a 100,000 title universe.

This is one of those rare deals where there really are no losers. If you really are excited about a specific film at a specific time, you might go out and buy it.  By the way, most of our subscribers do that all of the time.  Our subscribers purchase DVDs at the exact same rate as the national average. Our subscribers go to the movies at slightly higher rates than the national average. Our subscribers subscribe to pay TV channels at exactly the rate of the national average. I don’t think any one service tries to or successfully meets the entire consumer appetite for every movie all the time. I don’t think anyone does it better than Netflix, and that will continue.”

[via Hacking Netflix]