Widening the net: How Netflix plans to take over the world — Evening Standard

Marseille, an eight-episode Netflix Original series about power and corruption is due in late 2015. It will be the US video-on-demand service’s first foray into French-language production, as it bids to replicate the success of the David Fincher-directed House of Cards and is just the sort of immersive, multi-layered drama that Netflix, through deep mining of user data, knows its subscribers seek out — and an example of how the technology platform is reinventing screen entertainment.

With more than 53 million customers in nearly 50 countries, Netflix streams two billion hours of TV and movies a month and is reshaping the way content is created, consumed, delivered and paid for.

Since software entrepreneurs Reed Hastings and Marc Randolph founded the company in California in 1997 as a DVD rentals and sales website, Netflix has transformed from insurgent to behemoth, with a valuation at the time of writing of around £18 billion. In the process the founders have eased the stranglehold of legacy broadcast companies — including network, cable and satellite players — on consumers and their viewing habits.

As Hastings tells it, Netflix’s breakout moment came 13 years after the company was founded. In 2010 the company had just launched into Canada, its first new territory. Until then, the Netflix model had been a hybrid of DVDs and streaming. But north of the border they opted, with some trepidation, to go to market offering a streaming-only service.

“That night we got [our Canadian launch numbers] and found that the number of sign-ups was 10 times larger than we’d thought it would be…I remember thinking, ‘Gosh, streaming works!’ That was the beginning of our great, global expansion,” Hastings says.

From then on, Hastings bet the farm on streaming. A year later digital revenues had reached $1.5 billion.

Lean and silver-haired, with a goatee and an easy-going, laconic manner, Hastings, 54, sits in Netflix’s European headquarters in the heart of Amsterdam. The space is so new that it’s almost entirely empty. Doors have been decorated with life-size blow-up portraits of characters from some of the channel’s best known series, including a malevolent George “Pornstache” Mendez from Orange Is the New Black.

France was one of six territories into which Netflix launched in autumn 2014 as growth in the core US market, where the service currently has 37.2 million customers, inevitably starts to slow. Next on his list are central, eastern and southern Europe. “Our basic view is that we want to make Netflix available everywhere in the world,” he says.

Netflix’s success has startled an industry whose rules have changed only slowly since the advent of digital. Legacy companies are even now still adapting.

HBO, one such competitor, announced to shareholders in October that the premium cable and satellite network will launch a stand-alone online streaming service in the US in 2015.

Almost simultaneously, US network CBS announced that it, too, was getting into the streaming business thereby joining a host of incumbents ranging from Amazon Instant to long-established competitors including the BBC’s pioneering iPlayer and Channel 4’s 4oD. Even the world’s biggest e-commerce site, Alibaba, is deal-making in Hollywood, as it, too, muscles in on VOD with its own set-top box.

Incumbent television companies were slow to see the potential of VOD, viewing it as a niche service that would be dwarfed by legacy broadcast delivery. Indeed, the same year Hastings launched a streaming-only service in Canada, Time Warner CEO Jeffrey L Bewkes was asked whether he viewed Netflix as a threat. “It’s a little bit like, is the Albanian army going to take over the world? I don’t think so,” Bewkes replied. Hastings’s nose-thumbing response was to buy a consignment of Albanian army hats and issue them to staff to wear in the office.

One of Netflix’s main differentiators lies in its use of data, terabytes of which are analysed to build recommendations for each subscriber. It’s used to guide Netflix on how to spend its programming budget, which was $3 billion in 2014. Most of it is spent on licensing, but a growing, undisclosed percentage goes to commissioning original series. Award-winning shows such as House of Cards and prison drama Orange Is the New Black have been critical.

Netflix is venturing into movie production too, backing and releasing (online and in selected cinemas) a sequel to Crouching Tiger, Hidden Dragon and four Adam Sandler films. In all these cases the company uses subscriber data for what it terms “audience prediction”. Multiple factors such as genre, cast and director, and how prequels have fared (if they exist) on other platforms/channels, are analysed to boost likely success. With House of Cards, for example, it knew from customer viewing habits that a political thriller starring Kevin Spacey and directed by David Fincher would appeal to a very large slice of the Netflix audience.

Netflix can find an individual viewer’s “doppelganger” – someone anywhere where the platform is available, who also feasts on weekend binges of The Walking Dead plus wildlife documentaries on Sundays. Netflix analyses the titles a doppelgänger has watched that the first viewer hasn’t and offers those. This sort of personalisation is always iterating.

According to Neil Hunt, Netflix’s chief product officer, “With a streaming service, we get a lot of signals about what and how people are watching and enjoying. For example, if you start something and abandon it in a few minutes, that’s a pretty negative signal. If you watch an episode actively to the end, with occasional pauses and rewinds, then power down your device, you were clearly there and engaged all the way through. Plus we know what we’ve shown to you — we know what we put on the screen as possibilities for you, what you snapped up or passed over in favour of something else. All of those of signals, put together, allow us to use a variety of algorithms to produce Top Picks lists, Popular on Netflix lists, and also to produce the micro genres, the rows of things such as ‘featuring a strong female lead based on a book’.”

Some commentators have wondered how these algorithms might affect the creative process. Hastings insists that the artists Netflix commissions have complete freedom. “We want the artist to have creative vision and not to assemble a bunch of sugar candy or car chases…” he says.

As the competition among streaming services intensifies, Netflix has been forced to firefight on a number of fronts. The company has been battling a number of American ISPs which are levying fees for Netflix — which now accounts for over a third of American internet traffic, at peak times — to interconnect with their networks and provide the higher-bandwidth connections necessary for better streaming quality.

Eventually Netflix struck deals with Verizon, Comcast, Time Warner Cable and AT&T to “pay the toll”, as Hastings puts it. But it is, he acknowledges, a long-running issue, which is unlikely to disappear. “It’s settled for a couple of years, but then it’ll come back, right?” he says, adding that he expects to face similar bills in Europe too. No wonder then that Netflix is lobbying to portray ISPs charging interconnect fees as damaging the very notion of a free and open internet, with equal access for all. “We’re super positive [about net neutrality],” he says. “We’ve lobbied for no fast lanes, no slow lanes. If you have enough speed then you don’t have to get into the fast lane or slow lane.”

Disrupters inevitably get disrupted. Is there a force Hastings fears? A rare —albeit brief — pause ensues. “We worry about movies and TV shows getting disrupted,” he replies. “As long as there’s a strong market for movies and TV, we should be fine — nothing’s going to out-internet the internet. So really, it’s just that one day people might start looking at movies and TV as kind of like the novel: boring 19th-century stuff. And that in 15 years, there’s Google Glass, combined with virtual reality and a morphine drip, and [when] you put all that together, it’s an amazing experience, so you go: ‘Watch Mad Men? Really?’ That’s the risk,” he says.

See the full feature in the February issue of WIRED, on sale now.

This article, shortened from the February WIRED magazine cover story, was first published in the London Evening Standard on 9th January 2015.