Aaron Strout:     

Hi, my name is Aaron Strout. Welcome to the We Show.

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Aaron Strout:    

Thank you for joining us on the We Show today. My name is Aaron Strout, and I’m the VP of marketing for Mzinga, a leading provider of workplace and customer community solutions.  This podcast is one in a series and can be found on the WeAreSmarter.org site, Mzinga.com, and iTunes under "We Are Smarter."

Today I am speaking with Steve Swasey, who is the director of corporate communications for the world’s largest online movie rental service, Netflix. Welcome, Steve.

Steve Swasey:
Thank you, Aaron. It’s good to be here.

Aaron Strout: 
Glad to have you here. Steve, the purpose of these podcasts that we’ve been doing is really to sort of talk about – you obviously are featured in our soon-to-be-released We Are Smarter Than Me book – companies that using community to do self-service, marketing, really making a better experience for their overall customers. I have a few questions that I wanted to ask you. What I wanted to start with was basically a little bit about you and what your experience has been in the past, and then a little bit of Netflix and maybe what drew you to join Netflix.

Steve Swasey:
Well, thanks, Aaron. Actually I like to think of myself as a guy who has one of the best jobs in the world, because I get to talk about Netflix all day. I am director of corporate communications for Netflix, and Netflix has 6.7 million members, and growing. We’re forecasting growth for 2008. Netflix is a profitable company, which of course our investors like.

Netflix really changed the way Americans rent movies. Prior to Netflix, about nine years ago, you had to go to a video store where there was pretty limited selection, and kind of crummy service and punitive late fees. Netflix changed all that, of course, with the online DVD rental. You get as many as you want. If you’re on one of those plans, they’re shipped directly to your home or wherever you get your mail. Postage paid both ways by Netflix; it’s included in your subscription price. You can keep movies as long as you want – no late fees ever. Of course, the count is amazing – 85,000 titles on DVD, and more than 5,000 choices for watching instantly on the PC. Netflix really is the innovator and the company that changed the way Americans rent their movies. My job as corporate communications direct is to share the wealth of information with the nation’s media, and broadcasters and podcasters like yourself.

Aaron Strout: 
Great. I’m a huge lover of Netflix, and I will admit that – my wife and I have three kids – and it has totally changed the way we watch movies, and so thank you guys for that. When you joined Netflix, I’m assuming you joined a few years ago when Netflix wasn’t the powerhouse that it is today. So maybe you can talk a little bit about that and sort of what drew you to this company? Certainly it’s experiencing wonderful growth, which I’m sure you’re tickled about.

Steve Swasey:
I’m very pleased with the company’s growth. You know, not commenting on the current quarter, because we just closed the quarter yesterday and we’ll be announcing those results in a couple of weeks, but generally on the company’s growth it has been meteoric. The company had 6.7 million members at the end of last quarter, and not commenting again on growth for this quarter, but the point is it is a growing company. We have forecasted growth for 2008, and that is because, as I said, the company changed the way Americans rent movies. It gave people greater convenience, greater selection, and greater value. You’re right – when I joined the company about a little over two and a half years ago, it wasn’t the company that it is now. I think we had about 3 million subscribers, so we’ve more than doubled in two and a half years. Revenue was less than it is now.

At the end of 2007, revenue was about $1 billion, and profitable, so the company has enjoyed meteoric growth over the last several years. It’s overall a growing market. When you rent DVDs online, you’re one of 10 million households to do that. Netflix has two-thirds of the market share, and of course we have competitors. Wherever there are innovators, there are imitators. And Netflix innovated this online DVD rental business, and then there are companies that have imitated it. Not as well, we’d like to think, because Netflix continues to be the No. 1-rated website for customer satisfaction across all of e-commerce, and that’s done by a poll twice annually by the independent researcher Foresee Results, the leading research indicator for Web use. In five consecutive surveys since 2005, Netflix has been No. 1 for customer satisfaction. We like to uphold that by providing greater convenience, greater selection, and greater value.

We’re always looking for ways to improve the member experience, and we do that with adding more titles, adding more distribution centers so people get faster shipping. Now we have 85,000 titles and more than 95 percent of our 6.7 million members get their DVDs generally within the next business day.

We add more value. We lowered our prices recently. We continue to bring more to the table for value-adding different price plans and that, and then, of course, we’re expanding to online viewing. Right now you can watch any of 5,000 TV shows or movies on Netflix instantly on your PC. It’s as easy as YouTube with the quality of DVD. Of course, we’ll be moving that more to other screens in the future – your TV or your cell phone, or whatever device you want to watch. We’ll have those movies available in the future. So Netflix is a growth company, and it is growing to provide greater convenience, greater selection, and greater value for its members.

Aaron Strout: 
Steve, to that end, obviously you mentioned the polls, and I have received a few recently and have taken them. I do love the fact that you’re constantly innovating and doing things like dropping prices rather than increasing prices, and increasing titles, making it easier to sort of see the content by not only getting them out quickly via DVD, but turning them on on the computer or ultimately the cell phone or TV. How do you listen to your customers beyond that? Do you have a small dedicated group, a community per se that you sort of reach out to and you guys take your cues from? Is it really strictly from the people that you poll at large? How does that work?

Steve Swasey:
Well, Netflix listens to its customers all the time in many ways. I say that because most great consumer package companies – consumer products companies – are great because they respond to the customer, or better, as in Netflix’s case. They anticipate what the customer wants, based on observing and analyzing and listening, and provides it. That’s what an innovative company does, and those are the companies that continue to lead.

Netflix listens to customers in a variety of ways, really three big ways. One is direct research on our own; two is responding to customer inquiries; and three is observing third parties and observing trends. Responding to customers is probably the most obvious way. We have a very active customer service group. We recently changed all of our customer service from email to phone. So when you want to contact Netflix, if you have a question about your account, or if you have a billing issue, or you’ve changed your address or anything like that, you now call somebody and get a person, a live person based in Hillsboro, Oregon – which is a suburb of Portland, Oregon – and they answer the phone and talk with you.

We found that to be more expensive, more of an investment, but a greater investment ultimately for the member because we found that doing it through e-mail was not as conclusive. You can’t anticipate the next question in e-mail; you only can anticipate the question you’re being asked and then answer it. E-mail tends to be a unilateral communication, whereas direct phone contact, like you and I are having right now, is a bilateral conversation, and things can get closed and dealt with more quickly and more efficiently. While the customer service was more expensive for Netflix to put a live person on the phone 24 hours, seven days a week, we found it to be much more efficient and better for our customers. So, we get direct feedback from customers that way. That’s probably the most obvious.

A little less obvious, but one that Netflix really leads in, is polling its members. We have 6.7 million members, and we’re polling members all the time on such things as Web use, consumer interface on the site, on pricing, on title count. Just about anything that can touch you as a Netflix member is being polled right now. Overnight, we can literally poll 30,000 Netflix members at random, because it’s all done over the Internet. You might have a [inaudible] change on your user page that your next-door neighbor doesn’t have, because you’re part of a poll and you don’t even know it. It’s a new feature we put up, and we track how people use it: Do they like it? Do they rent more movies because of it? Do they stay longer as members because of it? So we’re always researching either directly through the site, or focus groups, and we do numerous focus groups every week – that is, out in the field.

We go to markets – it might be Columbus, Ohio, and it might be Las Vegas, Nevada, or it might be Stockton, California or any place in between. But we go to markets, and we get people in that are not members but do rent videos. You know, you do the traditional focus group – which you’ve probably seen – with the one-way mirror and all that, but we also do focus groups right in our own headquarters. Netflix is a company with about 400 salaried employees, and yet we look like a major international/multinational firm by the virtue that we have a focus-group research facility right in our headquarters. Major companies, like Procter & Gamble and General Foods have focus-group facilities right in their buildings, but Netflix with 400 salaried employees also does. So, we bring people in from the community, and we show them the site. And we say, “Test this out, and see how it feels.” So, people are on the Internet. We have a living room type of setup in one of our focus-group rooms. We have another direct-interview type of set up, so we’re always polling members and non-members.

The third thing we do is we analyze third parties. We spend a considerable amount of time in the blogosphere, reading media, watching consumer trends, going shopping. And we spend time in the marketplace because we also are consumers, and we want to have a better site experience. One of the blogs that we read with great frequency – several times a day – is Hacking Netflix. This is an independent blog. It’s written by a guy named Mike Kaltschnee, who knows more about Netflix than anybody other than a Netflix employee. He’s made it his life’s passion of writing about Netflix on this blog, and he gets tremendous consumer response from Netflix members to his blog. So we hear from him, and we hear from people who write to him as well. Then there are, of course, other blogs and other third-party media that cover Netflix that we spend a lot of time with.

So really, those three areas of direct consumer feedback from our members, from solicited and unsolicited feedback through focus groups and research and site testing, and the third is just being aware of what’s going on in third parties in the marketplace in general.

Aaron Strout: 
So, to keep your [Inaudible] with that last point you touched on, Steve. On the blog, Hacking Netflix, do you all actively participate or do you just sort of stay more in listening mode? Like, would any of your employees post on the Hacking Netflix blog?

Steve Swasey:
Well that’s a really good question because –

Aaron Strout: 
Or not a post, rather a comment, I should say.

Steve Swasey:
– That’s a very good question, because there’s an ethical discussion right now in the blogosphere about if you are blogging, are you doing it as a representative of your company or as an individual? What we do is when people blog, they tend to put their name on it, and you know it’s from Netflix. We don’t spend as much time responding to Hacking Netflix as we do to the specific issues that are brought up by Hacking Netflix. I personally have a very good relationship with Mike Kaltschnee, where we treat Mike as we would The Wall Street Journal or The New York Times or any of the other major media. We bring him into our office, and we give him interviews with our CEO and others. We give him site tours. We give him a lot of time, because he’s a bona fide journalist writing about Netflix, and that gives us great access to his blog.

We do have members of our staff who have their own blogs. Reed Hastings, the Netflix CEO, has Reed’s Blog, and he posts on that about things that matter to him as a CEO and the trends he sees in the marketplace. We also have a community blog that’s written by the head of our community, which is formally known as Friends, and that’s part of our outreach to members in the community. So, we do have our own internal blogs that are written. And they know they’re Netflix oriented and Netflix written, so there is complete transparency on that.

Aaron Strout: 
Well, that’s wonderful. I applaud you guys for doing that. Again, I’m personally a huge fan, and I love the involvement that you allow for both my co-viewers and through the different Friends functionality, but the ability for me to be able to link with some of my other friends –. You guys are doing wonderful things. It sounds like you’ve really got your eye on the ball in spite of some of the non-conventional things that you’re doing – unconventional things – like taking away e-mail response for customer service and putting back phone. It sounds crazy, but I love that concept – and the fact that you’re dropping prices and continually trying to get better. Really nice to see a company like yours doing a service for us, listening to the community in a number of different ways, and really participating in it. So, thank you for joining us today, Steve. I really appreciate it.

Steve Swasey:
Aaron, it was good to talk with you, and thanks for enjoying Netflix.

We appreciate you listening in to this series of the We Show podcasts. To find other podcasts like this, you can check out WeAreSmarter.org, Mzinga.com, and also iTunes under "We Are Smarter."

Thanks so much for joining us. We look forward to seeing you next week.