Reed Hastings, Founder and CEO of Netflix

This is a partial transcript from Your World with Neil Cavuto, October 27, 2003, that was edited for clarity.

Watch Your World w/Cavuto weekdays at 4 p.m. and 1 a.m. ET.

BRENDA BUTTNER, GUEST HOST: From store sales to online sales, my next guest knows all too well about upbeat customers as head of Netflix, one of the largest on-line DVD (search) movie-rental services. The California-based company lets customers rent DVDs through the mail and keep them as long as they want.

But does NetFlix have the winning ticket to beat out their competitors and eventually put them out of business? Let’s ask Reed Hastings, founder and CEO of NetFlix. Thanks so much for joining us.

REED HASTINGS, FOUNDER & CEO, NETFLIX (NFLX): Well, Brenda, you ask a tough question there. Since our largest competitor is Wal-Mart, I don’t think it’s very likely that we’ll put them out of business.

BUTTNER: Well, I don’t think so, but they, there you have to actually go and buy the DVD and go home. But you also have Blockbuster (BBI) and you’ve been making inroads into market share there.

HASTINGS: That’s right. We’ll we’ve been very successful. We’ve been growing extremely steadily over the last several years, the last three quarters. We’ve been growing 75 percent on a year-over-year basis, and it’s really driven by word of mouth. Consumers love our service because it’s online, it’s easy, it’s by mail, there’s no due dates, no late fees.

BUTTNER: It is 20 bucks a month, though.

HASTINGS: It is.

BUTTNER: But you can rent as many DVDs as you want, and then you get free postage envelope in the mail, and you use it for as long as you want.

HASTINGS: Not only that. We have incredible selection, 15,000 DVD movies to choose from, and any consumer can try NetFlix for free, rent a half-dozen movies on us to see how the online system works. And nine out of 10 people who try it for free become a paid subscriber.

BUTTNER: The thing that strikes me about this, though, is you’ve got a great idea, but there really are very small barriers to entry. Anybody can get together a library of DVDs and do exactly what you’re doing. What’s going to stop them from doing that?

HASTINGS: Well, it’s one of the cases where the barriers to entry may appear small, but the barriers to success are quite large. Now, for example, Walmart.com and Blockbuster both entered the market over a year ago, and, in the intervening year, we’ve continued to grow, we’ve raised our revenue guidance twice, and it’s, actually, very hard to get critical mass for our competitors because we’re so known.

We pioneered the category. And if you think about the Internet generally, I mean a lot of people made or lost a lot of money, but it wasn’t because of competition. That just didn’t drive the valuation for Yahoo! (YHOO) or eBay (EBAY) or Amazon (AMZN).

BUTTNER: Right.

HASTINGS: It was the business model and is it scalable. But it just wasn’t competition.

BUTTNER: Right. All right. Well, we’ll try it. Thanks so much.

HASTINGS: Thank you.

BUTTNER: Reed Hastings with NetFlix.

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