Netflix looks for new friends on Facebook

Deals Netflix obviously wasn’t kidding when it announced earlier this year that a “major” integration with Facebook was in the works. Last Thursday, the two companies announced the Netflix CEO Reed Hastings will join the Facebook board of directors, about as close an integration as you can get without a formal merger.

Oddly, the announcement didn’t actually tell us much about how Netflix actually plans to use Facebook or what the integration will consist of. Much of the speculation triggered by the announcement focused on potential operational aspects of the integration, most of which could be achieved without tying the companies together at the board level. Presumably, then, there are other, more strategic reasons why Facebook’s CEO Mark Zuckerberg would want Hastings on his board, and why Hastings would want the seat.

Here are a few thoughts:

Facebook: Facebook’s motives are the more straightforward. Reed Hastings in a serial entrepreneur who also understands bankers, Wall Street and similar perils. He sold his first company, Pure Software, in 1997 for $750 million. He then took some of that money and started Netflix, which he took public in 2002 and has built it into a Wall Street darling. With Facebook preparing for its own, inevitable IPO, Reed Hastings’ will be a very valuable brain for Zuckerberg to pick.

Netflix has also done a good job at maintaining its nimble, entrepreneurial culture even as its market cap grew. While Netflix’s transition from a company that mails out DVDs to one that streams movies over the Internet now seems like a no-brainer, those are very different businesses operationally. Not may large companies manage that kind of operational transition as smoothly as Netflix appears to have done. That, too, will be very valuable experience for Facebook to draw on, given the quicksilver changes inherent to the digital platform business and the high probability that it will have to navigate shifting business models over time.

Finally, Hastings knows something about running a subscription business that could also be helpful to Facebook someday.

Netflix: The upside for Netflix and Hastings is less obvious (apart from a piece of what is likely to be a ginormous IPO) but potentially more far-reaching. At a minimum, Hastings gets a front-row seat onto Facebook’s plans for establishing itself as a hub for movies, music and other types of media. Given Facebook’s potential leverage, that’s likely to prove very valuable intelligence.

The biggest benefit to Netflix come be overseas, however. Netflix’s biggest strategic challenge right now is to make sure its subscriber base continues to grow faster than its content costs. Inevitably, much of that subscriber growth will have to come outside the U.S., where Netflix will eventually see its growth curve flatten out.

As Hastings explained at the D9 conference earlier this month (starting around the 12:30 mark in the video below) Netflix faces a challenge in entering other countries because it typically has no previous brand presence in them. Unlike potential competitors like YouTube, which was able to build a global brand through user-generated content, Netflix has no presence where it doesn’t have content rights. It has to build its brand territory by territory, as it’s able to acquire content rights for those territories and begins to market itself. Unlike in the U.S., it won’t be starting its streaming business in those territories from a foundation of millions of DVD subscribers. It starts from scratch with each new territory it enters.

That’s an expensive and time-consuming process and time is not Netflix’s friend. It needs to grow its subscriber base relatively quickly.

One advantage it will have as it expands internationally is existing relationships with global CE companies, most of which are already embedding the Netflix streaming app in the devices they sell in the U.S. and Canada. Adding the app to the units they sell outside the U.S. should be a fairly straightforward proposition (presumably the deals are already in place), giving Netflix a leg up on subscriber acquisition.

Riding Facebook’s coattails into other territories, however, could be even more powerful. Facebook is already a powerful global Internet brand, with more than 700 million users worldwide. Having insight into where Facebook is expanding its reach as a media hub — as it currently is in France — will help Netflix target its own expansion plans for maximum impact in the minimum possible time.

That could certainly be worth attending a few more board meetings.