Netflix's Annual Shareholder Meeting (2009)

[Note: this 2009 post caused an uproar in the online community, leading to a small Facebook revolt and support from star Marlee Matlin. Within a few weeks, Netflix announced it would enable online captioning by 2010 (but didn't provide specific benchmarks). The real surprise? As of November 7, 2009, not a single mainstream media outlet had formally covered either the issue of online captioning or Netflix's response. Finally, on February 24, 2011, Netflix announced 80% of its streaming content would be captioned by the end of 2011. Thank you to everyone who supported the online captioning campaign.]

[Note: A major media outlet did eventually cover the issue of online captioning--a year later. See here for June 20, 2010 NYT story.]

Netflix, Inc. (NFLX) held its annual shareholder meeting yesterday at its headquarters in Los Gatos, California. The meeting lasted less than half an hour and around fifteen non-employees attended. As usual, only cookies, water, and soda were offered.

The meeting consisted of CEO and Founder Reed Hastings answering shareholder questions. There was no presentation.

I like Reed Hastings. He has great ideas on education reform, and he is smart enough to have caught the eye of Microsoft (MSFT), which placed him on its board of directors. When it comes to annual meetings, however, Mr. Hastings seems like he can't wait to get back to work. That's a laudable trait in a CEO, and most mathematicians (he majored in math) aren't known as overly social animals anyway.

Shareholders' comments were generally half-question, half-compliment. One shareholder praised Netflix's compensation factors, also known as "performance factors." (See 2009 proxy statement, pages 14-15: "to attract and retain outstanding performers, it must provide a challenging work environment. To this end, the Company strives to maintain a high-performance culture.")

Netflix also evaluates employee performance based on several factors, including judgment; innovation; impact; curiosity; communication; courage; honesty; selflessness; and passion. It's unusual for a company to openly tell shareholders that it bases compensation partly on goals like "honesty." Netflix rightfully deserves compliments for having a multi-faceted compensation analysis that includes an ethical component.

Another shareholder asked what the company was doing now that more players were entering the streaming video business. Mr. Hastings answered that Netflix "is always having to compete," and businesses like www.hulu.com were changing the competitive landscape. At the same time, he said, "It's a big landscape," and while there will be "more competition in the future," Netflix was continuing to add subscribers at a healthy rate. Mr. Hastings also said that the most competition came from cable and satellite companies.

Another shareholder asked what Netflix would look like in five to ten years. Mr. Hastings answered that he didn't have a crystal ball, but Netflix currently had millions of subscribers and he hoped to to keep increasing its customer base.

I asked two questions. Page 10 of Netflix's 10K states that Netflix had issues with Starz Play service:

Many of the [streaming video] licenses provide for the studios or distributor to withdraw content from our service relatively quickly...For example, in December 2008, certain content associated with our license from the Starz Play service was withdrawn on short notice.

I asked why Starz Play revoked its license in 2008. Mr. Hastings said he didn't know about that (perhaps he didn't understand my question) and said Netflix currently had a good relationship with Starz Play. When I later pointed him to the 10K, Mr. Hastings said he did not want to comment. He reiterated that Netflix currently has licenses for Starz Play. [Update: when I followed up on the Starz Play question, I read out loud the relevant section in the 10K to Mr. Hastings. He appeared to understand my question the second time and immediately said he had no comment.] I was a little stunned, because Mr. Hastings was not willing to answer a question about a publicly disclosed fact. I realize as a small shareholder, Mr. Hastings doesn't owe me answers on every question I ask, but the Starz Play revocation seemed like an important issue, and an issue that might impact the share price. Although I didn't say it, I was thinking, "If Netflix doesn't want to answer reasonable questions about its company, why did it go public?"

I then mentioned Netflix's failure to add captions/subtitles to its online streaming videos. Netflix's "instant play" option doesn't include captions, making its online video option unusable for many users. As a result of not offering captions, Netflix is alienating its hearing-impaired, deaf, and senior citizen customers. According to some estimates, there are 34 million hearing-impaired persons in the United States. One would think Netflix would think better than to alienate such a large customer base.

I asked what Netflix was doing to make its website and online video accessible to everyone. Mr. Hastings said other online streaming sites didn't offer captions, and mentioned hulu.com as one of them. He said as time progresses, captioning technology will become more widespread, and Netflix would then incorporate it into its own technology. He also said that customers can continue to receive DVDs through the mail, and most DVDs contained captions.

Unfortunately for Mr. Hastings, I use hulu.com to watch Simpsons episodes. Except for a few episodes, every Simpsons episode I've watched had captions. Obviously, the technology exists to make online video accessible to everyone, so I wasn't quite ready to let this topic pass. I gave Mr. Hastings another chance to explain how he would make his business accessible to everyone. I mentioned that hulu.com did indeed offer captions, and I said (paraphrased), "It sounds like you're not planning to do anything to add captions to your site. Am I correct in understanding that you don't plan on making your online videos accessible to the disabled?" Mr. Hastings said he would check out hulu.com, but essentially agreed that adding captions wasn't an active agenda item. Now, I don't want to go Kanye West on anyone, but it didn't feel like Mr. Hastings or Netflix cares about deaf people.

Mr. Hastings is making a poor business decision by not maximizing his site's accessibility. First, Netflix has already signed up the "low-hanging fruit." In order to keep growing and to justify its relatively high P/E, it will now have to maximize its customer outreach efforts. By not even trying to make online video accessible to the disabled, Netflix is losing goodwill and a large potential customer base.

Second, although Netflix wants to grow its online video business, it is subject to the whims of the studios and other content providers. Netflix doesn't have much leverage over the studios, who control their online content and may wonder why they should license content to Netflix. The December 2008 Starz Play incident shows just how vulnerable Netflix is to having its access unilaterally cut off. To encourage content providers to grant Netflix licenses on reasonable terms, Netflix needs to add something of value. Providing captions for online content may be one low-cost method of offering value to content providers. (I don't know exactly how much it would cost to create online video captions, but there are plenty of people in English-friendly countries who would be willing to do the work.)

Third, being insensitive to the disabled will harm Netflix's public image. I am surprised that Microsoft's good corporate citizenship in this area hasn't rubbed off on Mr. Hastings. Although Microsoft gets a lot of bad publicity, it is actually at the forefront when it comes to offering tools to assist the disabled. Here is a list of the awards it has received as a result of its work on behalf of the disabled. Here is one relating to the hearing-impaired community:

Microsoft was recognized among 12 companies and two educational institutions for "extraordinary efforts in promoting equal access to telecommunications and media for consumers who are deaf, hard-of-hearing, late-deafened or deaf-blind..." "TDI commends Microsoft for its special commitment and allocation of resources over the years to introduce and offer accessible and usable software applications for all Americans. With this technology, deaf and hard-of-hearing Americans can fulfill their potential as full, active participants in the general mainstream—regardless of differences in culture, language and communication."

Bet you didn't know about Microsoft's good reputation in the disabled community. That reputation has created lots of Microsoft supporters willing to speak up when others bash the company. In short, there is no need for Netflix to alienate an entire community, especially not one that contains millions of potential customers.

I understand that Mr. Hastings founded Netflix, controls much of the stock, and probably feels like he doesn't need to listen to anyone. At the same time, Netflix needs to more carefully manage its reputation so it maximizes its customer base. It already has many loyal fans and will probably keep growing (though its rate of growth may not be as high as some shareholders would like). Despite my criticism, I love Netflix and am a huge fan of the company. The algorithm that recommends movies has pointed me to many wonderful films I might have never found on my own, like Germany's Ali: Fear Eats the Soul, China's Shower, and Iran's Children of Heaven.

Mr. Hastings did shake my hand after the meeting and told me he wished he had better answers for me. He gets points for that gesture. I hope he will actually do something about Netflix's inaccessible features. In the meantime, I will not be adding to my small position in the stock. Absent a buyout, perhaps from Microsoft, Netflix looks fairly valued to me.

Bonus: I also blogged about last year's annual meeting here, calling it one of the strangest meetings I've attended.

Disclosure: I own an insignificant number of Netflix (NFLX) shares.

Update on June 1, 2009: unfortunately, this doesn't apply to online video, but if you have a complaint about a television show not being captioned, the following link shows you how to make an effective complaint:

http://www.hearinglossweb.com/Issues/Access/Captioning/Television/file.htm

Update on June 13, 2009: Netflix finally issued a statement re: captioning:

Captioning is in our development plans but is about a year away...I would expect to deliver subtitles or captions to Silverlight clients sometime in 2010...

It appears Netflix has changed its tune somewhat, but if you read the comments on the Netflix post, many readers are questioning Netflix's explanations and statements.

As of today, the Facebook group, "Netflix Watch-Instantly Needs Closed Captions!" had 983 members--most of whom joined after my review of Netflix's annual meeting was published.

Update on June 18, 2009: Here is my follow-up post to this story. The pro-captioning Facebook group continues to grow--"Netflix Watch" has 1,129 members.

Update on August 29, 2009: "Netflix Watch" now has over 2,000 members.

Update on April 18, 2010: Netflix has finally captioned some online videos, but only 100 so far. More here. Looking at hulu.com's options, which include online captioning and transcripts, I am still not happy with NFLX's slow progress. I guess it's a start, and better than nothing. Thanks to everyone who helped NFLX realize the importance of online captioning.

Sotomayor and Judicial Realism

1. Next time people want to place their faith in a judge, remember this name: Judge Samuel Kent. He was a judge in the Southern District of Texas who was sentenced to almost three years in prison for lying about his assaults on two women who worked for him. (See WSJ, 5/28/09, A5). Judge Kent was a federal judge--which confers a lifetime appointment. Guess who appointed him to the bench? President George Bush the First.

2. And now let's move on to Judge Sotomayor. I don't know her. I don't really care, because she'll be replacing a judge who seems to rule in a similar fashion. I'll get interested when someone replaces Alito, Roberts, Kennedy, Thomas, or Scalia. The idea, though, that she's unqualified to be a Supreme Court Justice is ludicrous. She made a comment indicating that a Latina female would have a different perspective than a white male. I heard Justice Sandra Day O'Connor--a conservative Reagan appointee--talk about the exact same thing in a Santa Clara Law school lecture many years ago (around 2002).

Justice O'Connor was talking about the Gail Atwater case, where a small-town cop hauled a Texas soccer mom to jail because her kids weren't wearing seatbelts. Justice O'Connor dissented in that opinion. See Atwater v. Lago Vista, (2001). Every single justice in the majority opinion was male. Every single female justice dissented. Justice O'Connor mentioned the gender disparity in her speech with a sigh and a shaking of her head. I interpreted her body language to mean that if more women were involved, the case would have been decided differently.

It should go without saying that a person's background will influence his or her personal opinions. For example, growing up female will present someone with a different--not better, not worse--perspective than growing up male. Does a person's ethnicity or gender mean that s/he will not be impartial when applying the law? Of course not.

Why, then, should we care about diversity on the bench? First, judges hold so much power over Americans--a non-homogeneous group of people--that diversity on the bench is a laudable goal, as long as excellence is not sacrificed. Second, most of us would probably recoil at the idea of a Supreme Court that is 100% African-American, 100% homosexual, 100% Hispanic, or 100% Muslim--why is that the case, if someone's background is irrelevant? I think it's because a lack of diversity indicates that the system for selecting powerful people is flawed. Assuming there are many people qualified to be on the Supreme Court, we should be able to draw from a wide pool of applicants, not just people from one particular ethnicity or gender.

Here, Judge Sotomayor's most relevant characteristic--the diversity of her work experience--is outstanding. She has been a criminal prosecutor (government lawyer); a civil litigator (private lawyer); and even a solo practitioner.

In any case, if Judge Sotomayor is a radical judicial activist, then so is Justice O'Connor.

Battle of the Sexes

Classic line, from Elia Kazan's A Face in the Crowd (1957): 

You cold-fish respectable girls...inside, you crave the same thing as the rest of 'em. 

The single most regressive piece of American culture is our attitude towards sex. Because we can't address it in an adult fashion, Americans only seem to accept sex when it's watered or dumbed down. Even in Hollywood--hardly a bedrock of decency or morality--Paris Hilton gets attacked by comedians for being sexually promiscuous. Meanwhile, to paraphrase anthropologist Helen Fisher, "If you think men are more promiscuous than women, who do think the men are sleeping with?" (Another one of her gems is, "We were built for reproduction, not happiness.") 

 I am not sure where I was going with this, except to say that gender stereotypes are as alive as ever. We've progressed from burning witches at the stake, but until women fully harness their sexual power by becoming comfortable with their bodies, it seems they will never attain full power in America. That's a shame. At the end of the day, although men and women are surely different, it makes no sense to use a naturally connecting activity to drive them apart. 

A memorable exchange from Kazan's film: 

 -For a mild man, you sound vicious. 

 -Didn't you know? All mild men are vicious. They hate themselves for being mild and hate the extroverts whose violence seems to have an attraction for nice girls who should know better.

Helen Fisher on Love

California Supreme Court on Prop 8

There's been a lot of confusion about Prop 8. The California Supreme Court held that the amendment (i.e., Prop 8, which defines marriage as between a man and a woman) does not prevent gay persons from actually raising kids, choosing the partner of their choice, or "entering into an officially recognized and protected family relationship with the person of one's choice." As a result, Prop 8 does not interfere with "substantive" rights and may be lawfully upheld.

The Court, through Justice George, contends that Prop 8 is a semantics issue, because all it does is prevent a particular word, "marriage," from attaching to a particular relationship. Since there's no "inalienable" right to call a relationship by any particular word, the Court reasons that Prop 8 does not infringe upon anyone's state Constitutional rights.

In addition, California has passed other laws protecting civil unions and guaranteeing similar rights to gay persons, so there's little evidence of widespread state discrimination against gay persons on the issue of fundamental rights. [Justice Moreno disagrees, saying the Court already found gay persons to be a suspect class previously, which requires them to use a "strict scrutiny" analysis. A "strict scrutiny" analysis means the Court has to strike down a law unless it is necessary to achieve an end result.]

Justice Werdegar concurs in the opinion, but makes a point of saying that laws actually discriminating on the basis of sexual orientation must "survive the highest level of scrutiny" (she seems to agree with Justice Moreno in spirit). Although she doesn't quite say it, Justice Werdegar apparently doesn't think this particular amendment actually discriminates on the basis of sexual orientation because civil unions provide the same protections as opposite-sex marriage. [She really should have written the opinion--she has a more balanced writing style than Justice George, who is thorough, but pedantic.]

Justice Moreno, the only dissenter, says that once you enact a law, you must treat everyone equally under it. He says that the whole point of the state Constitution is to protect all, not some, individuals from arbitrary government power. Once you overturn that framework, you alter the state Constitution, and the Court has the power to prevent a fundamental alteration to the Constitution. He starts with a great quote from a recent Iowa case:

The absolute equality of all persons before the law [is] the very foundation principle of our government. -- Varnum v. Brien (Iowa 2009)


So it comes down to this: is being able to call your relationship a "marriage" an "inalienable right"? The Court seems to say that "a rose by any other name would smell as sweet."

Personally, I don't think courts can change anyone's personal beliefs, so I am not outraged by the opinion. If anything, I hope this shows the public that the law is generally toothless when it comes to advancing progressive civil liberties. Why is that? Well, the Court decided the issue correctly, at least from a legal standpoint. All but one Justice agreed, which shows you this was an "easy" case to decide. That's just my point: the law isn't designed to change anything--it's designed to provide stability and predictability--the exact opposite of change. Of course, it is also supposed to protect minorities, but here, the Court saw the presence of civil unions as sufficient legal protection. Ironically, if the state had failed to enact civil unions, this case might/should have gone the other way.

The real problem is that the entire institution of marriage is failing. Instead of trying to fix the relatively high divorce rate, marriage proponents have fixated on strengthening the marriage "club" by excluding others from it. Exclusivity is indeed one way of adding value--anyone who belongs to a country club knows that--but it's certainly not the best way. The fact that pro-marriage types have to resort to Prop 8 shows that marriage itself is failing. As a result, this decision isn't a victory for marriage--it's a sign that marriage is so frayed, so weak, that it now relies on negative traits--i.e., excluding others--not positive ones, to bolster itself.

People keep asking how this could happen in California when supposedly more conservative Iowa allows greater protection for same-sex couples. I bet Iowans are more secure in their marriages than Californians and don't mind other people getting married. Gay marriage is a "threat" if you think your own marriage is falling apart and need an external boost to prop it up. On the other hand, if your marriage is fine, and your friends' marriages are doing well, you probably don't feel the need to butt your nose in anyone else's business. Iowans--who basically gave President Obama the Democratic presidential nomination and therefore his eventual election--are probably on the right side of history again.

I interpret the court's decision as a narrow one. The Court held that there is no "inalienable" right under the state Constitution for anyone--opposite-sex or same-sex--to call themselves "married." There is, however, a fundamental right to choose your own partner and raise the kids of your choice. In some ways, this decision might help gay persons get better access to adoption agencies, which I've heard discriminate against gay couples. There is another silver lining: the Court ruled that the 18,000 gay couples who got married before Prop 8 was enacted are still "married" because taking away their marriage would violate due process.

Update: here is Family Code 297.5, which establishes equality between same-sex and opposite-sex unions:

297.5. (a) Registered domestic partners shall have the same rights, protections, and benefits, and shall be subject to the same responsibilities, obligations, and duties under law, whether they derive from statutes, administrative regulations, court rules, government policies, common law, or any other provisions or sources of law, as are granted to and imposed upon spouses.

The California Court's ruling applies only within the state of California. A state supreme court cannot decide federal issues or issues relating to other states' substantive rights.

All of the comments I've heard against the decision--immigration, tax issues, and cross-border rights--relate to federal issues that are unreachable by a state supreme court. Again, state courts cannot interfere or decide federally pre-empted issues. Why not? Because then Californians might be subject to what Mississippi courts decide, and vice-versa. That potential for conflict is why we have a federal government to step in when these kinds of conflicts occur. Unfortunately, our federal legislative body, Congress, is not progressive when it comes to same-sex civil unions. As a result, the issue of same-sex civil unions will probably be resolved by the U.S. Supreme Court. Once you understand the limits of state courts, you should understand that California's state supreme Court decided the case properly and rendered a decision that is pro-gay-rights within the boundaries of its jurisdiction.

How could the United States Supreme Court protect same-sex couples and their ability to enter into state-sanctioned unions? The answer is that the Court must first determine whether gay persons are a protected class, thereby requiring a "strict scrutiny" analysis. The Court might use the passage of the "Defense of Marriage Act" to show governmental animus and bias against gay persons, but that might be a stretch, given that President Clinton signed the bill.

Still, as Justice Moreno points out, there is much supporting evidence that allows a finding of a protected class, such as "Don't Ask, Don't Tell" (i.e., military service discrimination); use of sexual-orientation-based epithets by government officials (see criticism of Barney Frank and the now-discredited belief that gay government employees posed security risks); previous criminalization of gay behavior; and horrific hate crimes committed against gay persons, including but not limited to Matthew Shepard.

There may be a more unorthodox way for the United States Supreme Court to decide these issues. The U.S. Supreme Court could rely on existing case law, which establishes that all persons have a Constitutional right to privacy. Following that principle, the government has no business invading the privacy of persons who wish to marry. Thus, to the extent that any law requires the government to extend a right based on analyzing an individual's sexual relations, then the government is violating an individual's privacy rights. Therefore, if the government chooses to be involved in granting rights based on marriage, it must extend such rights without regard to sexual behavior--which includes sexual orientation.

If I was a betting man, I'd bet that the Supreme Court would prefer to rely on privacy rights to render a decision rather than creating a new protected class. I don't think the Supreme Court would use my exact logic above, but it's important to note that Justice Kennedy, the swing vote, was the writer of the Lawrence v. Texas (2003) opinion. Here is the opening paragraph of that opinion:

Liberty protects the person from unwarranted government intrusions into a dwelling or other private places. In our tradition the State is not omnipresent in the home. And there are other spheres of our lives and existence, outside the home, where the State should not be a dominant presence. Freedom extends beyond spatial bounds. Liberty presumes an autonomy of self that includes freedom of thought, belief, expression, and certain intimate conduct. The instant case involves liberty of the person both in its spatial and more transcendent dimensions. [Emphasis added.]

I am hopeful that the U.S. Supreme Court will decide these issues correctly. But insofar as the California Supreme Court is concerned, it made a legally-defensible decision within the boundaries of its limited jurisdiction.

Update 2: here are some comments I posted on Facebook on this issue:

Do you believe people can invent any term to define a relationship and then force that definition on others? If so, then at what point may a Court step in and say that a particular relationship is invalid and undeserving of tax breaks, the ability to adopt, the ability to inherit money, etc.? The Court's answer is that it must step in when discrimination against "substantive" rights occurs between opposite-sex unions and same-sex unions. Here, in California, the substantive rights--all the ones I just mentioned above--of gay persons are the exact same as non-gay persons because of the state's option of civil unions. The Court had to draw the line somewhere and seems to have chosen a legally-defensible place to draw it by choosing substance over form...

All the court did was rule that the majority of the people can choose to call a particular relationship a "marriage," as long as the state doesn't create "substantive" differences in rights between marriages and civil unions. Thus, as long as "civil unions" confer the same substantive rights as "marriages," people can choose to call one of them a "marriage." In time, most scholars will see the decision as pro-gay rights, b/c the Court strives to ensure that "substantive" rights are protected for all persons, including gay persons...

I agree it would be "separate but equal," except that the Court did not deal with any ongoing government services like schools, water access, or transportation. The Court talked about one word, "marriage." It did not deny anyone's right to have a ceremony, to love a particular person, or to raise kids with that person. The Court saw the issue as pure semantics, i.e., you say tomato (marriage), we say tomatoe (civil unions).

It's also a huge leap--and almost insulting to the Civil Rights movement--to compare Jim Crow's lynchings, police dogs, and separate schools to the current status of gay life in California. I am being very deliberate when I say "California," and not "Wyoming," "Mississippi," or "Maine." It makes me sad to say this, but perhaps the Court and California voters need to see more Matthew Shepards and Charles Howards before they see the denial of gay marriage as a moral issue deserving of legal redress rather than a purely semantic issue.

Funny: Ellen's Commencement Speech

Ellen has given many commencement speeches, and the consistency varies greatly. In my opinion, her 2009 speech at Tulane is her best one. 

More here: https://youtu.be/0e8ToRVOtRo 

[FYI: This post was changed because the original link no longer worked.] 

Random Thought: Kazan's Face in the Crowd

I'm going to start calling Rush Limbaugh "Lonesome Rhodes." It's amazing how similar he is to the character in the 1957 Kazan film, A Face in the Crowd.

In Kazan's film, a hillbilly named Rhodes rises up and becomes the voice of the common man in America. Later on, drunk on his own power, he loses his audience.