Reed Hastings - Building Netflix - [Invest Like the Best, EP.453]

0:02 And welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper. Check out Colossus, our quarterly publication with in-depth profiles of the people shaping business and investing. You can find Colossus along with all of our podcasts at Colossus.com. Patrick O'Shaughnessy is the CEO of Passitive Sum.

0:29 All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, Visit PSUM dot VC Um The most interesting thing about studying Netflix and talking to Reed is that it is as a business probably the single most relatable example since we all watch Netflix. of two really simple ideas that everyone talks about but are very hard to do in practice. The first

1:09 Is this notion of finding a simple idea and taking it extraordinarily seriously. Netflix has effectively been scaling up. its core original model since its inception. Reed talks in our conversation about how even the DVDs were nothing but a stepstone towards the streaming future that they envisioned at the very outset of the company's founding in nineteen ninety seven. And simply letting that idea play out over decades without getting distracted. And how powerful that can be. And the second is this notion of talent density. This is a term that now gets thrown around every major company.

1:41 And really it was Reed and Netflix that pioneered this concept. Of what can happen if you set and keep a talent bar exceptionally high. We get into why that's difficult, what Netflix did to make that talent density bar work and sustain itself over decades. This conversation really is an ode to those two simple concepts. And of course, in this case, it's fun to learn about because it's something that we all watch every day. I wanna go back to your first business and the sort of origin story of this notion of talent density that you become very famous for. We'll talk about talent density for sure. It's one of these ideas that's now ubiquitous in most technology companies. I think you were sort of the originator of the concept.

2:22 But I want to hear how you came to learn that lesson in the first place, presuming that your very first team wasn't just incredibly talent dense and perfect. What was the early origin story of that concept? So I founded Pure Software in nineteen ninety. And grew kind of typical great software company doubling. I wasn't careful about it, and I would say talent density declined.

2:46 That company we went public in ninety five, got acquired in ninety seven. And when I analyze looking back, what happened, one of the major things was uh declining talent density and Then with declining talent density, you need a bunch of rules to protect against the mistakes. And that only further drives out the high caliber people. And so it was through that experience that I realized

3:12 Okay, I've tried to run software like a manufacturing plant and reducing error. And putting in process and then that doesn't get high productivity or high talent. And we should manage Software much more artisanally. with inspiration rather than management. So typically we humans, we value being nice and we value loyalty.

3:36 Yet in the workplace that's attention. Because Being nice is in contrast to our intention with being honest. I generally like people that are nice. And yet I want you in the workplace to be honest with each other.

3:50 So that we're more productive. So we have to find a way to give each other permission. To not be conventionally nice. And instead to be focused on the team's success. Which is being very direct. Similarly with loyalty.

4:04 We've come to see loyalty, which is something in your family, like you would never fire your brother if you were tight on money. Okay. You would share and and that's what we admire. And yet in a company, what we do is we lay people off. And so this whole idea that a company is a family It's unintentional, but it just derives from all the structures of society were family. All companies used to be family companies and then corporations have grown more recently.

4:35 All countries used to be family countries and kingdoms. And so basically family was the deep organizing unit. So it's natural that that spills in. To how we think about an organization. But the contrast is a professional sports team. And that's an admired model.

4:53 It's really focused on achievement and everyone understands that you change players as you need to try to win the championship. And we all got to fight every year to keep our position. Because if we can upgrade we must. to achieve the winning of the championship. Which is producing a great company.

5:13 How do you protect against The natural way that companies seem to bleed down towards lower talent density over time. Like there seem to be very few organizations that get it high and then keep it at that same level. Especially with scale. What are the ways that you learn to keep talent density as high as possible as the company grew so big?

5:33 Well, as the companies grow. You may be able to pay people more. So That will help if you think of the sports team in the biggest markets. They can afford the highest compensation.

5:44 And like the Yankees or the LA Dodgers, they often have the best players. It's not uh direct one to one on how much you spend and quality, but there is a strong correlation. I think the second thing you can do is continue to really evangelize the benefits of talent density over like total quantity. So that more and more of your leaders get adept.

6:07 at managing for density. I would love to talk about each stage of the funnel to creating talent testing in a business, starting with how you found people in the first place, what the most reliable ways were of finding people. And then also how you evaluated them. And then I'm going to talk about further down the funnel, but starting just with like top of funnel.

6:25 What were the most effective ways of finding people that had the potential to be extremely talented inside of one of your businesses? I've come to look at it like keeping a pretty broad funnel. And hiring a lot of people and then over the first year you really get to know them and you can figure out what you want to do. Do you want to keep them or not? Other people have a view like very hard to get in.

6:48 But then you can stay no matter what. And I I think that's been more of the Google orientation as an example. And it comes from their graduate school background, right? It's really hard to get into Stanford graduate school. And then it's hard to get pushed out too. And so it's just natural that they mapped themselves onto that model. And there's some benefits of that.

7:09 But that's a different model and mine is more have relatively open doors. We'll interview broadly and try to select what we think's the best person. It stands for reason that maybe your one year attrition rate was higher than say Google's or somebody else's. Quite a bit, yeah. What was it? Like would do do remember. That's pretty high. What would you tell people on the way in or tell the organization about that rate itself to make sure it didn't spook people that lots of people would leave?

7:36 Well, it did spook people and so it's only fair to let them know what they're getting into. We would say we're not gonna guarantee you a lot, but we'll guarantee that it will always surround you with great people and have you work on hard problems. That was our core that you may not be happy, the hours may be long, you know, the food may be okay, but like the essence of what we can do at work. is hard problems with great people. Think of it if your primary orientation is around job security.

8:07 And you're willing to put up with working with the uneven levels of talent. then there are other companies that are a better fit. And there's some benefits of that, you know, which is you you have stability in your life. If you're more of a performance junkie and the thing that makes you vibe the most is working around incredibly talented people and running fast and loose with great teammates. Then you're willing to put up with the job in security. Nobody likes it, but you're willing to put up with it.

8:36 to get the performance density. You said fast and loose. Can you say more about loose? If you overmanage, for example, a tight process or specific hours that you have to be in the office or a wide variety of things. You filter out Performance and creativity.

8:54 And the looser that you can run, the more creative that the organization will be. So we talk about it as managing on the edge of chaos. You don't actually want to fall into chaos. Okay. In chaos, the product barely gets released. It's full of bugs. People are upset. Payroll's not made. Lots of bad things happen. But it's getting us close to that edge of chaos where there's last minute saves and a lot of dynamism.

9:22 as you can possibly tolerate as opposed to say a semiconductor factory, which is trying to reduce variation and reduce error. to get rid of variants. If you're gonna be a creative organization You want to be high variance.

9:38 High creativity. And again, managing on the edge of chaos. I'm curious with the twenty percent. attrition rate. What you learned about Letting people go well and the right way. How did you get really good at that specific part of the life cycle?

9:54 Well I think there's two parts to it. to create the competence throughout the company. One is to release the moral thing. Most managers They're people managers. They like people. They don't want to hurt people.

10:06 So it's very difficult for them. And so one of the best things is to do large severance packages. Like four to nine months of Salary. And so it feels expensive at first, but

10:18 One is it makes the person who's let go feel a little bit better. 'Cause they've got a bunch of money in their pocket. Two, it helps the manager do their job. Because then they don't feel as bad in letting the person go. And then, you know, it just sets up a much better mutual feeling.

10:38 Third on the terminations is setting a context where it's not a moral issue. You didn't fail. It's just like a professional sports player. We think we can get someone better here. Okay, so it's a pity for the person. But it's seen as natural as opposed to like a failure.

10:55 So typically I would say something like Hey, I see, Patrick, you're working really hard. You're trying. I'm so sorry to tell you that Honestly, if you quit. I wouldn't try to change your mind to stay. The reason I wouldn't change your mind this day is I think I could get someone in your role.

11:12 They could do what you're doing plus even more, and here's why. The way the company is set up is if I wouldn't work to keep you. I'm supposed to let you go. In that way, we're sort of executing on an agreed upon framework, that whole keeper test framework. How did the keepers test literally work? Like how was it rolled out across the company? Well, it was always there that, you know, in the original slide deck

11:37 Adequate performance. Gets a generous severance package. So it's really just starting up front. The test that we encourage people to use is If someone were quitting, would you try to get them to stay to keep them? Because that turns out to be a good test relative to, you know, all the relief we sometimes feel.

11:56 When someone not great moves on. Was there an an episode in Netflix's history that you can remember where you were on the edge of chaos and it either did or very nearly cost you? Or dearly. During the Netflix twenty five years There's a couple small things that we did wrong and one big one being the quickster separation of DVD and streaming.

12:18 Maybe taking the quickster example, what is it like to see high talent density operate against Something like that. Like I'm just curious what it felt like to watch that happen. So um quick start for your listeners was a sad episode at uh twenty eleven. Where I became convinced we really had to go all in on streaming and drop D V D.

12:37 and put D V D in its own company that would drift along and free ourselves from that. Unfortunately, most of the customers were mostly using DVDs. Disagree. So yeah. Uh they were still uh mailed me the discs. And so they didn't like it, lots of cancellations, stock drop by seventy five percent. So it was a tough time. And ultimately it's the right thing to have separated DVD and streaming, but we did it too fast. The big analysis of it afterwards was lots of the executives thought that it was very problematic.

13:11 But they kinda said to themselves, Gee, Reed's made Eighteen decisions. right before, so you know, I'm probably wrong and Reed's probably right. So they kind of suppressed their own significant doubts.

13:24 And what we realized is if they all knew of each other's doubts, they would have been much more likely to weigh in. to probably just have us do it slower. We instituted a much more collective information process on Decisions going forward. Where everybody weighed in ten to negative ten.

13:43 on decisions and it's all in a big shark so everyone sees what everyone else thinks. So that way if we had had that decision process in place. Then I think I may well have thought, Well, these are all fantastic people and they're all horrified at this idea. So I may be right, but let's at least go a little bit more gently to figure out that and we wouldn't have had as deep a hole.

14:06 If you think about all the value creation that you've been A part of or the leader responsible for? Was most of that the result of a fairly non consensus Idea. 'Cause that seems like a consensus process, or at least if not decision by consensus, at least being aware of what the consensus is.

14:22 I'm curious about that tension there. It seems like Very often non consensus is where the value comes from. Is that generally true in in your personal history of decisions that you made that created most of the value? Well, I think you wanna be super careful here,'cause this is the source of much value. You want to be totally independent in your thinking.

14:41 And not consensus oriented at all. But you want to know what other people are thinking. Otherwise you're you know, fly blind. So I think there's a high value on information gathering opinions. But they're not averaging them. We would never do that. We were very clear that the concept was the informed captain.

15:03 So we wanted to make it like the captain of a ship. Okay, the captain of the ship makes the decisions. But It's good for them to collect a lot of information. And so we were very strong on no committees.

15:15 individuals make decisions, but we want them to be informed about that decision. And then it's up to them to make it. I'm so interested in the bucket of seems like a bad idea, but turns out to be a good idea because there's just less competition if it seems bad. What has been your process of I fall in love with ideas easily.

15:37 Like I'll see some combination or insight. The original one was that DVD, which was just coming out when Netflix started. was very lightweight.

15:48 And this was coming out of the AOL mailing CDs to everyone to install AOL on uh CD ROM. I was kind of like pretty familiar with mailing'cause I've gotten tons of these just through the mail. DVD for movies was just replacing VHS or just starting. So I kinda like clicked on that.

16:08 And then the classic computer networking thought experiment you do is what's the bandwidth of a FedEx of a tape through the mail. And it turns out you calculate it and it's like terabits per second at low cost. To send a backup tape by FedEx. So you start thinking about networks a little bit differently. So all those combinations made me think of DVD by mail and

16:32 as an extremely efficient digital distribution network. That some day the internet would be faster than and cheaper than and lower latency than So I never thought I love the mail business. I thought I love network business to deliver entertainment.

16:49 So that was an example and then The contrarian part of it was when we were fundraising in nineteen ninety seven, ninety eight, ninety nine. Everyone was excited by internet delivery and I'm like, but it's not even close. But didn't matter. They were excited about it. And so it was very we were contrarian.

17:08 And we had a contrarian thesis that we could build a business with DVD. And then transition it to streaming. And it's precisely because of that contrarian thesis that we didn't have much competition in that. Because it worked, we created great value. When did streaming first enter your mind as like clearly this is the place that

17:27 We're gonna have to ultimately go. Oh, that was from the beginning. That's why we named the company Netflix's Internet Movies. And so it was it was really just about managing the transition, even from day one designing the efficient system for DVDs was just a notch on the timeline getting to streaming. Correct. It was one digital distribution network and then eventually we would

17:46 Replace it with another. Yeah, we knew that would be a challenge, but we knew the best way to be successful at it was to get big on D V D. And so that became for the first decade, that's all we worked on. One of the other really cool things about your background is that for a long time you were on the boards of I think Facebook and Microsoft. I think are on the Anthropic board and the Bloomberg board. So you've had this sort of, of course, Netflix itself at the center of technology.

18:07 You've had this very cool three sixty view of Probably the most interesting era of technology development ever. I'm curious from those seats. what the technology landscape to you today. Like what are the key considerations, things that you have your attention on that seem the most important to you?

18:25 From those vantage points. First of all, um, because of exponential phenomena, it's always the coolest time ever to be in computer science. In the nineteen eighties, I thought, Oh my God, it's somebody better than the nineteen sixties. It will always be true. It'll always be true. I would say as a CEO of Netflix, I learned so much being on the boards of Microsoft and Facebook. They're quite different businesses.

18:48 But they made very interesting trade offs the way they thought about things. I mean, both of them were very long term oriented and what they thought they were willing to lose money in certain new areas for a decade. What I loved about looking at Facebook's business was ad supported and everything they did that was on the core, like Instagram worked incredibly well. And when they tried to do crypto or when they tried to do other things that were not big as the board of businesses. It didn't work well.

19:16 And so that's an example of companies get good at something and then if you can add to the core mechanism. That's great. Rather than go off to new fields all the time. That helps a lot. So we've always wanted to add content to the Netflix subscription to make it more and more useful. more and more enjoyable but kinda keep it like one big model as opposed to also do theatrical movies, or you know, also do something else as a way

19:42 to expand revenue. Trying to find simple large models that if they work. you can continue to expand and expand on the kind of core monetization engine that you've already got. Or if you look at Microsoft's case, you know, it's building high scale software. And then I'm on the board of Bloomberg, which is owned by my Bloomberg. It's uh trade stations of Wall Street and uh media around that.

20:06 And he's been incredible at kind of this long term orientation too. having this intimate relationship with the customers like a becoming a trusted utility. For the industry. That's been very powerful. Big motes for that business.

20:21 That are really customer loyalty that He's been serving m multiple dimensions for a long time. And then Anthropic, I've only been on the board for a year and it's a a wild story'cause you know, it's growing so fast. What did you learn from Mark?

20:36 You mentioned a little bit about what you learned from Facebook, but what did you learn from him specifically? Super committed, like when you look at the metaverse and uh convinced that there's gonna be something beyond the phones. Maybe that'll be a classes format. And not wanting to be dependent on it, wanting to be really the invention of that layer, which is, you know, extraordinarily ambitious. I probably would have just been like the ad giant if I was doing that business and try to

21:04 Go after TikTok. But he wants to do bigger and broader things for society, it's great because he does amazing amounts of innovation funded With what would otherwise be the profits of the company. You've been on these great boards. You had a board yourself, of course. What advice would you give to people to either be a great board member or run a great board? Process.

21:25 themselves. So typically board members uh wanna add value. 'Cause they're getting paid. It's a human nature thing. And the problem is by the conflict rules, they don't really know the business. If you run an airline, you can't be on another airline's board.

21:41 But you're doing that board one day a quarter. For the most part. And on one day a quarter, it is super hard to add value. And so what you see is a lot of directors who struggle to add value and then management has to be super polite to them. Management can tell them you don't know what you're talking about.

22:00 Because they run the thing. So you see this dysfunctional thing where board members ask hard questions and management ducks and weeds and it's not very functional. So I would say first part is board members to realize, okay, I'm not here to add value. They can hire consultants. Who know the industry and are not conflicted.

22:21 And that they pay for the advice. So I shouldn't spend my time Trying to give advice. So then what am I doing? I'm here as a board member as an insurance layer. If the company falls apart, I will step in and be part of replacing the CEO.

22:37 And that's basically the entire job, which is replacing the CEO well. And to do that and to have the confidence to do that, you have to learn the business. So you but you can't be asleep. You've got to really Ask a lot of questions and learn what drives the profit streams, how does the business work? What are the issues with it? But again, you're not trying to solve those problems. You're trying to get a grasp of the business. So that you can determine, you know, who might be the best person to run the fur.

23:04 And if you get that right, as say Microsoft shareholders or board did with Satian Adela. Then the business takes off and all the advice in the world doesn't matter compared to that. If you're on a board, don't measure yourself by did you give a suggestion. measure yourself by did you get more and more prepared for the small chance that you will have to take big action. And so it's a lot like a firefighter who drills and drills and drills. And hopes that there's never a fire.

23:33 When selecting for people that would be that insurance layer for your own business, what did you select for? Because a lot of these boards are full of Very fancy people like you that are great names to have on a you know website as a board of directors. And that seems to be a selection criteria. versus like this person's actually gonna be good at this insurance layer thing. How did you select board members? Yeah, people who I believe will be wise in a crisis.

23:56 We call it extreme duty of care. So duty care is one of the responsibilities of a director. And we amp it up that they really have to know what's going on. We ask directors to come to management meetings so they can watch what's going on. Watch the sausage being made. Again, not so they're adding value.

24:13 But so they're highly informed. And so we look for people who are wise in crisis. And so a board interview process would be those kinds of things tell me about different business crises that have happened and In case that happens, that they would be wise. How much of your time when you were running the business full time was systems structuring and thinking around the business versus like the marginal

24:36 you know, strategic initiative or something. I never like booked hours on my calendar to think about the culture. you end up just trying to make things better and then watching What's going well and what's not, and making observations. Here's an example.

24:51 So from Maybe two thousand and four on we had open compensation. So basically the top hundred or five hundred people of the company could see all the comp throughout the company. And the rationale was then they could keep like uh similar people in a similar vein and there would be more trust around gender, around other dimensions that could be discriminatory.

25:15 'Cause the data was all out for everyone to see. That was all true. But it also created a lot of petty rivalries. I make a huge amount of money, this other person makes a huge amount, plus ten thousand dollars more. And so it got pretty distracting. And ultimately we put it to a question of the VPs about ten years later, twenty sixteen, seventeen.

25:37 And they decided to take it away from themselves. And from everybody else and do the traditional You know your direct reports and their teams, but not the whole company. So I would say that was an experiment. In human nature.

25:51 Which got resolved pretty decisively. To be less mavericky. But it ended up working a little better. So Again, we would take on an experimental View on things.

26:03 And that's a good example because then you can see like we're not geniuses, we're just willing to question things. And try them. So we did open comp for a number of years and then decided that its net costs were negative. Another strategic question that always fascinated me about Netflix was how you determined how much to spend.

26:23 on originals and original content. As much as we possibly could Say more about just the core calculus or thinking there. I'm sure there would be some directors that would accept an unlimited amount of your money to make something. That's a different question. But in terms of the total budget. We would always try to shovel money into that on the hopes of creating the great next K pop demon hunters.

26:47 In terms of any one show, then the question is What's the likelihood based on what we've seen that this is gonna be big? And it's also a competitive market. In the very first original series that we had that helped make our reputation was House of Cards. And we had to bid that away from HBO.

27:05 So as Media Rights Capital was making it, they had bids both from HBO and us, and we were not we were a D V D company. Okay, so we had to overpay. Relative to HBO. And then they went with us. And we had to overpay by a bunch because, you know, it's a bu that's a lot of risk.

27:22 And then they came through and made a fantastic show. And then we were off to the races and original contact. And it's a simple way to think about it. Almost like one would think about a venture capital portfolio or something that you want to make lots of bets and you don't know exactly which one's gonna be K pop demon hunters, but that There being a K pop demon hunters is the thing that matters that you have some dominant massive franchise.

27:45 Very much so. But it's similar to venture capital, if every A round were a hundred million and there was just an A round. So It tends to be pretty much a single round to fund the construction. You do get sequels and other things you have option rights too. Uh, but that would be the big difference from venture.

28:03 If you think about the portfolio of content. What else would surprise people about the conversations happening inside the business, especially in the early days of developing that portfolio? The considerations that mattered to you as you expanded it. I mean it's now it's so many things, but In the early days, you know, you're obviously making choices. It's house of cards, it's not something else and

28:23 There's trade offs. What would surprise people about the conversations that led to the portfolio that you ultimately chose? I mean everything for us was around reinforcing the brand to trying to figure out what should the brand be. So The cable networks by necessity were narrow brands.

28:40 Because they got one cable slot. And so FX and Hallmark were both interesting doing different types of content. But the handle on the brand gave you the type of content which was inherently pretty niche because it had one network slot. We were doing something that had all the network slots. And so then we spent a lot of time thinking about how much of the programming do we want to be hallmark. Soft, easy, romantic stories feel good.

29:06 versus F X and be sort of cutting edge and violent and dark. versus Comedy Central. Our main issue relative to the industry was that we had this incredible breadth of content to choose from. And on any new film or series. Unless it's completely derivative.

29:24 There's just so many variables compared to other things. So it ends up you can do asset allocation, which is how much in comedy, how much in drama. But in terms of the stock picking. It ended up being intuition. And people's judgment and then we promoted those people with great judgment.

29:43 who got this right again and again and had we called a great taste. But they had more than taste. They had taste and judgement about, you know, would the people deliver would this come together in all kinds of ways. So it became just people picking. And so then it's trying to figure out how much money to put in each area. And then the people in those areas would figure out how to best spend it.

30:05 The other side of the equation, of course, is the beauty of the business model is fixed costs for a piece of content and then a growing subscriber base across which to spread those costs. But that requires that you grow the subscriber base. How did those two interrelate? Like what did you learn about what sorts of fixed spend on content would create great and reliable and high Subscriber growth. What I loved about Microsoft and Facebook's business is they

30:30 at that point basically had one big product or, you know, maybe two highly related ones. And then it was grow those products to be, you know fifty billion in revenue on a product. When I started Netflix, I was like, well, thankfully we can do this as, you know, one really big product because entertainment was an extremely large market. Basically Every human on the planet watches television.

30:54 To varying degrees, but It's a deeply human thing. To watch stories. And so then the question is, okay, what percent of that could we capture? Even today Netflix is about ten percent of US television. So

31:08 We've got a long way to go and internationally it's less than that generally. So plenty of in terms of How do we think about subscriber growth? We knew that if we could produce better television, make it lower cost and more enjoyable being on demand. that there would be a huge market for it. So it was kind of constrained on

31:28 Essentially product quality. What kind of shows do we have? Now the streaming is kind of flawless and not differentiated between competitors. But for a decade, we did it much better than our peers. That other ninety percent, is that defined as just traditional television or does that include like YouTube watched on No, YouTube is about twelve percent. includes everything sports, video gaming.

31:50 It's uses of the television screen. I mean We compete for time on mobile phones too, but we're very small there. It's not a big use case. And television were a big use case, but still. Really, it's under ten percent. If you think about that percentage as a important thing for Netflix, the business

32:09 What are the competitive frontiers or fields on which you feel like you're competing against something like YouTube. It's more easy to imagine versus cable or network shows or something like this, but versus something like YouTube that's sort of a pure UGC platform. Do you think about it that way, like we are competing against them and therefore we want to do certain things to win? Well, they're growing and we're growing.

32:31 And traditional linear is shrinking. So you're right that mostly we both compete with linear T V. But we do worry about YouTube because it's sort of a substitution threat. Does it get better and better with AI creators And it just becomes More and more of people's time.

32:48 And that's the user generated world. And it's not really user generated. It's on spec. That is, there are some very professional people who make content for you too. But they don't get paid on it in advance. Then they put it up and they see what kind of ad revenues they get. So in our case, you know, we pre fund the programs. Which gives them a bigger budget. They don't have to do it on spec.

33:11 And that's really the biggest difference in the business model. But it's ultimately do we produce content like The Perfect Neighbors uh documentary that just came out, won all these awards, and it's been the number one documentary this last month. you know, clever fresh perspective content like that. Or K pop Demon Hunters, which was our hit this summer.

33:32 So you know, it's ability to create those hits. What is that magic? What is shared amongst the people like Tad and others that had been able to reliably and consistently.

33:44 be a part of creating those big hits over time. If only it were reliable and consistent. K pop was probably our thirtieth animated film. So na it's not at all reliable and consistent. No, it is a lot more like that of art and seeing the contrarian edge. And what's the story? I mean, imagine the pitch for K pop demon hunters, right? You know? So it doesn't fit a set of formulas. So in that way it is a lot like venture and also that a few of the companies will generate outsized returns.

34:15 What do you think will be the most interesting impacts of AI on the Netflix business specifically? And this could mean from the perspective of cost to create the content it could mean for the service. Where does your mind go as you think about the raw capabilities of of the technology? Well visual effects is one Where

34:33 There's a lot of that workflow that can be automated. But in terms of like recognizing a K pop demon hunters at a script stage. Or pitch stage. Which is the biggest value creator, you know, which things do we back? That will be a far distant

34:49 skill. So eventually AI might eat up everything. And be better than humans on everything. But you know, in terms of the sequencing, so think of a A I is not particularly incented and the companies are not to do long form character development. But at some point they may do that and focus on that.

35:07 And then the AIs will be winning the Booker prize and doing the best fiction of the world. And remember, we're only interested in like the top point oh oh oh one percent of the stories. That get written. So simply writing a story, I mean there's a million film students We could just go to that. So the issue is trying to find one that's really unusual, extraordinary and recognizing that one early.

35:31 So I think AI will have had a lot of other effects before it hits us on that. Can you imagine kinds of innovation in the form factors or formats of shows? Like it seems like we've got a couple, you know, there's the show, there's the documentary, there's the full length feature movie. Can you imagine lots of different kinds of form factors starting to proliferate? Well let's step back a second and think about contrarian thinking generally. So you love contrarian thinking, right? But You probably need to remember that contrarian thinking most of the time is wrong.

36:03 And once in a while it's right, and that's when you get the big reward. But you have to say most of the time contrarian thinking is wrong. And the conventional thinking is right. So for example on formats, people have been trying to think about multi ending design your own story. Short form.

36:23 Qui, there's all kinds of things, right? And the enduring aspect of a film at one and a half to three hours as a story. Has stayed strong like the enduring form of a novel. Or the short story or the T V series. So these things are tapping into something human.

36:44 that other things so you've got video gaming as a a different modality. And that's quite a bit different, but like most of the hybrids between T V series that you Kind of interact with the Had been very small markets. That doesn't mean we won't eventually come up with a new art form.

37:01 That's quite different. But I don't think it's as easy as choose your own adventure. We're in lean back mode. with T V. And we're mostly wanted to tell us a story.

37:14 And if you think of young kids. Two year olds. Half the time they're like Daddy read me a story and half of the time it's daddy play with me. And these like are two different modalities.

37:25 that are different. One is passive, and I mean I again I think it's very biological and we're selected for it. And one's very active. One of those becomes T V and another becomes video gaming. I'm also fascinated by the technology backbone and story behind Netflix, the sort of invisible part of the business everyone just takes for granted they can hit a button and have this beautiful thing pop up. But I know there's quite a lot of building that happened behind the scenes. Can you tell that part of the Netflix story of what it took

37:53 infrastructure wise and technology wise to make what we all enjoy possible. Well it's always been a sort of medium barrier to entry. I would say first with D V Ds and we had incredible sorting and shipping machines and postal integration and I used to spend all this time on types of polycarbonate plastics that break and don't break and

38:14 We were impressing plants and the biggest issue we had was that the DVD would get to you without cracking or shipping or being damaged. It was on time, the postal carriers didn't steal it. So there's like a huge amount of machinery to shipping a million red envelopes a day consistently. FedEx style, right? And then certainly Streaming the mechanics of getting the bits to people.

38:36 was challenging. We first launched in two thousand and seven. And for probably fifteen years the internet was underpowered and you had to do a lot of clever engineering things. But for the most part, there's a hundred companies that stream now. Consumers can't particularly tell a difference between them. So I would say that's now just become part of the base Systems and commoditized.

38:59 What's unique is still being able to do the AI recommendations. All the deep learning on There's a thousand things on Netflix you would enjoy. Which one would you enjoy most at what time? That's still a big area of Tech innovation.

39:13 The gaming is we're trying to push into different types of games and figure out gaming in addition to T V series and films. Why do gaming at all? Like if you're so good at the core thing. And there's room for scale.

39:26 Still, you're only ten percent. Why bother with gaming? We used to just be movies and then we expanded T V series and we're really glad we did that. And then we expanded into unscripted content, you know, love is blind. So we've always been expanding in new categories and gaming's just another category of entertainment. And so we've got some cool stuff going on the T V where your phone is the remote control? Which has higher latency, but it's easy for party mode type games and it's

39:55 Really fun on these sort of social interactions. How do you know when to keep betting on something and how long term to be behind something? Like gaming is a great example. I'm sure there's examples of things you tried that didn't ultimately work that you stopped doing. Sure. Well yeah, let's do uh one of those. If you look at the New York Times, January two thousand six, there was a launch of Netflix Friends. So this was friend to friend sharing about films and what you were watching. Facebook was still just at Harvard. And then we worked for two or three years on that. Could we get people sharing? What D V Ds were you picking? Could you give each other we tried

40:28 Different permission schemes. Then Facebook started doing that whole integration, you know, where they did photos and you could share via Facebook. So then we said okay, that's the problem. You don't wanna set up your own network and so let's all share via Facebook. And then that didn't work any better. Then we tried one or two other variants, but it was Probably eight solid years. And that's part of what got me on the Facebook board, which is trying to figure out more of this.

40:52 How is social going to be And ultimately that probably got solved by TikTok. How do you think about TikTok? What are your impressions of it? It's like old cable used to be and you'd change channels and you'd just be there numb changing channels.

41:08 looking for something to watch, but really it was that he had a the new thing constantly. So it's hitting that part of enjoyment. very creative as a business and all of that and very effective, but I would say not a thing I want to spend a lot of time on. When you were CEO, I'm curious how you thought about Generating and keeping business power.

41:27 Which leads to free cash flow. And then allocation of free cash, although seem to be, you know, especially at once you've got product market fit and you're growing and you're huge, those are really important things. How much would you sit down and think about where does our power come from? Is it scale? Is it some other cornered resource? Is it some set of Different things.

41:46 And guide the decisions to get more power. How much was that like specifically on your mind? Power is a way of saying above market margins. So the theory is That we can all earn a marginal rate of maybe six percent. But to earn above that. Is because it's hard for competitors to do what you do.

42:06 And then you can get an above market margin. So we definitely spent time thinking about that. Which things should we license our content exclusively, non exclusively? are deals on televisions and those kinds of things. They would often want to tax us.

42:23 So a typical television maker thinks, Well, Netflix, you're making a lot of money, so if I'm putting the app on the TV, I want thirty percent like Apple gets. Okay, so they were the battles over that and then Power Could they sell a T V without Netflix or could we how many members would we lose?

42:42 If Sony Televisions, for example, didn't have the Netflix app. So that's an example of of how that worked out. Amazon and Bezos very famously for constantly reallocating capital back into the business to keep generating more customer benefit, which Obviously Netflix has done as well.

43:00 How did you think or would you think about the point in the company's life cycle to do more harvesting, to pay dividends, to buy back shares, to do this sort of thing. And just I'm just so curious how you thought through like the capital allocators toolkit of the things that you could do with the capital that you were generating. Well, in most businesses that's highly material, you know, building a lot more warehouses or something.

43:21 But honestly for Netflix, there's very little capital allocation. There's the total budget and per show. But the biggest shows we have like Stranger Things were less than one percent of viewing in a year. So we have extreme non concentration. And lots of different budgets and spread. There was very little capex of any long term nature. Margins were pretty close to free cash flow.

43:45 And then we just have always done buybacks with it rather than build it up. Probably the related tension was how profitable how soon. It wasn't a strictly cash one, essentially a P L margin question. And what we decided is Let's have uh low margins relative to cable. Which ran at like thirty five, forty percent margins.

44:05 So that we can invest a higher percentage of revenue into the content to have better content for our revenue level than we would otherwise. And that became the fundamental lens that we ran the business. And they still run it today. How did you know when it was time to leave being full time CEO? Because Greg and Ted were ready. I've been developing them for at least a decade.

44:27 And I felt like coming out of Covid they were ready and then Unless I was gonna be around for another decade and train a different set of people to take over, this was the time. So it was really driven from them and Since they took over, they've tripled the stock and you know, they've done incredibly well. How does something like the set of ideas we've talked about so far translate to a totally different domain like what you're doing with Powder Mountain?

44:51 It seems just such a wildly different Project. In almost every way that I can imagine it's very, very different. How much directly translates and how much needs to be left behind given the different nature of the project? So Powder Mountain is a ski mountain in real estate development.

45:07 That fell on hard times in Utah. So the original people running it ran out of money, so they never finished a lot of the project. We happen to have a house there, love the place. It's you know, natural beauty is insane. It's ten thousand acres. And so after retiring from Netflix I decided to take control of it, invest in it.

45:27 And do a turnaround. And so then it's rebuilding the staff, rebuilding the vision. And I would say Ninety plus percent of talent density, no rules, rules. the whole model has worked extremely well. And

45:42 The ability. hire incredible people, have them do things. It's everyone being very creative. And I would say the talent density model has been worth the pain, i. e. the turnover.

45:55 And has created a amazing set of leaders throughout the company. How did you approach it from the beginning? in terms of the original vision and plan. So it's a distressed asset that you go in and buy How do you determine the initial vision and then what were the first couple of steps to execute against it? It was a series of transactions to gain control. So it took

46:16 Six months to buy out a majority of the company of the shareholders to have control. Everyone wants the billionaire to pay a lot. I'm being clear with them that This thing could collapse. If I don't come in.

46:30 That was stage one. Then stage two was figuring out, okay, this is a great mountain. But if half of it were private. Like Yellowstone Club. And half stayed public as it was. Then there could be a real win win where they share operating costs and

46:46 Are more efficient. And we can then have a very uncrowded resort on the public side. Which gets to Something that's gone on in the ski industry, which is high crowds. So it gets to compete with that.

46:58 And then on the private side, it's building a six hundred and fifty home community. of ski lovers where they get their basically their own enormous ski resort. The size of heavenly or veil. Just for the six hundred home. So it's pretty spectacular. In terms of what drives the ski business. What, aside from the real estate stuff, what are the most important variables or

47:20 considerations that you've you've figured out in your studying of its history. Yeah, skiing is about one eighth or one tenth as big as golf and terms of number of people and playing. So I'd love to close some of that gap. You know, it's cold. But it's very family oriented. You get outdoors is social with your friends on the lift. It's got some of those same properties.

47:40 Interesting there are twenty five thousand golf courses in the US And about twenty percent, four thousand are private golf courses. And private golf courses, uh, you get better tea times, the Nice clubhouse atmosphere, social, you get to know people. And that's really what it is for private skiing also.

47:58 There's about five hundred ski areas instead of twenty five thousand, but only three are private Yellowstone Club. Wasuch Beaks Ran, and Powder. So it's very underserved market relative to golf. What's most fun about it too? The whole project.

48:15 That it's very right brain. Everything at Netflix was very strategic, logical. A lot of big competitors In skiing the competitors are

48:28 Very cooperative. It's I think because you have twenty or thirty miles between you and So it's a lot more collegial. And it's aesthetic. The big wins we've done have been Building up the art to Powder Mountain.

48:41 So there's got a lot of outdoor land art. It's incredibly beautiful to Ski through. So if you've had the good fortune to go to Storm King north of uh Manhattan Okay, so think of Storm King on a ski mountain. Skiing through and skiing through it. So tell me about that part of it. So how did you conceive of that and how did you execute it? Like how do you how does one acquire Storm King like art? It's the conceptual part's the key, which is we want to have a ski resort and to differentiate.

49:08 So what are we gonna do in summer? Well, you could do zip lines and mountain biking, but it's like it's all been done. Over and over. And frankly, it's high adrenaline and it's like okay, but it's not that great a match for real estate sales. But most importantly, it's conventional. It's been done. So what's like interesting and scalable and fantastic, but hasn't been done, and that's the art part. And you know, I'd been to Storm King, but Storm King has a level six hundred acres.

49:36 So it's not like in a mountain, but it is outdoor sculpts are incredibly stunning. So again, it was that synthesis to then trying to do that on a mountain. Then it was building in the curators and getting the work going and Now we've got Dozens of pieces already in and a lot more coming.

49:55 that side's really coming together as the heart of our summer fall experience. How did you decide to focus so much on education as one of the buckets of your time, we talked about Powder Mountain, but education, charter schools, et cetera, is a huge chunk of your time and and philanthropy as well. What was it about that sector that drew you? And I'm just curious for you to riff on the problems that you see in the space. Yeah, and it's interesting. I uh spend probably a third of my time on Powder Mountain because it's a joy. And then on the education side, I was a high school math teacher. It's my first job out of college.

50:27 And so I've always Cared about K twelve. And I've done a lot of philanthropy in that sector over the last twenty five years. And then the new big thing is AI. So it's easy to then put those together and how are we gonna apply AI The core vision and it's super well articulated by your prior guest around Alpha School.

50:49 Is kids should be taught individually as opposed to having a teacher stand in front of a class. And lecture to them. And that that industrial model of the teacher, the sage on a stage, we call it. needs to be replaced with individualized tutoring. And prior to AI, individualized tutoring would cost you a hundred thousand dollars a year per kit.

51:13 So out of reach of everyone. And so now with software, we can have individualized instruction. And the teachers become more like social workers where they're helping on discussion. social emotional learning. a lot of the more human and emotional factors. But the content transfer

51:33 What were the roots of the civil war, how to do fractions. that's all becoming software and hopefully as quickly as possible because then it's very global. And because kids will learn more. What do you think we can do to speed that up the most? It could take decades.

51:48 because of the regulated nature of the schools, things move slowly. What could we do that could speed that up? It's focused on the apps that really help kids learn more. It's helping parents see that They all wonder, hey, with AI coming when my kids six or sixteen, what's gonna happen to them in the workplace and they need

52:08 More and better skills than ever. And you know, every sixteen year old is learning things on AI anyway. So it's having them be more focused on that. And less on traditional classrooms. When you think about classrooms, we use it in K twelve, we use it in college. And then like in the workplace, you never use it again. You did all this classroom learning.

52:30 And it has like no bearing in your working life. And so again, it's really driving the percentage of kids' time that's not in classroom, and as Joe says, it's helping kids really love school. Because then they'll continue to love learning and the classroom and the boredom and frustration of that.

52:50 is at the heart of it. I'm curious as you think about the future just broadly across all your interests. You've got a cool purview on the world. What most worries you and what most excites you about the future? I'm part of the Anthropic camp where it's good to talk about the negatives not because we think they're gonna happen, but because we'll lower the chance of them happening.

53:10 If we're honest and talk about them. So I don't think the AI boomer and doomer thing is that useful. I think we all want to acknowledge there's some pretty significant risks. But they're not dispositive. And then we humans may be able to capture tremendous benefit by harnessing AI for higher quality of life on a global basis. I'm on team human for making that happen. But I would say that's the biggest

53:34 you know, swing factor of the next fifty years is how well we do that. What do you think the biggest risks are? Well, then near term risks are unemployment causes societal chaos and strife. So If you were to get a lot of unemployment

53:51 Then you might get radical politicians promising to get rid of AI. And that destabilizes society. There's the long term power competition between us and say China. And then, you know, is war become

54:05 How many robots do you produce? And you know, it'll be unfortunate if we both end up having to spend a bunch of money on that because of distrust. kind of a new Cold War would soak up a lot of GDP growth. And the benefit side would be that We cure disease, we get nuclear fusion with huge amounts of low cost energy.

54:25 Humans don't have to work as much, maybe not at all. They get to do things like learn chess and learn how to play all kinds of games. You learn biology for fun, like you learn chess today. So there's tremendous upside to automating a lot of this and taking it to the next level.

54:43 It's just keeping humans on top as the beneficiary of them. My traditional closing question for every interview is the same. What is the kindest thing that anyone's ever done for you? Thirty years ago I worked at a startup. I was a frontline engineer, twenty eight, so doing all nighters all the time.

55:03 I used to have coffee cups. spread around my desk and over a couple of days it would get kinda ugly and messy and Janitor every now and then would clean them all and I'd come in, they'd be cleaning mugs and I didn't think about it that much. One morning. woke up early in in those days you had to go in the office'cause of the computers were there, you couldn't take'home.

55:21 So I went into the office at four thirty five in the morning. Walked in, went into the bathroom. And there was my CEO. Washing Coffee cups and I looked at him and I was like

55:33 Barry are those my cups? He said yeah. And I said, Have you been washing my cups all year? And he said, Yeah. And I said why? And he said, You do so much for us, and this is the one thing I could do for you. Mm.

55:49 And I was just very moved uh about his humility and his In your question. And so I felt like God, I'll follow this guy to the ends of the earth. And so simple gestures. Holy cow. Great story. Amazing place to close. Thank you so much for your time.

56:07 Real pleasure, Patrick. If you enjoyed this episode, visit joincolossis.com where you'll find every episode of this podcast complete with hand-edited transcripts. You can also subscribe to Colossus Review, our quarterly print, digital, and private audio publication featuring in-depth profiles of the founders, investors, and companies that we admire most. Lear more at joincolossis dot com slash subscribe.

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