Netflix: Reed Hastings. “We’re Not a Family.” The Provocative Idea That Helped Build a Streaming Giant

Transcript from https://podmenti.com/t/fa7e8733d80c1748

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There's a story that I've heard.
You guys tried to sell
Tell me
What what is the story?
roughly the idea was, um, did they want to bet on us to do the online
If we could have become blockbuster.com, we'd grow a lot faster.
I I mean it's amazing to imagine.
that that could have happened. Like, you were prepared for Netflix to become Blockbuster's digital arm.
in two thousand like you would have been happy with that outcome.
Yeah, no, exactly. We had not much confidence that we could gr grow, period, and then particularly grow against them.
We were probably feeling pretty desperate.

Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements.
They built.
I'm Guy Raz and on the show today, how Reed Hastings built Netflix.
A business that began as a DVD rental service.
Wound up transforming home entertainment.
Forever.
Netflix should not have survived, in fact.
It should have been crushed within the first few years.
because when it launched in nineteen ninety seven
Blockbuster dominated the home entertainment market in the US.
The basic outlines of the story are pretty well known.
Netflix bet on DVDs when Blockbuster was still all in on VHS tapes.
Netflix believed people would rather pick their movies at home than
rather than go out and fetch them.
And Netflix also knew that most people hated the late fees that Blockbuster charged.
But still, four years into the business.
Netflix was on the ropes, and in fact
would have been happy for Blockbuster to just
Buy them out.
What happened next seems almost predictable from today's vantage point, but wasn't so clear cut back then.
Netflix adopted streaming video much faster than Blockbuster, and by 2010,
Blockbuster filed for bankruptcy.
At its height in the early 2000s, Blockbuster had 9,000 stores around the world.
Today, there is just one single store left.
in Bend, Oregon.
Now one of the reasons Netflix prevailed was because of the decisions its leadership made, and in particular, the culture of high performance that its founder Reed Hastings put in place.
Reed saw the company almost like a championship basketball team.
that everyone needed to be performing at peak level.
And for those who didn't?
Well, they were swiftly let go.
with no lengthy paperwork, no second chances, and a generous severance package to soften the blow.
Now, a lot has been written about this culture over the years. Some people see it as cutthroat and ruthless.
But others, most importantly Reed Hastings himself, argue that it's actually transparent and honest and
Well, humane.
In fact, Netflix has an incredibly high employee retention rate, despite the fact that around 9% of its employees are reportedly asked to leave each year.
But no matter what you might think of the work culture,
Netflix changed entertainment.
And the person widely credited with making Netflix what it is today is Reed Hastings.
What's interesting, among many things, about Reed is that he isn't a film buff at all.
He's not that guy who talks about Fellini and Trufo and Akira Kurosawa. In fact, when he started Netflix in 1997, he and his co-founder, Mark Randolph, had spent nearly a year brainstorming a bunch of different business ideas. Video rentals just happened to be the one they thought had the most potential.
But running Netflix didn't come easy.
And as he will describe in this interview, Relearned, sometimes painfully, how to become a better leader and a better manager.
Reed Hastings grew up in Boston in the 1960s and 70s.
His dad was a lawyer for the federal government, and as a teenager, it took him a while to find his footing.
I was uh a late bloomer kinda kid. Um so uh no J V or varsity sports, you know, we had to play sort of freshman stuff, um, no girlfriend, no big academic achievements, not not that high a GPA.
So in high school nobody would have looked at you and said, Oh this kid, watch out, this kid's gonna go places.
Correct.

So I I know you went you studied at Bowden College in Maine and and you describe yourself as an unexceptional
high school student, um
What happened there?
uh I mean you majored in math, right? Did you sort of all of a sudden kind of
Just
Everything opened up.
My guess is
What happened is uh physical brain maturity.
Yeah. And the kinds of abstractions uh that w you we deal with in math came
quite easily to me.
Um the moment that I was surprised at was um taking in a
advanced algebra class and the
professor uh showed us in on some kind of graphic, you know, all the scores of the class unnamed. And I had gotten a hundred and like the nearest other score was a eighty.
So that really built my confidence that I could do math well.
Hm.
And and I think that um after you graduated college, you went right into the Peace Corps, right? This is like like nineteen eighty two ish around then, right?
Yeah.

They signed me up as a high school math teacher.
And the country they sent me to as was Swaziland, which is between South Africa and Mozambique.
And this was all pre internet. And so, you know, I went off to the Encyclopedia Britannica to try to learn something about, you know, Swaziland.
And it w is and was a very small place, uh, five hundred thousand people.
So I mean n nineteen early nineteen eighties in Swaziland, God I mean
No internet and
I I can't even imagine like you'd probably talk to your parents, your family, like once a month, maybe if you were lucky, like on a pa if there was a payphone around. I think once a year. Um
Yeah, there was no payphones. Um you you have to travel to the capital to do that, uh to call. Um
So yeah, very isolated, beautiful country
Um came home once during that for my sister's wedding.
And um that was very hard because
Uh, you know, you um get to uh Johannesburg and you fly, I don't know, eighteen hours to Boston.
And then it's, you know, a three day wedding that's elaborate and champagne and dress up and
lot of, you know, just uh magic.
And then you jump back on the plane another eighteen hours back, and then you're in the classroom and the wind's blowing and it's quiet. There's you know
Uh was no electricity.
Yeah, the contrast was hard and when I
Came back from that week.
I came close to quitting.
But I you know, you make your incredible connection with your kids and uh I ended up sticking it out. But that was the only real hard time in it.
Yeah.
So I guess after a couple of years there, um, you decide to come back to the US and
You went and did a degree at Stanford. You did um a degree in computer science. That's correct. Um and then I
Uh I guess.
pretty soon after that you got a job at a start up in in the in the Bay area. What what was it? Wha what did you do?
Yeah, uh we were doing um AI for customer support systems.
Um, and I was working on the underlying operating system essentially for this.
And um we had a super compelling CEO, and he had a great vision.
And
I was the uh twenty eight, twenty-nine year old engineer worked all the time, um, you know, loved doing uh all nighters and
you know, was prolific in writing lots of code.
And ultimately, um, one customer ever bought the software and that customer never installed it.
So it was this scarring lesson because, you know, I had worked so hard.
and written all this beautiful code that basically was now getting thrown away.
But the CEO I learned a lot from
The thing I learned from the most was humility and the value of that.
And one day I came in uh very early, you know, four or five in the morning.
And I used to have a lot of coffee cups um spread around my cubicle, you know, the from the last four or five days and
Every now and then the janitor would uh wash em all and leave'em cleaned on my desk.
I didn't think much of it.
Um and then that morning I came in early, four or five, I'd go into the toilet.
Um and I see my CEO there um also in early uh and I see a lot of coffee cups.
Uh, and I realized suddenly he's been the one uh washing them all year. This was Barry Plotkin, I think that was his name. Correct. Yeah.
And I said uh you know, Barry, have you been washing my coffee cups all year?
And he said yes.
And I said,
Why?
And he said, You do so much for us, and this is the one thing I can do for you.
And um, you know, I would never have discovered it but for coming in so early that morning.
And
That just made me feel like, you know, I want to follow this guy to the ends of the earth.
'Cause he was so admirable personally.
And unfortunately, he led us to the ends of the earth.
i. e. to build a product that nobody wanted.
Yeah.
And so I realized in leadership there's both
being trustworthy and admirable.
Um, which he was in spades.
um and also astute about where the markets were.
That if the team builds
the thing that you think they should build.
That there will indeed be a successful path there.
And so you you have to both uh not lead uh all these great troops into a box canyon where you all get killed.
Um, but you also need to set a great uh personal example and that those were sort of the big aspects of leadership.
Okay, so I guess after
This startup failed.
Um you decide to start
your own company, you called it pure software.
And and I'm wondering, I mean, did you feel ready to to do that at that point? I mean I mean, clearly you'd make connections at at uh you know, previous startups and and maybe you know, in your previous job and
And it's Stanford, um, but uh like how did you start to build a team and and to start to build a company?
I was underprepared, um, for sure, but I would say one of the things about being around Stanford is all these pretty normal people create companies and you meet them.
And so it doesn't seem so impossible at all. Um
But I didn't know specifically how to do it.
Didn't understand what incorporation was or how to get a lease or anything.
The first year was trying to do a proof of concept. So I spent a year in a cold cabin in the Santa Cruz Mountains in La Honda.
Um where we just had a uh wood fireplace. Um
and had bought a Sun Microsystems computer. Uh and at the time that was like as expensive as a car. Like eight megabytes of RAM or something? Yeah, exactly. And and you know
It was a cutting edge computer that only corporations bought.
And not connected to any

No, you could do a little bit of dial up.
But it was like you know, nine point six kilobits. It was very too. It was just plugged into the power in the wall.
Yep. Okay. Um and I spent a year uh prototyping and learning uh how to do the software and do the proof of concept. So uh that was the beginning of Pure Software and w and we released a product, you know, within a year, year and a half of starting.
And that product was a debugging product, basically. That's right.
It was sort of like inventing an X ray uh machine and no one had been able to see a broken bone before and suddenly they could. And so it it exploded across the industry and everybody wanted it. And so it was a you know, a small uh breakthrough.
Yeah. Um and you went from like you
to like five people and then ten people and then eventually hundreds of people t tell me about
how you because you were a young guy when you started this you were like thirty one, thirty two.
How did you start to manage
that side of the business'cause you were making this thing and writing a paper
Explaining it.
Thinking deeply about it.
But there's another whole other side to it, which is a business, which is the people that you bring in and then that you have to manage.
Yeah, um that was my MBA is essentially was pure software. Uh and luckily the products were amazing'cause my management was not.
I only really had one gear, which was work hard. And so whenever things got harder, you know, difficult or challenging, I would just work more, so I would
you know, be coding at night, um and then, you know, trying to be CEO in the day, but I looked haggard, you know, I smelled, I hadn't showered, uh, you know, it was
So not a very inspiring look.
Typically, you know, your sales force and that kind of business is very important.
Um and
Unfortunately, I had little grasp of who's the right type of person to run the sales force, and so I kept hiring the wrong people.

And then taking a year to figure that out.
And so we had a new head of sales every year, five years in a row.
Which is chaos in enterprise software.
And yet despite that, um, we doubled sales every year in that time.
So that again, that was the strength of the products. Um
But to say it was unevenly managed would be generous.
the product was so good that it actually w you were actually able to to kinda get away with not being a great manager because everybody was happy, the sales were growing, people were making money.
And so maybe it kind of
inadvertently allowed you to not have to
Like figure that out.
That part of the job out.
Um, I don't think it w first of all it was not that everyone was happy. Um so it was
uh you know a lot of chaos and
I looked at a company like a semiconductor manufacturing plant and when you
Find an error, you know, you put a process in to avoid that error happening again.
And the challenge of that is in the field we were in, and in most tech fields, you have to be very creative and constantly changing the product of five years ago.
Is not gonna sell in the, you know, current climate.
And what we did is kind of systematically drive out.
The Maverick people.
who didn't follow process or rules and
Um and we were always trying to organize processes.
Дію скінт та
you had an opportunity to kind of reflect on
What it meant to be a good manager, or were you just was it just so
Crazy and the growth was so
Fast that you
It wasn't even there wasn't time to just stop and breathe.
There's a management phrase that someone's too busy chopping wood to sharpen the axe. Yeah.
Um, and I was definitely guilty of that.
I never took time to reflect.
Uh as a small example
I was invited during that time to join YPO, the Young Presidents Organization, which is a very mentor oriented organization.
Which in hindsight would have been very valuable, uh, now that I know about it well.
Um, but at the time I thought, Oh, it's way too indulgent on a day a month, you know, not doing the work. That's crazy.
So
this business eventually merges and then is is is acquired.
And
So you're you're in your late thirties and you know that you're not gonna stay on with this company.
And
You're not gonna sit around for the rest of your life and just uh go, you know, from vacation hotspot to vacation hotspot. Like you want to do something else. Um it's nineteen ninety seven.
Tell me a little bit about w take me back to that that

So I had more money that I knew what to do with and so it wasn't and I didn't think I would do another tech thing.
I did think um uh the guy who had been the chairman of um
Netscape was Jim Clark. He had carved out a life um doing um seed investing.

And I thought okay, that's what I'll do is I'll be an angel investor.
So along from a commercial standpoint, I started making seed investments, of which one was Netflix.
Okay. So we'll get we'll get to that in in just a moment, but I'm curious when you were around some of some of the you know, particularly VCs and and and some that I know, I think their talent in in many ways is their
Their charisma, you know, their their ability to create relationships and forge bonds and get people to like them and trust them and um and and you may have all of those those characteristics, but you strike me as a bit more introverted.
I maybe I'm wrong, but it it is
Is that right? I mean, how how did you kind of interact with that?
that world of like more sort of
extroverted and more
Um I would say um it's an astute observation, but I would say my skills are sort of analysis uh rather than uh connecting and relationship all the time. But people saw that I was sincere.
And so they kind of forgave me the uh awkwardness.
So you wouldn't uh'cause you don't strike me as a small talk person, that that doesn't come easily to you.
Correct. I would say the I don't know if it's easy or not. It's just not that interesting if we're talking about, you know, the weather or the the superficialities.
I find that I in certain circles or topics I find them incredibly exciting and that's very engaging. But in terms of flattering people and making them feel listened to like the politicians do, um, that's a definitely a different skill set.
Yeah.
There are many apocryphal stories about how it came about, but l let's start with
A guy named Mark Randolph. Um who is Mark Randolph? Who who who was he?
And how did you know him?
He was uh VP of marketing um at one of the companies that uh Pure acquired.
Mm-hmm. So that's how I got to know him.
He's a very fresh thinker, uh, creative. And then we made him um head of marketing of the whole company.
And then the whole company got acquired.
Right.
So um suddenly we were both uh freed up.
And we said, you know, let's try to find let's look at some interesting things to work on together.
From what I r understand, he lived in Santa Cruz as well. And one of the r one of the ways you connected was you would commute.
Together.
into
And to work sometimes.
Yeah, absolutely. Um, so I was
uh half hour drive, uh, maybe forty five minutes. So
You know, we got a bunch of time just brainstorming on different ideas.
What what do you start to talk about?
So the general thing was e commerce. So that was the hot story. Amazon had gone public.
Um, there was everything from pets.com, which old pet food online to, you know.
fifty other, you know, there was the C D now, there was Oh yeah, I remember that. I bought C Ds from them.
Exactly.
uh every new category, you know, you kind of got the URL. So I'd think of it as
Um e-commerce was like AI is today, um, which is everyone's doing everyone's throwing everything at it. Yeah. Um
And you know, like everyone of the era, I had my frustrations with video rental.
Partially by living when we lived in in La Honda, far away from video stores.
Um and had gotten a big late fee. And you know, again, it's not that remarkable because lots of people had them.
But you know it
Always uh bugged me and seemed a painful consumer experience.
And if it could be done by mail, like Amazon,
Um, then it could be improved.
Yeah.
But it turns out that VHS cassettes, which was the way movies were distributed, um, weighed about a pound and cost about four dollars to ship.
So if y if you got shipped uh a VHS cassette.
And then shipped it back that was eight dollars on top of the three or four dollar rental. So that didn't make a lot of sense. So it
It ruled it out as an interesting category.

Why did you think video rentals was
uh w was like a a a blue ocean. I mean yeah and Blockbuster, you know, I I remember going to Blockbuster. It sucked. You know, you go to Blockbuster and there'd be like
you know, a hundred cassette you know, a hundred uh boxes for a movie you don't want to see. And the movie you want to see you can get.
And then you'd pay late fees.
One advantage uh is that relative to Amazon,
The nice thing about rental is because you got to return the good. It's a very different logistic path.
Than um selling things.
So then it makes less sense for Amazon to invest in'cause it's only one category that does this.
You know, you don't rent computers or bicycles or other things where they get shipped and shipped back.
And it was
A large enough business to be interesting. Blockbuster was about five billion in revenue.
But not so large as to attract Amazon, uh, you know, and others.
into it. So you know, it was
Uh that that that crosshairs made it
potentially interesting from an e-commerce standpoint. Alright, but VHS tapes were not gonna work because and that was what everybody used. It well into the two thousands, but that wasn't gonna work because the shipping costs and also
They could get damaged, and they were very expensive.
But in the middle of ninety seven or fall of ninety seven.
a mutual friend uh of Mark's and mine, Steve Conn, who
Uh had it was an audio file and up on all the latest things, said Hey, there's this thing DVD coming out that uh was like a CD format but held a movie.
Okay, and that was interesting to you.
Um I would say it was an instant like oh my gosh reaction.
Because at the time AOL was mailing around
Yeah.
I was well aware of AOL discs in the mail.
Um and so I thought okay, they must be tough enough to go through the mail.
And
I rushed out and bought a bunch of CDs. You couldn't buy DVDs at that time and started mailing them to myself.
Um, to see, you know, would they arrive uh broken uh you know in pieces or all together.
And uh remember we were living in Santa Cruz by then, you know.
the next day getting the five discs in various types of envelopes. Um, you know, and if you put enough padding and packaging on it, of course it's gonna make it. But the question is how little
Uh, and this was like practically an airmel envelope. So, you know, very thin paper.
And uh all five CDs arrived at my house in good shape.
And so at that moment, that was for me.
Um the like this can work.
Why why did you have any confidence in the
In the
viability of DVDs. I mean laser discs existed. There were betamax tapes before there'd be Blueway later. Yeah. I didn't. So um I thought
There's some chance the D V D will take off across the industry.
And if it does
Then there's a dislocation, which makes it viable to build a business around.
But it may be that DVD will fail, in which case the business is dead. So I but it was not a guarantee at all.
But we said if this is successful, uh
Then there's an opportunity'cause it
You know, when three people in a city have the DVD players.
It doesn't make sense for Blockbuster to carry them.
Yeah.
And so that they will be late to the game.
And so that's where the by mail um for their
early DVD adopters would make sense.
And then we had to race to get good enough so that once Blockbuster carried rental DVDs in the store.
that we could sustain ourselves. So that you know, there was many challenges.
Yeah.
And t tell me a little bit about just
just the the kind of the the basic
Yeah.
Did you get a warehouse? Did you how did you b acquire the DVDs? Was it hard to just did you just buy a ton of DVDs? Because I think in the first year
Most of your money came from selling DVDs. You weren't
actually making as much renting them.
Uh, let's see. We started in the fall of ninety seven.
Um, and so I put in the initial two million dollars and was chairman.
And then the site launched in like May of ninety eight, roughly.
And it um may have been selling at the time, uh but
The real focus was on rental, and you know, was there a consumer demand uh for rental by mail?
So how are you gonna I mean this is
pre search engine optimization. It was people c would discover websites. I mean it was a time where
a new website would generate like an article or or like a a story on CNN. So did you get
Attention when this website went public.
We did.
But at that time, maybe um one percent of US households had a D D player. Yeah.
In hindsight, we were too early.
Okay, we we should have waited a couple years.
to launch.
So it was a very small business, um
And we were okay with that. Uh and you asked earlier where do we buy DVDs from? Costco.
Um we just go down to Walmart, Costco, et cetera, and buy
you know, twenty DVDs um of a given title. And there weren't many titles on DVD'cause the studios were tentatively publishing um the catalogue.
Yeah.
So I mean, if you wanna screen a movie, right? Like let's say I wanna screen a um
you know, on Golden Pond, I just c first thing came to mind. I don't know why.
And uh and I set up a screen in in my local park.
And I uh charge people five bucks to s come see it, I have to get a a license to do that, right? What were the regulatory hurdles to like buying DVDs at Costco and then putting and then putting them in an envelope and mailing them to people but getting paid a fee to
borrow them. Did you have to get permission from the studios? Like was that
Tricky were they
Did they just not even notice? What what did you have to do to to make that work?
In the US, you can buy and sell uh DVDs uh like you can buy and sell a car.
Um, so I can buy a car and I can use it as a taxi service that I don't have to tell GM
In the US it was treated that way.
the public display, uh, which is charging f you know, like running a movie theater. Yeah
That was not a right that came with the DVD.
But we could ship them, we could buy them, sell them, resell them.
Um, they were not treated as intellectual property, they were treated as uh a physical good.
And you could rent them.
Yeah, you couldn't copy them.
Uh yeah. Right. That's copyright. Right. You couldn't do public display.
But you could buy them and sell them.
So you could basically
U buy a film.
Any film in nineteen ninety Goodwill Huntington.
And uh send it out and for rental.
And the studio couldn't say, Hey, why are you you're making money off the fill you've got to give us a cut.
Of that.
Uh rental.
Yeah.
I mean mostly D V D, you know, there weren't that many titles on D V D.
Yeah.
Um, because they had to go through and remaster them one by one and
The best titles they wanted to save for when fifty million homes had a DVD player and then more people would uh buy it or rent it.
Did anybody in nineteen ninety seven or nineteen ninety eight
Think this was a viable business.
That you knew?
Very few. Um, you know, but that was more tied to
we weren't streaming. So the threat there was when are you gonna deliver over the internet, you know?
Cosmo and other people were doing amazing things, overnight delivery, uh or same day delivery. That was food, right? Cosmo was doing food and snacks and stuff.
That's right. But in in their plans and in their conversations, they talked about being blockbuster also, right? Uhhuh.
So that was perceived to be an internet based threat. And then the other is just downloading the movie was gonna take over.
Right. Okay. But that that I mean we're still you know, real audio and real video was just starting and streaming was still I mean, people didn't have
Some people had fast connections, very few people did in nineteen ninety nine. I think I'm thinking that's true, but the the model back then was downloading. Downloading it and then using the thing.
But it would still take forever, like, you know, bit by bit would be going floating through through yeah. Sure. We were asking about um or talking about barriers to people investing. So
The biggest barrier for'em was
What you know, to seems like a temporary business.
Right.
And I wasn't sure that it was gonna work. But I think, you know, it had the advantage of
I wanted to use it and so you hope there's other people like me.
because I was living an e-commerce life, you know, buying a lot of things on Amazon. Now I could do movie rental, you know, online. So it was kind of a natural extension. I was pretty confident the business would exist.

Renting movies online.
But
I wasn't sure that we were gonna win.
Well we come back in just a moment.
A brief flirtation with Blockbuster.
And a merger that
Thankfully.
does not happen.
Stay with us, I'm Guy Raz, and you're listening to how I built this.
Hey, welcome back to How I Built This. I'm Guy Raz.
So it's 1999 and Netflix has been in business for about two years.
And since launch, Mark Randolph has been CEO, but
That's about to change.
Because Reed is starting to think
he could do a better job.
You decide to take over.
and and run the the company.
Uh, Marcus talked about this that
You had approached him with a pitch deck to explain why.
Um it's very matter of fact and he he he described it in a very um generous way, not like he was m
He's mad about it, but just very matter of fact way.
Pitch deck explaining why he wasn't the right person to run.
the company, um which I think is we're gonna get into th that radical candor. Tell me about
About that approach you took.
You know, I I don't remember how we talked about it. So whether it was a pitch deck or a memo or something, I would have done it in person, not just send'em an email or text.
But um I may have written it out, you know, uh on some slides or on a
Memo or something.
So so for you it
It's not personal. It's it's just a very kind because a lot of people and I've I've had, you know, some of the best known founders in the world on this show, they still have a hard time
demoting people or or firing people or letting them go.
It seems like you see it in a very different way. That it's not
It's not about feelings or emotions. It's just a it's really about
Facts and data and
That's it.
Well definitely that's true now. Um but I would say at pure software.
I was very bad uh at letting people go and I introduced a lot of my own emotions. You know, it's natural for the manager.
Uh to feel guilty or you know, you like the people generally. Um
And then and letting them go, they're upset. You don't like hurting people.
So I had gotten
better I think by the time
of early Netflix, but I would say I'm much better now than I am then. So you know, it's an evolution of something you get from practice.
And and a in nineteen ninety eight.
Right, or nineteen ninety nine when you really start, you know, uh ro running operation. How many employees are are working in Netflix?
Thirty?
thirty, okay. And and it was based in Santa Cruz or was it was it already in
Uh it was in Scott's Valley where Mark lives, which is partway between Santa Cruz and Silicon Valley.

I guess I'm trying to figure out
Given your background and everything you had done up until that point, which had nothing to do with consumers or consumer products,
This was going to be
A brand.
A consumer
Products.
Business.
What was attractive about that to you?
What do you remember about thinking this is the company I'm gonna
Drop everything and I'm gonna run this thing.
So I think you're phrasing the question like an MBA would, which is sort of what are the properties of the business that made you think you had a differential advantage? And um how did this come about?
More like what's interesting about it to you. That's that's really.
I realised in myself, oh
I'm a crossword puzzle solver.
So I like an interesting challenge, which a with a bunch of, you know, challenge and constraint, and then seeing if I can figure out the crossword puzzle. Got it. And Netflix was a big crossword puzzle, uh in many ways for 25 years.
So I think that's the underlying theme. It almost doesn't matter what the domain is.
It's mostly uh is it a is it a puzzle to figure out?
A hard problem to solve.
Yeah. Um, but that implies that it's like twenty little problems. It's not a hard problem like uh fusion. That's a hard problem. Yeah. Um but it's a hard problem with many different aspects of the puzzle.
Okay.
And it and so
The business model was
going to be based on
a a monthly subscription, right? Like a fixed monthly fee.
Yeah.
No, in the early days when Mark was running it, you pay four bucks for a rental, um and that was for five days.
And then if you kept it longer, you paid another essentially a late fee.
So you could return it by mail.
To make it convenient to avoid the late fee?
Because you didn't have to go to the store?
Uh but uh you still had late fees.
And and just getting on this late thesis, I mean Blockbuster at this time, I read something like
Th like fifteen or twenty percent of their their revenue came from late fees.
Like this was a huge part of their b their business model. But just think of it as an extended rental. I mean, you know, in other words, if you rent a car and then you sti extend it for three more days.
You know, you can call that a late fee, but um and th their marketing was poor, so it got named as a late fee like you're supposed to be that's you know
Like it's a moral issue.
Yeah.
And it should have been if they had just gotten to be called a double rental or an extended rental.
Instead of making it punitive, right, right, yeah.
Yeah, so uh
In any case, um
So the initial Netflix model was a single rental.
You know, it was a four dollar rental.
And what we found is that there was less and less repeat business. So people did it for a little while.
Um three, four, five rentals and then didn't really come back.
And then uh when I came in
I wanted to convert us to subscription.
And to this idea that
When you returned a DVD.
uh we automatically sent you the next one from your list.
And so in September twenty third of ninety nine, um, we launched the subscription service.
Twenty bucks a month um for unlimited DVDs. Got it.
And we had no idea what would the retention be.
In other words, once you started it, how long would you stay with it?
You know, we waited day by day to see who would cancel and you have to proactively cancel, right? Yeah.
Um and then it was
Unbelievable the elation because the first
Two days came in, it was like eighty five percent retention.
And we were like, Oh my God, this is gonna work.
Did you have trouble raising money?
Well yes, but the internet bubble was expanding and expanding.
In early two thousand, um, we closed around with LVMH.
With with L VMH the
consumer luxury brand.
Correct. So we close that round of them investing fifty million.
I don't remember the valuation, but it was a good valuation.
Um, and that was February of two thousand and then March of two thousand is when the bubble broke.
And you know, it was a shitstorm of everybody retrenching.
Um, no more investment for anybody. So, you know, by pure luck.
Um we got that deal done.
By pure luck for you and LVMH.
So right before the dot com bubble bursts you get this funding
And you're not a public company, so
You're not going through the same challenges, but it myself that you you know at that point.
you're not gonna be able to raise more money for a while.
Yeah.
Uh Mark and I had to think through okay how do we give ourselves the best chance of success? You know, how
Can we grow
get enough customers in um that we become cash flow positive. And so that was the the crucial thing is
Getting to cash flow positive. Do you remember what you how much revenue were doing in in two thousand or ninety nine?
Like a a few million?
A few million. So uh when we went uh public two years later, we were at fifty million.
Right.
So I'm gonna guess it was sort of, you know, ten million of revenue and and ten or twenty million of losses, of cash losses.
And and were the losses in those early years mainly because of
marketing costs or was it literally just the cost of
All ab all of the above. Um, so we had to pay to acquire customers, marketing. Uh we had to pay to acquire D V D, and then we had our fixed cost, uh, which was um all the people, and then we had the mailing cost, how much did it cost to
package uh something. So you know, we lost money on every shipment.
Because we were inefficient at packaging. We knew we could fix that.
But we had to, you know, do a lot of scale to fix that.
Th there's a story that I've heard, um and and it might be apocryphal, maybe your your memory of it is different, but
Something to the effect of
In two tausent
You guys try to sell
the business or to try to merge with Blockbuster to become blockbusters.
Digital art, but I don't exactly know but tell me.
What what is the story?
Oh, we had been wanting to talk to them, uh, for a while and roughly the idea was
Did they want to bet on us to do the online? Because um
If we could have become blockbuster dot com, we'd grow a lot faster.
So
We talked to them and they were, you know, pretty gracious.
But we were kinda naive about, you know
We wanted the blockbuster dot com brand.
Right.
Everyone we wouldn't have to build our brand, you know. Um
And I think they were they looked at us uh you know as
You know, a flashback.
Curious, yeah. Yeah. Um
And I don't remember them actually making an offer, um or but I I I think we probably would have taken any offer, but it was not
It didn't result in any any deal transaction. Probably all we did is make them watch us more.
I I mean it's amazing to imagine.
ha that that could have happened. Like you were prepared for Netflix to become
Blockbuster's digital arm.
in two thousand. Like you would have been happy with that outcome.
Yeah, no, exactly. We had not much confidence that we could
Grow period.
And then particularly grow against them.
I mean, it sounds like it was a Hail Mary in a way. Like okay, it's a dot com
bubbles burst, you're not gonna get any new funding. You've got this fift million in cash, but you're you're watching that run rate, you know.
Pretty closely.
You can see where things are headed if you can't bring money in.
And Blockbuster could be the savior.
Uh yeah, we had a similar thing with Amazon.
But I think it was earlier. I think that was like in ninety nine.
But in both cases, you know, the they
particularly Amazon have
A hundred companies they could buy.
And but Blockbuster had like fourteen thousand stores in the US. I mean i I I think that year alone it it made eight hundred million dollars in just late fees.
Right. We were the size of of one store.
Yeah. Also, they could have looked at you and said, We can do this ourselves. We don't need you. We can do we can replicate your business and put you out of business.
Yeah, I'm not sure their exact thought process, but I agree with you that it was naive of us to think that there was possibly a deal, but we were probably feeling pretty desperate.
All right, so that doesn't happen.
And you you are surviving the dot com
crash because you're not a public company. And do you remember b being really disciplined about conserving cash? I I mean you were losing money every month, but was it did it become top of mind?
Well, we did a big layoff, you know, shortly after the crash. So yes, we were um conscious on
Um
Yeah.
You know, we had this amazing fifty million in from L VMH and
Then uh we
We're gonna have to make that last.
All right.
Today when a startup goes public, you know, they do a road show and people look for profitability and and there are all kinds of things that happen.
You took Netflix public in two thousand two.
It was still an uncertain business.
Was did you did you w take it public because that was the only way to raise money?
As far as you were concerned.

I would say we took it public because that's what companies did. We didn't really question it that much. Um we took it public as soon as we possibly could.
But in hindsight, I tell uh other entrepreneurs that don't be in a hurry to go public because it gives your competitors a lot of information. Yeah. Um and that was certainly the moment I think that Blockbuster said, Oh, that's bigger and more profitable than we thought.
And we should go start competing. That was two thousand two.
And in two thousand and four they launched Against Us.
So, um you know, in hind perfect hindsight, I wish we had stayed private for another two or three years. Yeah, I mean that year you went public.
based on on on my reading.
Walmart also announced that they were gonna do a subscription DVD service.
U in November of that year your stock was down to like two and a half dollars, two dollars fifty cents.
The big storyline uh is we went public, it was fine for a quarter, Walmart announced Walmart.com that they were gonna do DVD rental.
Which made no real sense, and then Blockbuster had bought
a tiny little DVD rental company. Um and uh so they were clearly interested and so
Those two facts created a lot of fear about our revenue, but our our revenue never dipped in that time frame.
Um, it was only once Blockbuster did the big launch in two thousand four, two thousand five, uh, that it was a real competitive battle.
Okay, so the so now you've got the biggest
Uh brand.
you know, in in the in the rental business.
getting into this space. You have a leg up. You guys have been doing this for six years.
Blockbuster was the main one we were worried about because for them it was, you know, kill us or die.
Yeah and we knew the biggest companies like Walmart were not going to focus on this tiny little business. Um they had a big competition with Amazon.
Yeah.
Um, so they never worried us, and we in fact played up David versus Goliath relative to Walmart to get us more attention.
And I you know, I remember uh New York Times articles in two thousand and two about
You know, what's with Netflix and you know, it's got the biggest company in the world, Walmart.
You know, the biggest rental, you know, blockbuster coming after it, Amazon's lurking. Um but it was the little engine that could. And so that got us kind of more press.
Um and with Amazon, we're always kinda worried because they have such high confidence.
But it just was too niche a business, uh, for them.
What's remarkable is that Blockbuster launches this service in two thousand five, right, to compete with Netflix.
And
In ten years Blockbuster's gonna be dead.
Right. And and
Did anybody know that?
Oh, we knew it.
But you know, they they were a very good store operator. They had rolled up the whole business, they'd beaten everybody else, they were highly skilled at running stores.
And I think that selective
uh intelligence
You know, can blind you to other models.
Yeah.
You take away twenty percent of the revenue from every store.
And that takes away the profit.
Right. And our customer base was highly distributed.
You know, across the US.
So we knew that if we got to a certain size, um, that it was like, you know, a billion, it was very painful for the store based model.
And we always anticipated the store based model would collapse.
If online got large enough.
And then it was who's online, ours or blockbusters.
But the inevitability of stores going away was pretty clear.
So as as Netflix you know hits profitability and is growing and is really dominating by two thousand five is dominating the
the sort of the mailing male rental market, right? And everybody remembers those red envelopes, not everybody, everybody's a certain age.
I certainly do binging binge watching the wire, I remember.
those red envelopes and I just send them back and get'em more and send'em back. Um
T Tell me about your
sort of involvement in the branding, right? Like the red envelope and
Uh
This sort of the
Just building the brand of Netflix, right? Because
It
That's
But was also part of its success.
So uh Mark, uh bless his heart.
put his ego aside when I came in.
Uh, and then he was uh head of marketing and and merchandising and
Um
Up until the IPO.
And uh just before then, um we got in a head of marketing uh Leslie Kilgore.
uh who was out of Amazon, but before that was Proctor and Gamble and you know, uh central casting for marketing.
Yeah.
And she really drove the the red envelope um and the iconic branding.
uh that we had. And you know, I uh at that by then was articulating the freedom and responsibility model.
And so it was very consistent for me that I was not involved in the branding, the iconography, the all of that, and that she ran it and ran it incredibly well.
And now twenty years later, she's a board member at Netflix.
Okay, let's talk about the freedom and and responsibility model here, because this is a um a reference to this what's known as the Netflix culture deck.
Um and I want to dive in here because you you make this public in two thousand nine.
Um and th th was would eventually become the basis for a book that you wrote a few years later. But when it it when it was released, it it was released to mixed reviews. Some people were just blown away. And for people who don't know what this is, it's 127 slides. It explains Netflix's culture and how they
how the the company motivates performance and and um
and evaluates employees, and some people saw it and were just, you know, sort of recoil at it g this because basically it demands um high performance s pe for for
Uh and also it it it it shows how
You when people aren't performing, you push'em out.
Tell me about developing
This model because
You know, I asked you earlier about
the previous companies you said sometimes, you know, when you're chopping wood you can't
Sharpen the axe.
In this case
Clearly you took the time.
So
How did this
uh sort of approach to building culture and building
an environment uh a around
Excellent, some people would say um mercenary.
culture. How how how did you develop that?
Um the core of it was
If you had incredibly talented people, you didn't need a lot of process and rules.
Netflix was anti process and rules.
and pro talent density.
And then to get talent density
We modeled it on a championship sports team.
And they had to swap out players, and that was a normal part.
Uh of the ethos.
And so that contrasted with the notion of company as family.
You know, you're all like my family, that kind of CEO talk.
But then you go and lay someone off, which, you know, if you were on hard times you wouldn't
say we're gonna lay off your sons and you know your daughters get to eat and you know. Um, you know, our our ethos in family is around undy loyalty. That's what we admire.
And so I realized, oh, it's really that we want to organize as a professional sports team and not a family.
And it lots of people were
operating their Silicon Valley uh business that way, but none of them admitted it.
Or not many.
And so the shock was this the sort of it resonated because it was the truth of the what we aspired in
Much of the competitive ecosystem of team not family.
But no one had said it so directly.
And that
Not only did that run counter to the direction that that corporate America was heading in, it still does, right? I I I think it's changing a little bit, but for the last twenty years, many companies, certainly tech companies,
We're talking about their
Employees like family.
And that model
can work and it can work really well

That model is
It sort of
naturally
results in inefficiency and in
in in just waste and uh lack of productivity.
Well, um
Families are dysfunctional in many ways. And so yes, I think it's a inferior model.
And again, team is not cold.
You know, a good team really has highly functional people with good relationships between each other.
They pass the ball well.
um sacrificing their own opportunity to score to so that because the other person's got a slightly better shot.
So, you know, you you need incredible cooperation.
And we said, you know, today
Many people want to be team players.
But not everybody has the skill to do a blind pass. So a blind pass in soccer or basketball is is
throwing the ball without looking at the player because you've worked so well together, you have a high confidence where they're going to be.
And so we would talk about that as the skill of teamwork, um, which is building trust.
um proactively letting each other know about things, all kinds of close cooperation.
There were a joy to be part of.
You know, I I think people did focus we had a line in there.
Um that adequate performance gets a generous severance package.
So that was sort of the acid line. The typical model is
the job is a property right and you have to screw up and the company has to prove that to take away that that property right. And what we were saying is no, in a sports team, it's very clear that adequate performance, you know, uh generates a cut and someone else gets a chance to try to be extraordinary in that in that position.

Interesting about that model. It's like when you think about, let's say, a professional baseball player and they are on team that wins a World Series. They're committed to the mission.
Of the team winning the world series.
uh and they're f they're playing as hard as they can and they celebrate it and then the off season they get traded and and the and the thing that the
hear again and again from a player is it look that's business, that's the business, you know.
Very rarely do players take it personally. Sometimes they do, but very rarely do they take it personally. They're traded to another team, they're not needed in that position anymore.
Um, and so how do you find a star who's also understands that, you know, business is business and that at some point
They might be uh cut loose.
I mean broadly there's two types of people, one for whom job security is very important.
and they're willing to tolerate uneven quality of colleagues.
That's just an acceptable price to pay.
Yeah.
And then there's others who are willing to tolerate job insecurity. Nobody likes it.
Okay, but they're willing to tolerate it because all of their colleagues are amazing.
At what they do, and it's so much fun to work in that high talent dense environment.
So I would say um
The original deck
was in hindsight
Didn't balance enough the love and the care that we have for each other.
So it came across as competitive, that we were internally competitive for the positions.
Right. Um, which really was not the experience of employees inside. So it we should have warmed up that deck.
with um a lot of intense positive emotions about teamwork.
Um in fact the story behind publishing that deck
was too many people were surprised when they came into the company the way we operate, and it wasn't fair to them.
We wanted to be really clear about who we were.
so that we differentially attracted the second type.
who was willing to tolerate job insecurity to get um talent density.
How would you make that assessment though? Like it it ha you it has to be sort of coldly rational.
Right, and and so No, there's it's not rational when you let someone go. I mean you wanna think it through, but it's it's an instinct that you could get someone better for that role.
So the the test we use is called the keeper test.
Would you fight to keep that employee if they were leaving on their own?
Like if I worked for you and I said, Hey, I if I was gonna leave, would you fight to keep me? And if your answer was no, then I would know I'm not
Probably
You know.
The right fit. Then it's time for a generous severance package, that's right.
The Genera Severance Package helps in a couple of ways.
If there's a general severance package, it hurt less.
Because the person had a a backstop.
Um, and then second, then we didn't have to do like performance improvement plans and document that we had tried and all those things, which eats up a lot of time and energy and money anyway. Yes. So I don't think it actually cost us money because it got managers to act more quickly.
And it made it easier on the person who was let go,'cause they got, you know
uh what they perceived as a generous severance package. So
Then you know, we could be letting go of hundreds of people and have no lawsuits.
Reed, how did you make sure that people were honest with you? Because you presumably are expecting people to
also evaluate you based on this model.
Now you got a great record build Netflix, but so so maybe you're, you know, uh you sort of
Uh are kind of
Uh it doesn't apply to you, but I guess
To be consistent it has to.
It had to.
Yes. I mean I would ask the board of if I were, you know
quitting or retiring, would you want to change their mind you might stay.
Um so yes, it applies to me also.
But I have to imagine that if I'm
uh you know, uh an employer, a manager of Netflix and
Uh there's Reed Hastings, the guy who who who who you know who went up against Blockbuster and believed in this thing when when the stock price was a quarter and
Wow, look look where we are now. Like I I would probably be intimidated.
to give you feedback and that actually
I think
In part.
did happen, right? Like there was
You've described this kind of debacle that happened around two thousand eleven. Maybe it's time to talk about this. Um
Uh because I think part of
At least y from your view, part of the reason why that happened is'cause nobody really pushed back.
Well let's set that one up because it's a good one.
I became in two thousand and ten with the rise of Hulu.
Um, which was a straight streaming play by the industry.
I became obsessed if if we cling to DVD
Despite the fact that it's growing and it's profitable, uh, we may not succeed in in streaming.
And that we should wean ourselves from the D V D business.
T V D'O Rentals was still growing in two thousand eleven.
Yeah.
Yeah. Okay. Um and so and streaming was quite small.
But it was clearly the future. You saw that that's what it was gonna be.
That's right. And one step in that was to separate the businesses into the the old DVD business was gonna get spun out as quick ster.
And then Netflix was gonna be the streaming business like Hulu.
That this was gonna be the uh dramatic, you know, painful in the short term, but you know, important in the long term uh thing to do.
And there'd be two sites, Quickster
Dot com and Netflix dot com. Okay. Uh and two pricings and two yeah, you just separate the business. And it was more expensive if you wanted access to D V D and streaming.
Correct.
Okay. Um but b both were good deals, um, but it was more expensive.
Yeah. So everyone knew it was scary, but as you said, everyone said, Well Reed's been right, so many times before, uh let's do this. Uh we did it.
Um, we got a number of things wrong. In particular the pricing, uh we should have grandfathered in the existing base. But big picture, it was too early. So most of the customers didn't care that much about streaming.
And they didn't want uh all this change and the split. So we were ahead of the customers by several years. So it was a blow up, customers very upset, stock drops by two thirds, um we did a layoff, all kind we had to reset our revenue expectations.
It was a disaster.
Mm.
When we come back in just a moment.
Quixter gets demolished.
And a house of cards.
It's built.
Stay with us, I'm Guy Raz, and you're listening to how I built this.
Welcome back to How I Built This, I'm Kai Raz.
So when we left off, Netflix was in the middle of a crisis.
Reed had launched a spin-off company strictly for DVD rentals, which raised prices and made
Everyone really, really mad.
By the way, how long did this disastrous period last? Was it it was more than a year, right?
Oh, it was probably three years really the the launch of House of Cards and Arrested Development that kinda got us out of it in twenty thirteen, so two years. Right.
Because you had to you had to eventually
I'm only smiling'cause I've seen the Saturday Night Live parody, but you had to apologize for it. I'm sorry if that if the if I Which did only made it worse, so you know, that didn't that didn't that was a desperate technique that didn't work. You went on you you did a video sort of
Acknowledging that this
Just a YouTube, yeah, that's right. Um but um
Uh and then SNL parodied it. Um
Jason to Dacis is Yeah, exactly. It's quite funny. It's quite funny. Exactly.
Okay, so we dug our way out. No it's good.
So
A year later, uh, roughly, we spent some real time analysing, okay, what went wrong, how do we avoid it?
And that's when I realized that many of the executives, top fifty people
Thought this was very risky and unwise.

Um, but they all deferred uh to me because they thought, well, Reed's gotten so much right before.
And they didn't know that each the other people in the room were also scared. And if they had known that, they would have spoken up more forcefully, and we probably would have taken a slower, more cautious approach.
So
The thing we instituted on big decisions is everybody publicly weighing in.
You know, on a ten to negative ten, is this a wise decision?
So that would affect like going into Europe, uh going into original content, um pricing changes.
So that everyone knows where everyone else stands.
Um who got vote on that? Like if you were to make a big
decision or wanted to who got to vote on whether that was the roughly the top fifty people. Sometimes it was top a hundred, but you know something like that. Trevor Burrus And so negative ten to positive ten.
And you would
you would use you would sort of use the their responses to to guide your decision. Like let's say you were really convicted that this was right.
We talked about it as the informed captain. The the leadership model is to be the informed captain. So the the captain of a ship is the absolute ruler of that ship and makes decisions.
Yeah.
We want our leaders
to feel like they're the captain. It's not a democracy.
But they needed to know what everybody else thought.
If you knew that there was
an uh discomfort or uncertainty about this quick stir idea, do you think it would have changed? I mean it I I wanted to think
Absolutely, it would it absolutely would have changed if
Everybody was like
Well, we can figure this out in two steps. If we do it here was say grandfathering the price.
Okay, so you know, there was no price it and then if it works well, then we can, you know, raise prices over time.
So just as an example, there are many ways to do it.
less aggressively and still do it.
And ultimately we did it. The thing that was D V D became D V D dot com.
Um
And so, you know, it it happened, it just happened less dramatically.
Um, and then we eventually down the DPD business in roughly twenty four.
Yeah.
Did did you ha I mean, given that Hulu was going to start streaming stuff,
Um they they started in two thousand seven. So they're starting streaming.
That also
Probably
created a potential threat in that
some of these um uh content creators would not give you the rights to stream.
Stuff, right? Like you could
DVDs was one thing. Ever gave us rights.
We we we bid for them.
Right. So it was an open market and buying the rights.
And if we paid, you know, enough more than Hulu, we would win the bid.
Yeah.
But
Hulu uh was a pure play. It was all about streaming, that's all it did.
that was the risk was that they would um become the symbolic center.
uh rather than Netflix, which, you know, had this DVD heritage.
So
How did the idea to make original content come about? Was that in response to where you saw
T.
this sort of whole industry headed that if you didn't do that
You would just and you were just a rental streaming rental service.
then your business wouldn't survive.
Well every cable network, which is a subscription business.
Had started on other people's content, build some audience.
And then start to add their own content.
HBO was built on other people's content.
and then got good at original programming. So
I again it was a a very well trod path.
And when Ted Sarandos came in, which he joined us in two thousand.
Um he was the one who sort of articulated, you know, eventually we're gonna want to do original content.
And then we actually started in two thousand and five doing original content on DVD.
And we didn't have a big enough subscriber base. And so after two years, we closed that down. That was red envelope entertainment.
We closed that down in 2007 and then we reopened it essentially with House of Cards. Uh I believe we commissioned that Ted did in twenty ten.
Um and then it came out in twenty thirteen.
And was a huge success, massive success.
Which is all Ted's programming judgment of there was many scripts floating around and then he swung for the fences.
We had to bid against HBO. This was not
kind of junior content. This was first you know, league content HBO was thinking of it.
Uh and we came in with a higher financial bid, even though we couldn't uh justify it at the time.
Um, and in the hopes that this would be our breakthrough, and indeed it was.
And you like you
Like you personally, would you say that you had
a good eye or or like a good sort of uh the ability to judge what was was gonna be good, or did you kinda defer that to people who had a better
Instinct for it.
I don't and I still don't when I read a script. It's very hard for me to translate to why one w one and one didn't.
Um, I would say that's a unique skill, which uh Ted and his team uh were very strong in.
And and let's talk about Ted now for a moment,'cause y you would you would serve as co CEOs.
I mean you have a very strong point of view.
You also like feedback, you also give it.
Um
What was it about him
Because y you were running the business for so long. What was it about him that you thought oh this is somebody I could
split this job with and actually
you know, totally uh work really closely with.
You know, by the time I did that, which was I'm gonna guess twenty twenty.
Um, we'd been working together for twenty years. So we grew up together. Um, you know, we were both uh quite young uh in doing Netflix and
At every place in the growth, uh, you know, uh we learned more and relied on each other. So I it was a pretty easy, non traumatic thing.
That uh only changed the business slightly.
I mean
twenty thirteen, you've got you the the sort of this original content really starts to
become a huge part of of Netflix's
business model and
By you know,
twenty eighteen, twenty nineteen, um, twenty twenty really, there's a
There's now all the code.
just a ton of money coming into this, ton into content with uh you know the other big
players competing um in that space.
Tell me a little bit about how how that sort of impacted what you guys
put bets on because I mean there were I think in in twenty eighteen, um
Spending on content was like
twelve billion dollars, you know, just that year alone.
Um what we did in original content was very well executed.
But it was conventional wisdom that that's what we needed to do.
So it it wasn't that radical. It was just you gotta do it well.
The thing that was radical is being direct to consumer around the world.
So every other network let's take
HBO is an example, but FX the same. They built shows for the US market. They had their own distribution here.
And then they sold the shows off to the BBC or Canal Plus or different networks in different countries. They were not direct to consumer outside of the US. And we were the first to say, hey, with the internet
We can be direct to consumer in India, in Japan, in South Africa, in Brazil, uh, in France. And this was seen as ludicrous in the industry that, you know, we would never be able to break in, uh, that we would never get successful.
you know, our um
First market uh was Canada uh in twenty ten.
And that didn't have D V D, right? So that was streaming only. And that's part of what gave us confidence that streaming only could work.

Uh then we did Latin America and then country by country in Europe, and then in twenty sixteen we did the whole world ex China.
And we gained increasing confidence year by year because the markets that we had gone into early continued to grow and eventually became profitable.
When do when do you remember thinking, okay, we're gonna uh
Win or be
near or at the top of this competitive environment. I mean
over time, you know, there's who you mentioned Hulu and then then Disney gets into this and HBO and
Permanent Apple and Amazon.
Um
were you always do you always remember while you ran Netflix, do you always remember being on like a war footing and always paranoid about you could actually
be defeated or you know
Or did you were you confident that
You guys were gonna go.
Emerge victorious or whatever word you want to use.
Well, if you look today um at TV viewing in the United States as an example.
Um Disney's ahead of us. YouTube is this is combining linear and on demand.
Uh, YouTube's ahead of us, they're the largest, Disney's ahead of us, even Paramount's ahead of us, because they all have big linear capabilities.
So we still have a long way to go. We're less than ten percent of uh US television watching.
But that includes terrestrial t television. Yeah, it's all in other words, it's
The television viewing is television viewing.
You know, you pick up your remote control and you choose where you're going. That's the moment of truth that we're battling for. And do you choose Netflix or do you choose YouTube?
And I would say the the
big uh challenger is U two because they
have doubled in the last four years their their share of uh television viewing.
Somewhat in the US, but dramatically around the world.
You know, people call it user generated, but it's not really users. It's kind of semi pro. It's people putting all kinds of different content on. Yeah, there's a little bit of user gen too, but
Uh it's the incredibly broad selection, you know, podcasts, uh everything.
you know, that's on YouTube is very popular.
So we're definitely a surprisingly small player in the US and around the world, again, being less than ten percent of television viewing and having YouTube be the past us and be the fastest growing. So we're, you know, again, trying to
win more share by having better and better programming.
I know that you you you
stepped away from the operational side. You're still uh the chairman.
Of the board.
Um and I
Uh and so you you you may have a uh I don't know, sort of outsider insider perspective on it, but how does
A brand like Netflix.
You know.
Maintain.
even maintain its its position when you've got
all this competitive pressure and for years people were saying people are not gonna want multiple subscriptions, they're not gonna want to pay for Apple and Disney and Paramount and Hulu and YouTube and Netflix. Wha but in fact many people do.
Yeah, I mean uh you're right that it's
a market structure of individual subscriptions that's very fluid. And so competing for it is having the best content. So
This summer we had an amazing movie, K-pop Demon Hunters. Yeah. Uh that for you know, eight year olds became like the the stunning thing. And you know.
adults could watch it two or three times, kinda like Shrek was when we were growing up and
Um so it's our first big animated hit. After, you know, maybe 40 different animated movies, we finally had a monster hit.
So it's an artistic execution business. And you know, if we can improve those ratios to from one in forty to one in twenty to one in ten to one in five, we'll be a monster.
Um but it's hard.
Netflix has invested
tons of money in content over the last ten years, right?
And there's all of this technology, I'm sure you've seen Sora too, and all of this technology and
You know, just as you could see that the world was gonna go streaming.
Can you look at do you look at AI'cause I look at it and I think I don't see how
I can imagine a future where there aren't human actors, where where it's all done
You know, using AI actors.
Do you think that
Is a realistic
Scenario?
Well, think about sports. Uh, do you think if there's two teams of robots playing basketball, it's gonna be interesting? I think some people would say yes.
Okay. I think a lot of people would. I think that will be a very small market. So I'll I'll take the under on that.
Um, and there's something about watching humans compete that makes it interesting.
I think we humans care about what other humans do, and that kind of puts some limits. And that's why we have anti-steroid rules, because we don't want to, you know, change the competition too much.
And I think in the same way, um, you know, uh films will have human actors not because it can't be something else.
Um, but because other humans won't be that interested.
Um, so think of it as uh you know, the Booker prize is a big prize for the best novel of the year.
You know, the year that AI wins the Booker Prize.
Then it's starting to really change the entertainment business.
Yeah. But up until then it's kind of uh tactical.
Um about what's on screen.
Reef, it would be irresponsible of me not to ask you this. I mean when this airs, this whole thing may be an old story,'cause this won't air you know, we're talking now in December of twenty twenty five, this will air in or in twenty twenty six, but um obviously there's uh a lot of news around
Netflix and uh ac acquiring
Um
Warner's uh streaming service or their their film division, I should say. Uh, and then um uh Paramount coming in with a uh c another offer. There's a lot of
There's a whole, you know, sort of m I don't know if I should say mess, but there's a whole big story here.
Um
Tell me about
just your your kind of w and there may be things you can't talk about, but what what's your overall
impression of
the acquisition offer and then now sort of the
Challenge from Paramount.
Well I'm super excited that the uh my replacement CEOs, Greg and Ted, which have been uh running the business for two and a half years
Um they've tripled the stock since I left. So they've been fantastically successful.
And I'm uh thrilled to be supporting them in this next chapter in uh acquiring Warner Brothers. Um but that's about all I can say about it as a board member.
Alright, as you mentioned.
Ted Sarandos and and Greg Peters now share the CEO job.
Uh and you've moved on to become the chairman of the board.
Uh and in twenty twenty three, the year you stepped down, I think I think that year you acquired a ski resort in Utah, which I I have skied at before years ago. It's a beautiful place near Ogden.
uh in Utah called Powder Mountain. Um I think it's called Powder Haven now.
Um, tell me about that. I mean you you you had
Plenty of money to do it, obviously, and I'm assuming you like skiing, so
probably a lot of people just assume, oh, you know, this is a
you know, fun little side project for Reed.
I mean can you explain this? I mean what what was the motivation to
To manage a ski resort.
Um, we had a home there, so we were skiers there, but we were one acre customers.
And I had noticed that the resort was uh not very successful.
And so I started to get to know that spring, the owners, uh, to see where I might be able to help.
And in April, uh one of the two owners sold to me, and in November the other one did.
And so for me, it's a passion play of creating a real estate uh place of beauty. Um, real estate's a different skill set. You know, you you build a neighborhood, you put in roads and and sewers, and then you try to sell the lots.
And that's the basic play. And this year we had a big success and we sold out.
So you know, think of it as a a big resort like Heavenly, um in in Tahoe for only six hundred and fifty families and their guests.

And then we're also running the public resort.
uh which is a normal public ski mountain with season passes and uh et cetera.

Um the public ski resort's good, but it's not an exciting business. It's a hard uh you know, it's like running a restaurant or something.

The private side is um, you know, much higher revenue, much more exciting.
And so I think of it like uh my friend Steve Bomber who bought the Clippers. Um, you know, it's kind of like buying a sports team.
You know, it's a passion.
But it's not f some fundamentally around the profits. It's around
Um competing and winning and succeeding.
And for me, this is totally different than running Netflix, but it, you know, it has a lot of interesting puzzles.
Yeah.
When you think about about the the journey you took, right?
mean to age thirty s five already you were
very successful financially.
Um but then of course it would go on to build Netflix, which is not just a
company. I mean it's one of the
It's one of the you know.
one of the things, right? It's a it's it's a huge technology stock. It's a huge brand. It's a
Cultural touchstone.
How much of what happened to you
Do you do you attribute to the work that you put in and your
Your skill and your
approach and how much do you think had to do with with
Getting lucky.
Well, I wouldn't put them opposed to each other. So we got lucky at a number of places. We talked about the L VMH fifty million investment. We could have easily been bankrupt.
Um, we got lucky that D V D came along and you know
Uh, lots of people worked on that and then it won. We got lucky that a lot of competitors did or didn't do certain things.
But there was a lot of hard work for twenty five years. I was always trying to be the first one up in the morning, the first one reading the metrics and
You know, uh it was a very
Wonderful intensive time. So I would say we made the best of what the luck offered.
And it might not have worked out, like you said. Um and if it hadn't, I'd like to think we w would feel like this I would feel like the same person, and that the success of Netflix hasn't changed me. That's probably a little bit naive, but I think it's fundamentally true that
You can't underestimate the role the luck plays.
That's Reed Hastings, co founder of Netflix.
By the way.
And this will come as no surprise to many of you.
The most watched original Netflix film of all time?
is K pop demon hunters.
As of last December.
It had amassed more than five hundred million views worldwide.
Hey, thanks so much for listening to the show this week. Please make sure to click the follow button on your podcast app so you never miss a new episode of the show.
And if you're interested in insights, ideas, and lessons from some of the world's greatest entrepreneurs, please sign up for my newsletter at gyros.com or on Substack.
This episode was produced and research by Sam Paulson, with music composed by R teen Arably. It was edited by Neva Grant. Our engineers are Patrick Murray and Robert Rodriguez. Our production staff also includes Alex Chung, Elaine Coates, Nor Gill, Casey Herman, John Isabella, Catherine Sepher, Chris Massini, Carrie Thompson, and Ramel Wood.
I'm Guy Roz and you've been listening.