Reed Hastings - Building Netflix (EP.453)

00:00:00Most software companies try to maximize your time on their app to juice engagement. Ramp does the exact opposite. Ramp understands that no one wants to spend hours chasing receipts, reviewing expense reports, and checking for policy violations. So they built their tools to give that time back, using AI to automate 85% of expense reviews with 99% accuracy. And since Ramp saves companies 5%, it's no wonder that Shopify runs on Ramp, Stripe runs on Ramp, and my business does too.

00:00:26To see what happens when you eliminate the busy work, check out Ramp.com slash Ingram. invest. Open AI, cursor, anthropic, perplexity, and Versel all have something in common. They all use WorkOS. And here's why. To achieve enterprise adoption at scale, you have to deliver on core capabilities like SSO, Skim, Rback, and Audit logs. That's where WorkOS comes in. Instead of spending months building these mission-critical capabilities yourself, you can just use WorkOS APIs to gain all of them on Day Zero. That's why so many of the top AI teams you hear about already run on WorkOS. WorkOS is the fastest way to become Enterprise-ready. and stay focused on what matters most, your product.

00:01:02Visit workOS.com to get started. Felix by Rogo is a personal finance agent that turns a single prompt into finished client-ready work using your firm's own templates, context, and standards. Send Felix an email like, take these comments and turn them for me, or update my tracker with the context of these emails, or run the ability to pay math on this buyer,

00:01:21and Felix sends back finished PowerPoint decks, Excel models, and sourced research. Felix works the way your team already does, delivering work quickly and accurately around the clock. Learn more at rogo.a.ai slash Felix. Hello 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.

00:01:59Patrick O'Shaughnessy is the CEO of Positive Sum. 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 Some may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc. The most interesting thing about studying Netflix and talking about talking about to read 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.

00:02:42The first 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. Reid talks in our conversation about how even the DVDs were nothing but a stepstone towards the streaming future that they envisioned at the very important. very outset of the company's founding in 1997 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. 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.

00:03:24We 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 want to 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. 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.

00:04:04What was the early origin story of that concept? So I founded pure software in 1990 and grew kind of typical great software company doubling. I wasn't careful about it, and I would say talent density declined. That company, we went public in 95, got acquired in 97. And when I analyzed looking back what happened, one of the major things was, 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, okay, I've tried to run software like a manufacturing plant

00:04:50and reducing error and putting in process. And then that doesn't get high productivity or high talent. and we should manage software much more artistinally with inspiration rather than management. So typically we humans, we value being nice and we value loyalty. Yet in the workplace, that's attention because being nice is in contrast or 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 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.

00:05:37Similarly, with loyalty. We come to see loyalty, which is something in your family, like you would never fire your brother if you were tight on money. You would share 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 where family. All companies used to be family companies, and then corporations have grown more recently. All countries used to be family countries and kingdoms. And so basically family was the deep organizing unit.

00:06:16So 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. 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.

00:06:46How do you protect against the natural way that company, 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? Well, as the companies grow, you may be able to pay people more. So that will help.

00:07:13If you think of the sports team in the biggest markets, they can afford the highest compensation. And like the Yankees or the L.A. Dodgers, they often have the best players. It's not a 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

00:07:37so that more and more of your leaders get adept at managing for density. I would love to talk about each stage of the funnel to creating talent density in the 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 want to talk about further down the funnel. But starting just with like top of funnel, 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

00:08:15figure 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, but then you can stay no matter what. And 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 in to 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, 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 is the best person. It stands for reason that maybe your one-year attrition rate was higher than, say,

00:08:56Googles or somebody else's? Quite a bit, yeah. What was it? Slyke, do you remember? I guess it's probably 20% in the first year. 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?

00:09:11Well, 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 going to 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 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

00:09:50benefits of that, you know, which is 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 to get the performance density. You said fast and loose. Can you see more about loose? If you overmanage, for example, a tight process or are specific hours that you have to be in the office or a wide variety of things, you filter out performance and creativity. And the looser that you can run, the more creative that the organization will be.

00:10:34So 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

00:10:56as you can possibly tolerate, as opposed to, say, a semiconductor factory, which is trying to reduce variation and reduce error to get rid of variance. If you're going to be a creative organization, you want to be high variance, high creativity, and again, managing on the edge of chaos. I'm curious with the 20% attrition rate. What you're learned about letting people go well and the right way? How did you get really good at that specific part of the life cycle? 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. So it's very difficult for them. And so one of the

00:11:43best things is to do large severance packages, like four to nine months of salary. And so it feels expensive at first. But one is it makes the person who's let go feel a little bit better because 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. 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. So typically I would say something like, hey, I see Patrick, you're working really hard, you're trying.

00:12:35I'm so sorry to tell you that honestly, if you quit, I wouldn't try. I wouldn't try. to change your mind to stay. The reason I wouldn't change your mind to stay is I think I could get someone in your role that 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 old 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 slides, deck, adequate performance, gets a generous severance package. So it's really just starting

00:13:17upfront. 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 when someone not great moves on. As your business scales up, everything gets more complex, especially your compliance and security needs. With so many tools offering band-aids and patches, it's unfortunately far too easy for something to slip through the cracks. Fortunately, Vanta is a powerful tool designed to simplify and automate your security work and deliver a single source of truth for compliance and risk. There's a reason that Ramp, cursor, and Snowflake all use Vanta. It frees them to focus on building amazing, differentiated

00:13:56products, knowing that compliance and security are under control. Learn more at vanta.com slash invest. I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridgeline offers a better way forward, one unified platform that automates away that complexity across portfolio accounting, reconciliation, reporting, trading, compliance, and more, all at scale. Ridgeline is revolutionizing investment management, helping ambitious firms scale faster, operate smarter, and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgeline.aI. Your finance team isn't losing money on big mistakes. It's leaking through a thousand tiny decisions nobody's watching.

00:14:43Ramp puts guardrails on spending before it happens. Real-time limits, automatic rules, zero firefighting. Try it at ramp.com slash invest. As your business grows, Vanta scales with you, automating compliance and giving you a single source of truth for security and risk. Learn more at vanta.com slash invest. Every investment firm is unique and generic AI doesn't understand your process. Rogo does. It's an AI platform built specifically for Wall Street, connected to your data,

00:15:10understanding your process, and producing real outputs. Check them out at rogo.a.i slash invest. The best AI and software companies from OpenAI to cursor to perplexity, use WorkOS to become enterprise-ready overnight, not in months. Visit WorkOS.com to skip the unglamorous infrastructure work and focus on your product. Ridgeline is redefining asset management technology as a true partner, not just a software vendor. They've helped firms 5X in scale, enabling faster growth, smarter operations, and a competitive edge. Visit ridgelineapps.com to see what they can unlock for your firm.

00:15:47Was there 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 very dearly? During the Netflix 25 years, there's a couple small things that we did wrong and one big one being the Quickster separation of DVD and streaming. Maybe taking the Quickster example, what does it like to see high talent density operate against something like that? I'm just curious what it felt like to watch that happen. So Quickster for your listeners was a sad episode at 2011 where I became convinced we really had to go all in on streaming and drop DVD and put DVD in its own company that would drift along and free ourselves from that. Unfortunately, most of the customers were mostly using DVDs.

00:16:35Disagreed. So, yeah, they were still, mailed me the discs. And so they didn't like it, lots of cancellations, stock dropped by 75%. 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. But they kind of said to themselves, geez, Reed's made 18 decisions, right? before, so, you know, I'm probably wrong and Reid's probably right. So they kind of suppressed their own significant doubts. 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 10 to negative 10 on decisions, then it's all in a big shared documents or 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.

00:17:48So 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 whole. 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? Because that seems like a consensus process, or at least, if not decision by consensus, at least being aware of what the consensus is. And 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 your personal history of decisions that you made that created most of the value? Well, I think you want to be super careful here because this is the source of much value.

00:18:25you want to be totally independent of your thinking and not consensus oriented at all, but you want to know what other people are thinking. Otherwise, you're flying blind. So I think there's a high value on information, gathering opinions, but then not averaging them. We would never do that. We were very clear that the concept was the informed captain. So we wanted to make it like the captain of a ship. Okay, the captain of the ship makes a decisions, but it's good for them to collect a lot of information. And so we were very strong on no committees, 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,

00:19:16because there's just less competition if it seems bad. What has been your process of coming up with good ideas in the first place. I fall in love with ideas easily. 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. And this was coming out of the AOL mailing CDs to everyone to install AOL on CD-ROM. So I was kind of like pretty familiar with mailing because I've gotten tons of these discs through the mail. DVD for movies was just replacing. vHS or just starting. So I kind of like clicked on that. 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

00:20:07you 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 as an extremely efficient digital distribution network that someday the internet would be faster than and cheaper than and lower latency then. So I never thought I loved the mail business. I thought I love network business to deliver entertainment. So that was an example. And then the contrarian part of it was when we were fundraising in 1997, 98, 99, 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. And we had a contrarian thesis that we could build a business

00:21:00with 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 we're going to have to ultimately go? Oh, that was from the beginning. That's why we named the company Netflix as internet movies. And so 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 replace it with another.

00:21:36And we knew that would be a challenge, but we knew the best way to be successful at it was to get big on DVD. 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're on the boards of, I think, Facebook and Microsoft. I think you're on the Anthropic board and the Bloomberg boards. You've had this sort of, of course, Netflix itself at the center of technology. You've had this very cool 360 view of probably the most interesting era of technology development ever. I'm curious from those seats what the technology landscape looks like to you today. Like what are the key considerations, things that you have your attention on that seem the most important to you from those vantage points?

00:22:15First of all, because of exponential phenomena, it's always the coolest time ever to be in computer science. In the 1980s, I thought, oh, my gosh, so much better than the 1960s. It'll always be true, hopefully. It'll always be true. I would say as a CEO at Netflix, I learned so much being on the boards of Microsoft and Facebook. They had quite different businesses, but they made very interesting trade-offs the way they thought about things. I mean, both of them were very long-term oriented in what they thought they were. were willing to lose money in certain new areas for a decade.

00:22:48What 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 ad-supported businesses, it didn't work well. 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.

00:23:16So we've always wanted to add content to the Netflix subscription to make it more and more useful, more and more enjoyable, but kind of keep it like one big model as opposed to also do theatrical movies or, you know, also do something else as a way to expand revenue.

00:23:33Trying 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 trading stations of Wall Street and media around that. And he's been incredible at kind of this long-term

00:23:58orientation to having this intimate relationship with the customers, like becoming a trusted utility for the industry that's been very powerful. Big moats for that business that are really customer loyalty that he's been serving multiple dimensions for a long time. And then Anthropic, I've only been on the board for a year. And it's a wild story because, you know, it's growing so fast. What did you learn from Mark? 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 convince that there's going to be something beyond the phones, maybe that'll be a classes format. and not wanting to be dependent on it,

00:24:43wanting to be really the invention of that layer, which is extraordinarily ambitious. I probably would have just been like the ad giant if I was doing that business and try to 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

00:25:01with 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 themselves? So typically board members want to add value because 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.

00:25:27If you run an airline, you can't be on another airline's board. 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't tell them, you don't know what you're talking about, because they run the thing. So you see this dysfunctional thing where board members ask hard questions

00:25:54and 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, 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.

00:26:20If the company falls apart, I will step in and be part of replacing the CEO. 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 can't be asleep. You've got to really ask a lot of. 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

00:26:52firm. And if you get that right, as say Microsoft shareholders or board did with Satya and 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 drills and hopes that there's never a fire.

00:27:22When 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 website as a board of directors. And that seems to be a selection criteria. versus like this person's actually going to be good at this insurance layer thing. How did you select board members?

00:27:41Yeah, people who I believe will be wise in a crisis, we call it extreme duty of care. So duty of 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 meeting so they can watch what's going on, watch the sausage being made. again, not so they're adding value, 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, you know, strategic initiative or something?

00:28:27I 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. So from maybe 2004 on, we had open compensation. So basically, the top 100 or 500 people of the company could see all the comp throughout the company. And the rationale was then they could keep like a similar. people in a similar vein, and there would be more trust around gender, around other dimensions that could be discriminatory, because 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 $10,000 more, and so it got pretty distracting. And ultimately, we put it to a question of the VPs about 10 years later, 2016, 17, 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,

00:29:39which 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. 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 on originals and original content. As much as we possibly could. Say more about just the core calculus or thinking there.

00:30:19I'm sure there would be some directors that would accept an unlimited of your money to make something. There's how much on any one show? 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. In terms of any one show, then the question is, what's the likelihood based on what we've seen, that this is going to 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,

00:30:51and we had to bid that away from HBO. So as media rights capital was making it, they had bids both from HBO and us, and we were a DVD 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 lot of risk.

00:31:11And then they came through had made a fantastic show. And then we were off to the races and original content. And is the 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 going to 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? Very much so. But it's similar to venture capital. If every A round were 100 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 to. But that would be the big difference from venture. Your finance team isn't losing money on big mistakes. It's leaking through a thousand tiny decisions nobody's watching. Ramp puts guardrails on spending before it happens. Real time limits, automatic rules, zero firefighting. Try it at ramp.com.com slash invest. As your business grows, Vanta scales with you. Automating compliance and giving you a single source of

00:32:11truth for security and risk. Learn more at vanta.com slash invest. Every investment firm is unique and generic AI doesn't understand your process. Rogo does. It's an AI platform built specifically for Wall Street connected to your data, understanding your process, and producing real outputs. Check them out at rogo.a.i slash invest. 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 matter to you, as you expanded it. I mean, now it's so many things.

00:32:43But in the early days, you know, you're obviously making choices. It's house of cards. It's not something else. And there's tradeoffs. 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

00:32:59should the brand be. So the cable networks by necessity were narrow brands because they got one cable slot. And so FX and Hallmark were both. 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 to think about how much of the programming do we want to be Hallmark, Soft, Easy, Romantic Stories, Feel Good, versus FX and B

00:33:33sort 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, 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 who got this right again and again. had, we called a great taste, but they had more than taste. They had taste in judgment about,

00:34:15you 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. The other side of the equation, of course, is the beauty of the business model is fixed cost 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

00:34:48and reliable and high subscriber growth? What I loved about Microsoft and Facebook's business is they, 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, 50 billion in revenue on a product. When I started Netflix, I was like, well, thankfully, we could. do this as, you know, one really big product because entertainment is an extremely large market. Basically, every human on the planet watches television 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

00:35:27capture? Even today, Netflix is about 10 percent of U.S. television. So 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 essentially product quality, what kind of shows do we have?

00:35:56Now 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 90% is that defined as just traditional television, or does that include like YouTube watched on? No, YouTube is about 12%. It includes everything sports, video gaming. It's uses of the television screen.

00:36:17I mean, we compete for time on mobile phones too, but we're very small there. It's not a big use case. And television, we're a big use case, but still, really, it's under 10%. If you think about that percentage as an important thing for Netflix, the business, what are the competitive frontiers or fields

00:36:37on 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're competing against them and therefore we want to do certain things to win? Well, they're growing and we're growing. And traditional linear is shrinking. So you're right that mostly we both compete with linear TV.

00:37:02But 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. 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 to, but they don't get paid on it in advance.

00:37:25Then they put it up and they see what kind of add 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. And that's really the biggest difference in the business model. But it's ultimately, do we produce content like The Perfect Neighbors, a documentary that just came out, won all these awards, and it's been the number one documentary this last month.

00:37:49You know, clever, fresh perspective, content like that for K-pop Demon Hunters, which was our hit this summer. So, you know, it's ability to create those hits. What is that magic? Like, what is shared amongst the people like Ted and others, that had been able to reliably and consistently be a part of creating those big hits over time. If only it were reliable and consistent,

00:38:14K-pop was probably our 30th animated film. So 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? 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.

00:38:39What 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 the technology? Well, visual effects is one where there's a lot of that workflow that can be automated. But in terms of 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 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 it, AI is not particularly incented and the companies are not to do long-form character development.

00:39:29but at some point they may do that and focus on that. 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 O.001% of the stories that get written. So simply writing a story, I mean, there's a million film students. We could just go to them. So the issue is trying to find one that's really unusual, extraordinary,

00:39:53and recognizing that one early. 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.

00:40:22So you love contrarian thinking, right? But you probably need to remember that contrarian thinking most of the time is wrong. 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, quibby, 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 TV series. So these things are tapping into something human that other things, so you've got video gaming as a different modality and that's quite a bit different, but like most of the hybrids between TV series that you kind of interact with have been.

00:41:20in very small markets. It doesn't mean we won't eventually come up with a new art form. 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 TV, and we're mostly wanted to tell us a story. And if you think of young kids, two-year-olds, half of 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 that are different.

00:41:50One is passive. And, I mean, again, I think it's very biological and we're selected for it. And one's very active. One of those becomes TV 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.

00:42:14Can you tell that part of the Netflix story of what it took 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 DVDs, 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.

00:42:38And 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 was 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 was challenging. We first launched in 2007.

00:43:05And for probably 15 years, the internet was underpowered and you had to do a lot of clever engineering things. But for the most part, there's 100 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. 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.

00:43:38The gaming is we're trying to push into different types of games and figure out gaming in addition to TV series and films. Why do gaming at all? Like if you're so good at the core thing and there's room for scale still, you're only 10%. Why bother with gaming? We used to just be movies. And then we expanded a TV series and we're really glad we did that. And then we expanded into unscripted content, you know, love is blind.

00:44:04So we've always been expanding in new categories. And gaming is just another category of entertainment. And so we've got some cool stuff going on the TV where your phone is the remote control, which has higher latency, but it's easy for party mode type games and it's really fun on these sort of social interactions. How do you know when to keep betting on something

00:44:25and 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, let's do one of those. If you look at the New York Times, January 2006, there was a launch of Netflix friends. So this was friend to friend sharing

00:44:41about 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 DVDs were you picking? Could you give each other? We tried 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 want to 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. 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 looking for something to watch. But really, it was the hit of 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 the thing I want to spend a lot of time on.

00:45:47When you were CEO, I'm curious how you thought about generating and keeping business power, which leads to free cash flow, and then allocation of free cash flow. Those seem to be, especially 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? 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.

00:46:20So the theory is that we can all earn a marginal rate of maybe 6%. But to earn above that is because it's hard for competitors to do what you do. And then you can get an above market margin. So we definitely spend 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. 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 30%, like Apple gets.

00:46:56Okay, so they would be battles over that. And then power is essentially, could they sell a TV without Netflix, or could we, how many members would we lose if Sony televisions, for example, didn't have the Netflix app. So that's an example 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 is done as well. 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 buyback shares, to do this sort of thing? And just I'm so curious how you thought through like the capital allocators toolkit of the things that you could do.

00:47:38with the capital that you were generating? Well, in most businesses, that's highly material, you know, building a lot more warehouses or something. 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 1% of viewing in a year. So we have extreme non-concentration and lots of different budgets and spread. There was very little CAP-X of any long-term nature. margins were pretty close to free cash flow,

00:48:10and 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 low margins relative to cable, which ran at like 35, 40% margins, 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.

00:48:39And 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 lead being full-time CEO? Because Greg and Ted were ready. I've been developing them for at least a decade. And I felt like coming out of COVID, they were ready. And then unless I was going to 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.

00:49:09The best AI and software companies from OpenAI to cursor to perplexity, use WorkOS to become enterprise ready overnight, not in months. Visit WorkOS.com to skip the unglamorous infrastructure work and focus on your product. Ridgeline is redefining asset management technology as a true partner, not just a software vendor. They've helped firms 5X in scale, enabling faster growth, smarter operations, and a competitive edge. Visit Ridgeline apps.com to see what they can unlock for your firm. 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? It seems it's such a wildly different project in almost every way that I can imagine is very, very different. How much directly

00:49:49translates and how much needs to be left behind given the different nature of the project? So Powder Mountain is a ski mountain and real estate development that fell on hard times in Utah. So the original people running out ran out of money so they never finished a long. of the project. We happen to have a house there. I love the place. It's, you know, natural beauty is insane. It's 10,000 acres. And so after retiring from Netflix, I decided to take control of it and invest in it and do a turnaround. And so then it's rebuilding the staff, rebuilding the vision. And I would say 90 plus percent of talent density, no rules, rules. The whole model has worked extremely well and the ability to move fast, hire incredible people, have them do things.

00:50:38It's everyone being very creative. And I would say the talent density model has been worth the pain, i.e. the turnover, and has created an 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 over the first couple steps to execute against it? It was a series of transactions to gain control. So it took six months to buy out a majority of the company of the shareholders to have control. Everyone wants the billionaire to pay a lot and being clear with them that this thing could collapse if I don't come in.

00:51:21That 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 it could be a real win-win where they share operating costs and are more efficient, and we can then have a very uncrowded resort

00:51:41on 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. And then on the private side, it's building a 650 home community of ski lovers where they get there, basically their own enormous ski resort,

00:51:59the size of heavenly or veil just for the 600 homes. 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 considerations that you've figured out in your studying of its history? Yeah, skiing is about one-eighth or one-tenth as big as golf in 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 to get outdoors as social with your friends on the lift. It's got some of those same properties. Interesting in there, 25,000 golf courses in the U.S., and about 20%, 4,000 are private golf courses. And private golf courses, you get better tea times, the nice clubhouse atmosphere, social, you get to know people. And that's

00:52:46really what it is for private skiing also. There's about 500 ski areas instead of 25,000, but only three are private Yellowstone Club, Wasatch Beaks Ranch. and powder. So it's very underserved market relative to golf. What's most fun about it to you, the whole project? That it's very right brain. Everything at Netflix was very strategic, logical, a lot of big competitors. In skiing, the competitors are very cooperative. It's, I think, because you have 20 or 30 miles between you, and so it's a lot more collegial. And it's a The big winds we've done have been building up the art to Powder Mountain. So there's got a lot of outdoor land art that's incredibly beautiful to ski through. So if you've had the good fortune to go to Storm King north of Manhattan. Beautiful, yeah.

00:53:43Okay, so think of Storm King on a ski mountain. Skying through it. Yes, and skiing through it. 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. So what are we going to do in summer?

00:54:01Well, 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 and 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 is a level 600 acres. So it's not like in a mountain, but it is outdoor sculpture and 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. Now we've got dozens of pieces already in and a lot more coming. 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 philanthropy as well. What was it about that sector that drew you?

00:55:04And I'm just curious for you to riff on the problems that you see in the space. Yeah, and it's interesting. I 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, is my first job out of college. And so I've always cared about K-12. And I've done a lot of philanthropy in that sector over the last 25 years. And then the new big thing is AI. So it's easy to then put those together and how are we going to apply AI? The core vision, and it's super well articulated by your prior guest around Alpha School is kids should be taught individually as opposed to having a teacher stand in front

00:55:45of 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 $100,000 a year per kit. So out of reach of everyone. And so now with software, and 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.

00:56:21But the content transfer, 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

00:56:36to speed that up the most? It could take decades because of the regulated nature of 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 16, what's going to happen to them in the workplace? And they need more and better skills than ever.

00:57:01And, you know, every 16-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-12. We use it in college. And then like in the workplace, we never use it again. You did all this classroom learning. 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.

00:57:31And as Joe says, it's helping kids really love school because then they'll continue to love learning. And the classroom and the bored of and frustration of that 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. It's not because we think they're going to happen, but because we'll lower the chance of them happening if we're honest and talk about them. So I don't think the the AI boomer and dumer 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

00:58:15tremendous 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, you know, swing factor of the next 50 years is how well we do that. What do you think the biggest risks are? Well, the near-term risks are unemployment causes societal chaos and strife. So if you were to get a lot of unemployment, 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, 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,

00:59:05Cold 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, 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. 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?

00:59:4530 years ago, I worked at a startup. I was a frontline engineer 28, so I do it all nighters all the time. I used to have coffee cups spread around my desk. And over a couple days, it would get kind of 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 those days.

01:00:09You had to go in the office because of the computers were there. You couldn't take them home. So I went into the office at 4.35 in the morning, walked in, went into the bathroom, and there was my CEO washing coffee cups. And I looked at them and I was like, Barry, are those my cups? He said, yeah. And I said, have you been washing my cups all year? And he said, yeah.

01:00:33And I said, why? And he said, you do so much for us, and this is the one thing I could do for you. Nice. And I was just very moved about his humility and his caring, kindness in your question. And so I felt like, God, I'll follow this guy to the ends of the earth. Wow. And so simple gestures. Holy cow.

01:00:54Great story. Amazing place to close. Thank you so much for your time. Real pleasure, Patrick. If you enjoyed this episode, visit join colossus.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. Learn more at join colossus.com slash subscribe.

01:01:21Your finance team isn't losing money on big mistakes. It's leaking through a thousand tiny decisions nobody's watching. Ramp puts guardrails on spending before it happens, real-time limits, automatic rules, zero firefighting. Try it at Ramp, As your business grows, Vanta scales with you, automating compliance and giving you a single source of truth for security and risk. Learn more at Vanta.com slash invest. Ridgeline is redefining asset management technology as a true partner, not just a software vendor. They've helped firms 5X in scale, enabling faster growth, smarter operations, and a competitive edge. Visit Ridgelineapps.com to see what they can unlock for your firm.

01:02:21Every investment firm is unique and generic AI doesn't understand your process. Rogo does. It's an AI platform built specifically for Wall Street, connected to your data, understanding your process, and producing real outputs. Check them out at rogo.a.i slash invest. The best AI and software companies from OpenAI to cursor to perplexity, use WorkOS to become enterprise-ready overnight, not in months. Visit WorkOS.com to skip the unglamorous infrastructure work and focus on your product.