To me, the most interesting thing about

studying Netflix and talking to Reed is

that it is as a business probably the

single most relatable example since we

all watch Netflix [music] of two really

simple ideas that everyone talks about

but are very hard to do in practice. The

first is this notion of finding [music]

a simple idea and taking it

extraordinarily seriously. Netflix has

effectively been [music] scaling up its

core original model since its inception.

Reed talks in our conversation about how

even the DVDs were nothing but a

stepstone towards the streaming future

that [music] they envisioned at the very

outset of the company's founding in 1997

and simply letting that idea play out

over decades without [music] getting

distracted and how powerful that can be.

And the second is this notion of talent

density. This is a term that now [music]

gets thrown around every major company

and really it was Reed and Netflix that

[music] pioneered this concept of what

can happen if you set and keep a talent

bar exceptionally high. We get into why

that's difficult, what Netflix [music]

did to make that talent density bar work

and sustain itself over decades. This

conversation really is an ode to those

[music] 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've

become very famous for. We'll talk about

talent density for sure. It's one of

these ideas that's now ubiquitous in 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. What what was the early origin

story of that concept? So I founded uh

pure software in 1990. Uh we grew kind

of typical great software company

doubling. I wasn't careful about it and

I would say talent density declined

in later when I analyzed that company uh

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 and um

reducing error and putting in process um

and then that doesn't get high

productivity or high talent and we

should manage uh software much more

artistally with inspiration rather than

management. So typically we humans um we

value being nice and we value loyalty.

And yet in the workplace that's

attention

because being nice is in contrast or

intention with being honest. I I

generally like people that are nice. Uh

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

um focused on the team success uh which

is being very direct. Similarly 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. Okay, you would share

and and that's what we admire and yet in

a company what we do is we lay people

off. And so this whole idea that a

company is a family, it's unintentional

uh but it just derives from all the

structures of society were family. You

know 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. So it's [clears throat]

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. It's changing the language

that you use and don't use things like

we're a family. I treat you like my

family. Okay, which is like a little bit

true but not true enough. and instead

we're a professional sports team 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.

>> How do you protect against uh the

natural

way that companies seem to bleed down

towards lower talent density over time

like there 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, uh, you may

be able to pay people more. So, uh, that

will help. If you think of the sports

team in the biggest markets, they can

afford the highest compensation and like

the Yankees or the LA Dodgers, they

often have the best uh, players. It's

not uh direct uh onetoone on how much

you spend and quality but there is a

strong correlation. I think the second

thing you can do is continue to really

evangelize the benefits of talent

density over like total quantity so that

more and more of your leaders get adept

at managing for for density.

>> I would love to talk about each stage of

the funnel to creating talent density in

in a business starting with how you

found people in the first place. what

the most reliable ways were of finding

people and then also how you evaluated

them and then I want to talk about you

know 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 more like

keeping a pretty broad funnel

>> and hiring a lot of people and then you

know over the first year you really get

to know them and you can figure out um

what you want to do you want to keep

them or not

>> you know other people have a view like

keep uh very hard to get in but then you

can stay no matter what and I I think

that's been more of the Google

orientation as an example and it comes

from their graduate school background

right it's really hard to get into

Stanford graduate school um

[clears throat] 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.

>> And it stands to reason that maybe your

one-year attrition rate was higher than

say Google's or somebody else's.

>> Oh, quite a bit.

>> Um what was it like? Do you do you

remember the

>> 20% in the first year?

>> And so give that's pretty high. Um 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

after? Well, it did spook people. And

so, um, I would say we want, it's only

fair to let them know what they're

getting into.

>> Yeah.

>> We would say we're not going to

guarantee you a lot, but we'll guarantee

that we'll 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. You

think of it, if your primary orientation

is around job security and you're

willing to put up with working with

uneven levels of talent, then there are

other companies that are a better fit.

>> And there's some benefits of that, you

know, which is you you have stability in

your life. Um, 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 and 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 say

more about loose? If you overmanage, for

example, a tight process or specific

hours that you have to be in the office

or a wide variety of things, you filter

out uh performance and creativity. And

the looser that you can run, the more

creative that the organization will be.

So we talk about it as managing on the

edge of chaos. You don't actually want

to fall into chaos. Okay? In chaos, the

product barely gets released. It's full

of bugs. People are upset. Payroll's not

made. Lots of bad things happen. Okay.

But it's getting us close to that edge

of chaos where there's last minute saves

and a lot of dynamism uh as you can

possibly tolerate as opposed to say a

semiconductor factory which is trying to

reduce variation and reduce error to get

rid of variance. And if you're going to

be a creative organization, you want to

be high variance, high creativity,

uh, and again managing on the edge of

chaos.

>> I'm curious with the 20% attrition rate,

what you learned about letting people go

well and the right way. How did how did

you get really good at that specific

part of the life cycle?

>> Well, I think there's two parts to it.

One is to release the moral thing. Most

uh managers uh they're people managers.

They like people, they don't want to

hurt people. U so it's very difficult

for them. And so one of the best things

is to do large severance packages like

four to nine months of uh salary. Um and

so it feels expensive at first, but one

is it makes the person who's let go uh

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. Um and then the 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. U but it's seen as natural

as opposed to like a a failure. So,

typically I would say something like,

"Hey, I see you know, Patrick, you're

working really hard. You're trying. I'm

so sorry to tell you that, you know,

honestly, if you quit, I wouldn't try to

change your mind to stay." Okay? And the

the reason I wouldn't change your mind

to stay is I think I could get someone

um in in your role that could do what

you're doing, plus even more. And here's

why. And that the way the company is set

up is if I wouldn't work to keep you,

um, I'm supposed to let you go. In that

way, we're sort of executing on an

agreed upon framework, that whole keeper

test framework.

>> How did the keepers test literally work?

Like how was it rolled out across the

company?

>> Well, it was always there that, you

know, in the original slide deck, you

know, it was adequate performance gets a

generous severance package. Okay. So,

it's really just starting up front and

that the test that we encourage people

to use is if someone were quitting,

would you try to get them to stay to

keep them? Um, because that turns out to

be a good test uh relative to, you know,

all the relief we sometimes feel when

someone not great moves on. Was there an

episode in Netflix's history that you

can remember where you were on the edge

of chaos and it like really it either

did or very nearly cost you very dearly

>> during the you know uh Netflix 25 years.

There's a couple small things that we

did wrong and one big one being the the

Quickster separation of DVD and

streaming.

>> So maybe taking the Quickster example,

what is it like to see high talent

density operate against something like

that? So, um, Quickar, uh, for your

listeners was a sad episode at, uh,

2011,

uh, 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.

Disagree. So, so yeah, uh, they were

still mailed me the discs. Um, and so,

uh, they didn't like it. lots of

cancellations, stock dropped by 75%. So,

it was a tough time um as we had to and

ultimately it's the right thing to have

separated DVD and streaming, but we did

it too fast. But the 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, you know, 18

decisions uh right before, so you know,

I'm probably wrong and Reed'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. And we

instituted a much more collective uh

information process on decisions going

forward where everybody weighed in 10

togative -10 on decisions and it's all

in a big shared document so everyone

sees what everyone else thinks. So that

way if we had had that um decision

process in place then I think I may well

have thought well these are all

fantastic people and they're all

horrified at this idea. So I may be

right but let's at least go a little bit

you know uh more gently to figure out

that and we wouldn't have had as deep a

hole. 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 of a fairly non-

consensus

idea because that seems like a consensus

process or at least um if not decision

by consensus at least being aware of

what the consensus is and I'm curious

the about that tension there. It seems

like very often non-conensus is the is

where the value comes from. Is is that

generally true in 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. [clears throat] You want to be

totally independent in your thinking and

not consensusoriented at all, but you

want to know what other people are

thinking otherwise you're, you know,

flying blind. So, I think there's a high

value on information, gathering

opinions, but then not averaging them.

Uh, 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 um

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. Um and

then it's up to them to make it. I'm so

interested in the bucket of seems like a

bad idea but turns out to be a good idea

because there's just less competition if

it sort of seems bad.

What is the what has been your process

of coming up with good ideas in the

first place?

>> I fall in love with ideas easily. Yeah.

Um and so like I'll see some combination

or insight. So uh the original one was

that DVD which was just coming out when

Netflix started uh 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 just 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 uh thought

experiment you do is kind of what's the

bandwidth of a FedEx of a taped you know

a tape through the mail and it turns out

you calculate it and it's like terabits

per second at low cost you know 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 um the internet

would be faster than and cheaper than

and lower latency than it was an unus I

never thought I love the mail business.

I thought I love network business to

deliver me. The contrarian part of it

was when we were fundraising in uh 1997

989

everyone was excited by internet

delivery and I'm like but it's not even

close u 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

with DVD and then transition it to

streaming. So um and it's precisely

because of that contrarian thesis that

we didn't have much competition in that

and um because it worked [snorts] um you

know we created great value.

>> When did f 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.

>> From the very beginning

>> that's [clears throat] why we named the

company Netflix is internet movies.

>> Yeah. And so it was it was really just

about managing the transition even from

day one. designing the efficient system

for DVDs was just a notch on the

timeline getting to streaming.

>> Correct. It was one digital distribution

network and then eventually we would

replace it with another.

>> Um and and we knew that would be a

challenge, but we knew the best way to

be successful at it was to get big on

DVD. Um and so that became for the first

decade that's all we worked on.

>> One of the other really cool things

about your background is that for a long

time you were on the boards of I think

Facebook and Microsoft. I don't know if

you're still on those two boards or not.

Um,

>> no I'm not.

>> But today I think you're around the

anthropic board and the Bloomberg board.

So you've had this sort of, of course,

Netflix itself at the center of

technology. You've had this very cool

360 view of the 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 you that

seem the most important to you from

those vantage points? Well, first of

all, because of uh exponential

phenomena, it's always the coolest time

ever to be in [laughter] computer

science. I mean, you know, in the 1980s,

I thought, "Oh my god, so much better

than the 1960s." So, I just think that's

a it'll always be true.

>> 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.

You know, they had quite different

businesses. Um, but uh 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 willing to

lose money in certain new areas for a

decade. What I loved about looking at um

Facebook's business was, you know, ad

supported um 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 um

companies get good at something and then

if you can add to the core mechanism uh

that's great. So we've always wanted to

add content to the Netflix subscription

to make it more and more useful uh more

and more enjoyable you know 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. So to answer your

question, I would say trying to find

simple large models that if they work um

you can continue to expand and expand on

the kind of core monetization engine

that you've already got. Um 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 Mike Bloomberg. It's a trading

stations of Wall Street and uh media

around that. and he's been incredible at

kind of this long-term orientation to

having this intimate relationship with

the customers like becoming a trusted

utility uh for the industry that's been

very powerful and so big Moes uh you

know for that business um that are

really customer loyalty that he's been

serving you know in multiple dimensions

for a for a long time and then Anthropic

I've only been on the board for a year

and it's a you know a wild uh story

because you know it's growing so fast.

>> What have you learned from Mark? You

mentioned what you learned from

Facebook, but what did you learn from

him specifically?

>> You know, super committed like when you

look at uh the metaverse and the you

know convinced that there's going to be

something beyond the phones maybe

that'll be a glasses format and not

wanting to be dependent on it, wanting

to be really the invention of that layer

which is you know extraordinarily

ambitious. Um, I probably would have

just been like the ad giant if I was

doing that business and try to like go

after Tik Tok. Um, but he wants to do

bigger and broader things for society.

It's great because he does amazing

amounts of innovation funded uh with

what would otherwise be the profits of

the company.

>> You've been on these great boards. You

had a board yourself, of course. What

advice would you give to people to

either be a great board member or run a

great board process themselves?

So typically um board members u want to

add value. The problem is by the

conflict rules they don't really know

the business. They're not you know if

you run an airline you can't be on

another airlines 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.

Okay? Because they run the thing. And so

you see this dysfunctional thing where

board members ask hard questions and

management, you know, uh ducks and

weaves and it's not very functional. So

I would say um 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

[clears throat] 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.

Okay? If 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,

okay. And um 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 questions and learn what drives the

profit streams, how does the business

work, um 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 firm. And if you

get that right, as say Microsoft

shareholders or board did with Satcha

Nadella, then the business takes off and

all the advice in the world, you know,

doesn't matter compared to that. If

you're on a board, uh, 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.

[laughter]

And so it's a lot like a firefighter who

drills and drills and drills and, you

know, hopes that there's never a fire.

>> Yeah.

>> Okay. [snorts]

>> When selecting for people that would be

that insurance layer for your own

business, what did you select for?

because a lot of these boards are full

of very fancy people like you that are

great names to have on a you know

website as a board of directors and that

seems to be a selection criteria versus

like this person's actually going to be

good at this insurance layer thing. How

did you select board members?

>> Yeah, people who I believe will be wise

in a crisis

um and so uh you know we talk through

the the board model you know we call it

uh extreme duty of care. Okay. So duty

care is one of the responsibilities of a

director and we amp it up that they

really have to know what's going on. We

ask directors to come to management

meetings so they can watch what's going

on, watch the sausage being made. Um

again, not so adding value, but so

they're highly informed. Um 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, you know, business crises

that have happened. and uh in case that

happens that they would be wise.

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focus on your product. 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?

>> I never like booked hours on my calendar

to like, you know, think about the

culture. you you end up just trying to

make things better and then watching

kind of what's going well and what's not

and making observations and then here's

an example from maybe 2004

on we had open compensation

so uh 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

similar people in a similar vein and uh

and there would be more trust around uh

gender, around other dimensions that

could be discriminatory because the data

was all out for everyone to see. That

was all true. Um but it also created a

lot of petty rivalries. You know, I make

a, you know, huge amount of money, this

other person makes a huge amount plus

$10,000 more. And um and so it got

pretty distracting. And ultimately we

put it to a question of the VPs about 10

years later, 2016.

uh [clears throat] and they decided to

take it away from themselves and from

everybody else and do the traditional uh

you know you know your direct reports

and their teams but not the whole

company. Um so I would say that was an

experiment

in [clears throat] human nature which

got resolved pretty decisively to be

less mavericky but it ended up working a

little better. So again, we would take

on an experimental view on things and

that's a good example because then you

can see like we're not um you know

geniuses. We're just willing to question

things and try them. So we did open comp

for a number of years and then uh

decided that it's 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

>> and and yeah, so say say more about just

like the the core calculus or thinking

there um I'm sure there would be some

directors that would accept an unlimited

amount of your money to make

>> well there's 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 uh on the hopes of creating the

great next you know K-pop demon hunters

>> um in terms of any one show then the

question is you know what's the

likelihood um based on what we've seen

um that this is going to be big and it's

also a competitive market and the very

first original series that we had that

helped make our reputation was House of

Cards and we had to bid that away from

HBO. So as Media Rights Capital was

making it, they had bids both from HBO

and us and we were not we were a DVD

company. Okay. So, we had to overpay um

relative to HBO and uh and then they

went with us. Um and we had to overpay

by a bunch because, you know, it's a

it's a lot of risk.

>> Yeah.

>> Uh and then they came through and made a

fantastic show. Um and then we were off

to the races and original content. And

it's a simple way to think about it

almost like one would think about a

venture capital portfolio or something

that you want to make lots of bets and

you don't know exactly which one's going

to be K-pop Demon Hunters, but that

there being a K-pop Demon Hunters

[clears throat] is the thing that

matters that you have some dominant

massive franchise.

>> Um, very much so. Uh, 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 too.

>> Yeah.

>> Uh but that would be the big difference

from venture. If you think about the

portfolio of content, what else would

surprise people about the conversations

happening inside the business as you

especially in the early days of

developing that portfolio? The key the

considerations that matter to you as you

expanded it so that it's a combination.

I mean, now it's so many things, but in

the early days, you know, you're

obviously making choices. It's House of

Cards. It's not something else and

there's trade-offs. What what would

surprise people about the conversations

that led to the portfolio that that you

ultimately chose? I mean everything for

us was [clears throat] around

reinforcing the brand and trying to

figure out what should the brand be. So

>> the cable networks um by necessity were

narrow brands because they got one cable

slot.

>> Yeah.

>> Okay. And so FX and Hallmark were both

interesting doing different types of

content but the handle on the brand gave

you the type of content which was

inherently pretty niche because it had

one network slot. and we were doing

something that had all the network

slots. And so then we spent a lot of

time thinking about how much of the

programming do we want to be Hallmark uh

soft easy romantic stories feel good

versus uh FX and be sort of cutting edge

and violent and dark um uh versus uh the

comedy central. Okay. So, you know, 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, [clears throat] unless

it's completely derivative, uh you know,

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.

>> Okay. 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 um who got

this right again and again and had we

called it great taste but they had more

than taste. They had taste and judgment

about you know would the people deliver

um would this come together and all

kinds of ways. So it became just people

picking and so then it's trying to

figure out uh 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 you know great and

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. So when I started Netflix I was

like well thankfully we can do this as

you know one uh really big product

because entertainment is an extremely

large market. Basically, every human on

the planet watches television, okay, to

varying degrees, but uh it's a deeply

human thing [clears throat] to watch

stories. Uh and so then the question is,

okay, what percent of that could we

capture? And so, you know, even today

we're only about Netflix is about 10% of

US television. We've got a long way to

go and internationally it's less than

that. generally plenty of in terms of

how do we think about uh 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

is it was kind of constrained on

essentially product quality. What kind

of shows do we have? Now the streaming

is kind of flawless and not

differentiated between competitors. But

for a decade we did it much better than

our peers. That other 90% is that

defined as just traditional television

or does that include like YouTube

watched on

>> No, YouTube uh is about 12%. I mean you

know so

>> so includes everything includes

[clears throat] everything sports video

gaming it's uses of the television

screen. I mean we compete for time uh on

mobile phones too but we're very small

there. it's not a big use case. Um and

television were a big use case but still

um you know again under 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 on which you feel like you're

competing against something like

YouTube. It's more easy to imagine

versus cable cable or network shows or

something like this but versus something

like YouTube that's sort of a a pure UGC

platform. Do you think about it that

way? like we are competing against them

and therefore we want to do certain

things to win.

>> Well, they're growing and we're growing.

Um and traditional linear is shrinking.

So, you're right that

>> [clears throat]

>> um mostly we both compete with linear

TV.

>> Um but we do worry about uh YouTube

because it's sort of a substitution

threat. Does it get better and better

with AI creators and it just becomes,

you know, more and more of people's

time? uh and that 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 YouTube but they don't get

paid on it in advance then they put it

up and they see what kind of ad revenues

they get so in our case you know we

preund the programs uh which gives them

a bigger budget they don't have to do it

on spec um and that's really the biggest

difference in the business model um but

it's ultimately do we produce produce uh

content like The Perfect Neighbors, a a

documentary that just came out, won all

these awards and it's been the number

one documentary this last month, you

know, clever, fresh perspective

um content like that. Uh or 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 what what

is shared amongst the people like Ted

and others that have been able to

reliably and consistently create be a

part of creating those big hits over

time.

>> If only it were reliable and consistent.

[laughter]

>> I I mean I think K-pop was probably our

30th animated film.

>> Fascinating.

>> Okay. So it's not at all uh reliable and

consistent again

>> it 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 [laughter]

right you know uh so it doesn't fit a

set of formulas um so in that way it is

a lot like venture um and also that a

few of the companies will generate

outsized returns

>> what do you think will be the most

interesting impacts of AI on on the

Netflix business specifically and this

could mean from the perspective of cost

to create the content. It could mean for

the service, it could mean for any. How

do you how do you where does your mind

go as you think about the raw

capabilities of of the technology?

>> Well, visual effects is one um where uh

there's a lot of that workflow that can

be automated. But in terms of like

recognizing a K-pop demon hunters at a

script stage uh you know or or pitch

stage, which is the biggest value

creator, you know, which things do we

back? um that will be a far distant uh

skill. So you know eventually AI might

eat up everything and be better than

humans on everything. But you know in

terms of the sequencing so think of a

when uh AI [clears throat] is not

particularly incented and the companies

are not to do long form character

development but at some point they may

do that and focus on that and then the

AIs will be winning the booker prize and

you know uh doing the best fiction of

the world and remember we're only

interested in like the top 0.001%

of the of the stories that get written.

So simply writing a story, I mean

there's a million film students, you

know, we could just go to them. So the

issue is trying to find one that's

really unusual, extraordinary, and

recognizing that one early. So um I

think AI will have had a lot of other

effects before it it uh hits us on that.

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>> 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 um step back a second and

think about contrarian thinking

generally. So, you love contrarian

thinking, right? But you probably need

to remember that contrarian thinking

most of the time is wrong,

>> right? 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. Um and the

conventional thinking is right. So for

example on formats people have been

trying to think about multi-ending

design your own story

uh you know short form uh you know there

was quibby there's all kinds of things

right and the enduring aspect of a film

at you know 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

um and that other things. So you got

video gaming as a a different modality

um and that's quite a bit different but

like most of the hybrids between TV

series that you kind of interact with

you know have been you know very small

markets. It doesn't mean we won't

eventually come up with a new art form

that's quite different. Um but I don't

think it's as easy as um you know choose

your own adventure. Those aspects the

particular ones is we're in leanback

mode um with [clears throat] uh TV and

we're mostly wanted to tell us a story.

If you think of young kids,

two-year-olds, they're half of the time

they're like, you know, daddy read me a

story and half of the time it's daddy

play with me. And these like are two

different modalities um that are

different. one is passive and I mean I

again I think it's very biological and

we're selected for it and one's very

active and that but one of those uh

becomes TV and another becomes video

game.

>> Um I'm also fascinated by the technology

backbone and story behind Netflix the

sort of invisible part of the business

everyone just takes for granted they can

hit a button and have this beautiful

thing pop up but I know there's quite a

lot of building that happened behind the

scenes. Can you tell that part of the

Netflix story of what it took to the

infrastructure-wise and technology-wise

to make what we all enjoy possible?

>> Well, it's always been a sort of medium

barrier to entry. Um, I would say uh

first with DVDs and we had incredible

sorting and shipping machines and postal

integration and you know I used to spend

all this time on types of polycarbonate

plastics that break and don't break and

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 if it was on

time. The postal carriers didn't steal

it. So there was like you know a huge

amount of machinery to shipping a

million red envelopes a day consistently

you know kind of FedEx style right and

then certainly uh streaming the

mechanics of getting the bits to people

uh you know was challenging. We first uh

launched in 2007 and for probably 15

years the internet was underpowered and

you had to do a lot of clever

engineering things but for the most part

the you know there's a hundred companies

that stream now uh consumers can't

particularly tell a difference between

them. So I would say that's now just

become part of the base um uh systems

and commoditized. What's unique is still

being able to do the AI recommendations.

Uh all the deep learning on what do you

you know there's a thousand things on

Netflix you would enjoy which one would

you enjoy most at what time. Um you know

that's still a big area of uh tech

innovation. Um the gaming is you know

we're we're trying to push in 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 why

bother with gaming?

>> Yeah. Um we used to just be movies um

and you know then we expanded TV series

and we're really glad we did that and

then we expanded into unscripted

content. Um you know Love is Blind. So

we've always been expanding in new

categories and gaming is just another

category of entertainment. Um, and so

we've got some cool stuff going on the

TV where your uh phone is the remote

control which has uh, you know, higher

latency, but it's easy for party mode

type games and it's, you know, really

fun on these sort of social

interactions.

>> How do you know when to keep betting on

something and how long-term to be behind

something like 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, uh the

January 2006, there was a launch of

Netflix friends.

>> So this was friendto friend sharing

about uh films and what you were

watching. You know, Facebook was still

just at Harvard. Okay. 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. Uh 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

>> of, you know, how is social going to be?

And ultimately that probably got solved

by Tik Tok.

>> How do you think about Tik Tok? 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

>> uh looking for something to watch but

really it was the numbness of the new or

the endorphin hit of the new thing

constantly so it's hitting that part of

uh enjoyment so I mean very creative as

a business and all of that and very

effective but I would say not a thing I

want to spend a lot of time on

>> when you were CEO I'm curious how you

thought about uh generating and keeping

business power and then c- which leads

to free cash flow and then allocation of

free cash flow. Those seem to be, you

know, especially as 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 and really like

guide the decisions to get more power?

How much was that like specifically on

your mind?

>> Power is a way of saying above market

margins. So the theory is that we can

all earn a marginal rate of you know

maybe 6%. Um but to earn above that is

[clears throat] because it's hard for

competitors uh to do what you do. Um and

then you can get an above market margin.

So um we definitely spent time thinking

about that. You know which things should

we license our content exclusively

non-exclusively our 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 uh you know on the TV I

want 30% like Apple gets. Okay so there

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 um Sony

televisions for example didn't have the

Netflix app. So that's an example of of

how that worked out. Amazon and Bezos

very famously uh for constantly

reallocating capital back into the

business to keep generating more

customer benefit which you know

obviously Netflix has done as well. How

did you think or would you think about

the point of the in the company's life

cycle to do more harvesting to pay

dividends to buy back shares to do this

sort of thing and just I'm just so

curious how you thought through like the

capital allocators toolkit of the things

that you could do with the capital that

you were generating. Well, in most

businesses that's highly material, you

know, building a lot more warehouses or

something. Um, but honestly for Netflix,

there's very little the 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 we have

extreme non-conentration

um and you know, lots of different

budgets and spread. There was very

little capex of any long-term nature.

margins were pretty close to free cash

flow and then we just have always done

buybacks with it rather than build it

up. It wasn't probably the related

tension was how profitable how soon.

Okay. So, uh it wasn't a strictly cash

one. is essentially a P&L margin

question. And what we decided is let's

have uh low margins relative to cable um

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. Yeah.

>> And that became the fundamental lens

that we ran the business and they still

run it today.

>> How did you know when it was time to

leave being full-time CEO? Uh because

Greg and Ted were ready. Um so uh you

know I've been developing them for at

least a decade. Um and I felt like

coming out of COVID they were ready. Uh

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. Um so it was really driven from um

uh them and since they took over they've

tripled the stock and you know they've

done incredibly well. How does something

like the set of ideas we've talked about

so far translate to a totally different

domain like what you're doing with

Powder Mountain? Like it seems is such a

wildly different project um in almost

every way that I can imagine. It's very

very different. How much directly

translates and how much needs to be left

behind given the different nature of the

project?

>> So Powder Mountain is a ski mountain and

real estate uh development uh that fell

on hard times in Utah. So the original

people running it ran out of money. So

they never finished a lot of the

project. We happen to have a house there

and love the place. It's, you know,

natural beauty is insane. It's 10,000

acres. And so after retiring from

Netflix, [clears throat] I decided to

take control of it, invest in it, and do

a turnaround. And so then it's

rebuilding the staff, rebuilding the

vision. Um and I would say uh 90 plus

percent of talent density no rules rules

um the whole model has worked extremely

well and [clears throat] the ability to

move fast uh hire incredible people have

them do things. It's everyone being very

creative and I would say the talent

density model uh has has been worth the

pain i.e the turnover and has created an

amazing set of uh 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 um that you go in and and buy. How

do you determine the initial vision and

then what were the first couple steps to

execute against it?

>> There it was a series of transactions to

gain control. So, it took six months to

buy out a majority of uh the company of

the shareholders to have control.

everyone wants the billionaire to pay a

lot and being clear with them that you

know that this thing could collapse and

you know if if I don't come in that was

stage one then stage two was figuring

out okay this is a great mountain um but

if half of it were private uh like

Yellowstone club and half stayed public

as it was uh then it could be a real

win-win where they share operating costs

and are more efficient um and we can

then have a very uncrowded resort on the

public side. Um, which gets to uh

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 uh ski lovers where

they get their basically their own

enormous ski resort uh the size of

Heavenly or Veil um just for the 600

home. So, it's it's pretty spectacular

>> in terms of uh what drives the ski

business. Yeah.

>> What what aside from the real estate

stuff, what are the most important

variables or considerations that you

you've figured out in your studying of

its history?

>> Yeah, skiing uh is about uh 1/8 or

onetenth as big as golf in terms of

number of people and uh playing. So, I'd

love to close some of that gap. You

know, it's cold. Um but it's very family

oriented. You get outdoors. It's social

with your friends on the lift. It's got

some of those same properties.

Interestingly, there there are 25,000 uh

golf courses in the US. Uh and about 20%

4,000 are private golf courses. And

private golf courses, you get better tea

times, the uh nice clubhouse atmosphere,

social, you get to know people. And

that's really what it is for private

skiing. Also, there's about 500 ski

areas instead of 25,000, but only three

are private. Yellowstone club, uh Wasach

Peaks Ranch, uh and Powder. Uh so it's

very underserved market relative to uh

golf.

>> What's most fun about it to you? The

whole project

>> that it's very rightrained. Um

everything at uh Netflix was very

strategic, collogical. Um a lot of big

competitors. Um in skiing the

competitors are very cooperative. It's I

think because you have, you know, 20 or

30 miles between you and um so it's a

lot more collegial. Um and it's

aesthetic. The the big wins we've done

have been uh building up the art at

Powder Mountain. Uh so there's got a lot

of outdoor land art that's incredibly

beautiful to uh ski through. So if

you've had the good fortune to go to

Storm King north of Manhattan. Okay. So

think of Storm King on a ski mountain.

>> Skiing through it.

>> Yes. And skiing through it. That's

>> 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 for a ski

mountain?

>> Um well I think that for your audience

the conceptual parts the key which is we

wanted to have a ski resort and to

differentiate. Okay. So what are we

going to do in summer? Well you could do

zip lines and mountain biking but it's

like it's all been done over and over

and frankly it's high adrenaline and

it's like okay but it's not that great a

match for real estate sales. Um, but

most importantly, it's conventional.

It's been done. So, what's like

interesting and scalable and and uh

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. Um, so it's not like in

a mountain, but it is outdoor sculpture

and incredibly stunning. Um, so again,

it was that synthesis to then trying to

do that uh on a mountain. Um, and then

it was building in the curators and

getting the work going and now we've got

uh, you know, dozens of pieces already

in and a lot more coming and that 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, etc. is

a huge chunk of your time and and

philanthropy as well. What was it about

that sector that drew you? And I'm just

curious for you to riff on the problems

that you see in the space.

>> Yeah, it's interesting. I 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 as my first job out of

college. And so I've always,

[clears throat] you know, uh cared about

K12 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 and it's

super well articulated by your your

prior uh guest around alpha school um is

[clears throat] kids should be taught

individually as opposed to having a

teacher stand in front of a class uh and

lecture to them and that that um

industrial model of the teacher the sage

on a stage we call it um you know needs

to be replaced with individualized

tutoring.

Prior to AI, individualized tutoring

would cost you, you know, [snorts]

$100,000 a year per kid. So, out of

reach of everyone. And so now with

software, we can have individualized

instruction. And the teachers become

more like social workers where they're

helping on discussion, uh, social

emotional learning, uh, a lot of the

more human and emotional factors. But

[snorts] the content transfer um you

know what were the roots of the civil

war how to do fractions

um that's all becoming software and

hopefully as quickly as possible because

then it's very global and because kids

will learn more.

>> What [snorts] do you think we can do to

speed that up the most? You mentioned it

could take decades because of the

regulated nature of the of schools.

Things move slowly. What could we do

that could speed that up? It's focused

on apps that really help kids learn

more. It's helping parents see that um

they all wonder, hey, with AI coming,

you know, and my kids uh six or 16,

what's going to happen to them in the

workplace? And they need, you know, more

and better skills than ever. Um that and

you know, every 16-year-old is learning

things, you know, on uh AI anyway. So,

it's having them be more uh focused on

that and less on traditional classrooms.

And you know, when you think about

classrooms, we use it uh in K12, we use

it in college, and then like in the

workplace, we never use it again. You

know, you did all this classroom

learning and it has like no bearing in

um you know, the your working life. And

so, again, it's really driving the

percentage of kids time um that's not in

a classroom. you know, as Joe says, it's

helping kids really love school um

because then they'll continue to love

learning and the classroom and the

boredom and frustration of that is uh at

the heart of it.

>> I'm curious as you think about the

future just broadly across all your

interests. Uh you've got a cool purview

on the world. What most worries you and

must what most excites you about the

future? um part of the anthropic camp

where it's good to talk about the

negatives, 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, uh I

don't think the AI boomer and doomer

thing is that useful. I think we all uh

want to acknowledge there's some pretty

significant risks. Um but they're not

dispositive and that we humans may be

able to capture tremendous benefit by

harnessing AI uh for higher quality of

life on a global basis. I'm on team

human for making that happen. Um but I

would say that's the biggest uh you know

swing factor of the next uh 50 years is

how well we do that.

>> What do you think the biggest risks are?

Well, the near-term risks are

unemployment causes uh societal chaos

and strife. So, if you were to get a lot

of unemployment, um then you might get

radical politicians promising to get rid

of AI or promising to do other things

and that destabilizes society. there's

the long-term power competition between

us and say China and then you know is

war become you know how many robots do

you produce and you know it' be

unfortunate if we both end up having to

spend a bunch of money on that because

of distrust kind of a new cold war would

soak up a lot of uh GDP growth um and

the benefit side would be that you know

we cure disease we get nuclear fusion

with you know huge amounts of lowcost

energy um 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. All learn you

learn biology for fun like you learn

chess today. Um so there's tremendous

upside uh to automating a lot of this um

and taking it to the next level.

>> My traditional closing question for

every interview is the same. What is the

kindest thing that anyone's ever done

for you? 30 years ago I worked at a

startup. Um I was a frontline engineer

you know 28 so you know doing all

nighters all the time. Um and I used to

have uh coffee cups uh spread around my

desk and you know over a couple days it

would get kind of ugly and messy and and

then the janitor every now and then

would clean them all and I'd come in

there'd be clean mugs and I didn't think

about it that much. one morning woke

[clears throat] up early and in those

days you had to go in the office because

of the computers were there. You

couldn't take them home. Uh so I went

into the office at you know 4:35 in the

morning. Uh walked in went into the

bathroom uh and there was my CEO uh

washing coffee cups and I looked at him

and I was like uh Barry are those my

cups? And he said yeah. And I said have

you been washing my cups all year? And

he said yeah. And I said, "Why?" And he

said, "You do so much for us, and this

is the one thing I could do for you."

>> And uh you know, I was just very moved

uh about his humility and his uh caring,

kindness in in your question. Um and so

I felt like, God, I'll follow this guy

to the ends of the earth. And so simple

gestures.

>> Holy cow. Great story. Amazing place to

close. Thank you so much for your time.

>> Real pleasure, Patrick.

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