00:00hi everyone welcome to the a 6mz podcast
00:03today's episode is based on a
00:05conversation between Reed Hastings CEO
00:07and co-founder of Netflix and Marc
00:09Andreessen that took place at our
00:11inaugural summit event given how rare it
00:14is for companies to successfully disrupt
00:15themselves the way Netflix did when
00:17arguably cannibalizing its own DVD
00:19business for internet streaming and then
00:21going into original content how do they
00:24Marc and Reid take us on a journey
00:26through the origin story of Netflix to
00:28how that entertainment and tech industry
00:30has evolved in this episode and perhaps
00:33read argues we need more sophisticated
00:35metaphors then only the paranoid survive
00:37for business leaders to anticipate the
00:40paths and judgments behind which of the
00:42competitive pats they should put the
00:44most effort into when they're thinking
00:46about what comes next just thrilled to
00:55be here today with Reid who makes about
00:5790% of my favorite TV shows so we're
00:59gonna spend the entire time talking
01:00about spoilers for the third season of
01:01daredevil hopefully you all watch season
01:04one and two actually let's start with a
01:06show of hands how many people here
01:07subscribe to Netflix that's pretty good
01:11there's still a little room for growth
01:12so Reid's very interesting guy so a
01:15quick historical story on my part how I
01:17first ran into Reed so back when my
01:18partner Eric bina and I at University of
01:20Illinois in 1992 were first developing
01:23what became mosaic which was the 400
01:271992 back in the good old days the big
01:30challenge for programmers if you're a
01:31programmer back then and some people in
01:32this in this audience probably were you
01:34dealt with a very specific technical
01:36challenge it's called memory leaks and
01:38so it's very sort of it's not so
01:40relevant a challenge anymore because
01:41things have changed but at the time as a
01:43programmer you had to keep track of how
01:44you use computer memory and computers
01:46didn't have very much memory and so if
01:47you screwed this up it was like having
01:49you know termites at your construction
01:50site for your new house or something you
01:52had memory leaks your program at some
01:54point was gonna collapse and you were
01:55gonna sit there and stare in horror cuz
01:57you weren't gonna understand why it was
01:58collapsing and in fact if you as users
02:00of Technology have ever had a phone or a
02:02PC that just like you know slows down it
02:04slows down it slows down it's probably
02:06memory leaks and so this was just kind
02:08of a torture thing that programmers
02:09lived with and then in 92
02:14a product came up called purify suffer
02:15product Emma called purify and it was
02:17like it was like penicillin for software
02:20programmers it solved memory leaks and
02:21it was this program very clever
02:23technical mechanism to basically surface
02:24all the memory leaks and make it easy to
02:25fix and it really it was like a step
02:27function upgrade in coding and of course
02:30interesting relevant part of that story
02:31is Reed was the founder co-founder
02:33founder of pure software which was the
02:35developer of purify I believe URL so the
02:37developer of the product or one of the
02:38developers as well as the CEO of the
02:40company and for context this would be a
02:43little bit like you know a modern movie
02:45mogul in Hollywood having started his
02:46career by like polishing 35 millimeter
02:48film lenses like this is an unusual
02:50background for somebody who's now doing
02:52what you're doing and so I thought maybe
02:53you could start basically tell us that
02:55at least the the short form of the story
02:56of pure and purify and how it inform
02:58kind of how your career develop from
02:59there because you were a young man at
03:01the time young man of the lucky break of
03:03my life was I was a high school math
03:06teacher I want to get into computers and
03:09I got a job serving coffee in a teaching
03:12lab for computers and that company
03:15turned out to be the first dot-com of
03:17all time which was symbolics calm now
03:20out of business and they made Lisp
03:22machines in hardware and this was an
03:25architecture that was a 36 bit date
03:27award so I was 32 for the date and four
03:29bits of real-time data type tagging and
03:31I didn't think that much about it except
03:33I learned a lot about Lisp in that area
03:35and then three years later at Stanford
03:38doing lots of C programming and I'm so
03:40frustrated where's my datatype tagging
03:42and I realized that it would be possible
03:44to implement that all and software were
03:47the techniques that purify used and if I
03:49hadn't gotten that first job serving
03:51coffee and been so exposed to this very
03:53alternative style computer architecture
03:56it would have never occurred to me and
03:57then from that invented that first
03:59product purify and that changed my life
04:02because then I was able to start a
04:04company it doubled every year when
04:06public one week before Netscape actually
04:09and so for one week we were the big
04:11topic ok so I mean everybody now knows
04:12you from Netflix how did the peer
04:14experience kind of shape your thinking
04:15as you went to build a new company in
04:17the form of Netflix later on and in what
04:19would appear to be at least at the start
04:21a completely unrelated space yet it is
04:23substantially non-related
04:27was a product guy and I didn't think
04:29much about management and it didn't turn
04:31out very well so as the company grew and
04:33got more bureaucratic we were obsessed
04:36with putting processes in place because
04:38every time there was a mistake we wanted
04:40to make sure that mistake didn't happen
04:41again so we treated it like managing
04:43semiconductor yield when in fact in a
04:46creative process that doesn't work very
04:47well and so it got less and less
04:49innovative and that was the great scar
04:52which is it got less fun to work at and
04:54so that's when I vowed that in starting
04:57another company that at least we
04:58wouldn't make that mistake that as we
05:00grew we would try to have less rules not
05:03more rules so that was the big impact
05:05for me right that's interesting and so
05:07does that suggest that if someday you
05:08were to start a third company you will
05:09learn from Netflix that you can you
05:11don't have enough rules need to then
05:12revert back like do you think this is it
05:14this is a cycle or do you think you
05:16figured out the right formula I think
05:17I'm in love with Netflix for a long time
05:19so that company pure was a software
05:22tools company they always get acquired
05:24media companies can grow to be quite
05:26large and independents not for sure so
05:28it's good good odds though okay good
05:30well so I think everybody knows you know
05:32the original story of Netflix I'm kind
05:34of how it became a big success with DVD
05:35rentals and then ultimately switch to
05:37streaming it so the thing I really want
05:39to grow into tonight is that transition
05:40to streaming because it's sort of this
05:42classic you know there's a
05:43counterfactual universe in which Netflix
05:45got disrupted right by somebody some
05:47other new company that created streaming
05:48and made DVD rentals
05:49you know irrelevant and so maybe take us
05:51through like when did you start thinking
05:53about streaming I'm how early because
05:55Netflix started in what the mid 90s 90
05:5797 97 so when did you first start for
06:00those of you who maybe are too young
06:01remember this internet video in 1997 or
06:04even 2000 or even I would argue probably
06:052003 2004 was very bad it was tiny
06:09little postage stamp-sized videos you
06:11needed special plugins and it almost
06:13never actually worked and so it was
06:15quite a conceptual leap to kind of
06:16envision the kind of thing that you you
06:17know you have now when you sit down in
06:18front of Netflix and some so and you
06:20started streaming I remember actually
06:21read invited me and probably I think
06:23you're talking a bunch of people in
06:24around 2003 2004 attack and I think if
06:26read remembers that she invited me in
06:28and said what do you think of this
06:29streaming thing and I said ad will never
06:30work so you know great foresight but it
06:33was based on all this starts well
06:34actually I said it someday it might work
06:36but it seems awfully hard because
06:37they're all these technical impediments
06:38that seems like a very challenging thing
06:40so maybe take us through when you
06:41started thinking about that so if you
06:43look at median residential bandwidth
06:46from nineteen eighty forward it's
06:48completely smooth and so we've gone
06:51through multiple technologies first
06:53different types of dial-up and then the
06:55beginnings of DSL and cable and fiber
06:57and so interestingly the speeds at which
07:00streaming was going to become practical
07:03sort of one megabit two megabits was
07:05completely knowable now we weren't that
07:07smart you know we knew it was sometime
07:09in the future but right from the
07:11beginning in 1997 we envisioned it when
07:13I was at Stanford you take the classic
07:15Tenenbaum computer networking class and
07:18you know it makes you think about
07:19networks differently and you have to
07:20compute the bandwidth of a station wagon
07:22filled with backup tapes driving across
07:24the country and so you start thinking
07:26about networks in a different way and
07:28then in 97 when a friend told me about
07:30DVD I was like oh my god that's the
07:33that's this five gigabyte packet that
07:36you could mail and you know for 32 cents
07:39very high bandwidth very high yeah
07:42that's right no high latency yeah
07:4324-hour latency but but good throughput
07:46and slightly better than carrier Pidgeon
07:49yes yes so you know it was again affect
07:53cross fertilization of metaphor so we
07:55always viewed the dvd-by-mail as a
07:57digital distribution network and then we
07:59knew eventually and that's why we call
08:01the company Netflix and that dvd-by-mail
08:03or you know that kind of thing so we had
08:05the slight advantage that the thing that
08:07we our first business we didn't totally
08:09fall in love with because we knew it was
08:11temporary it was the path to something
08:13else and I think that helps in
08:15comparison to other people like the
08:18founders the blockbuster who gets so
08:20associated with store that it's hard to
08:22think outside of that because it became
08:24such a big thing right right and so how
08:26did you make a decision of on the
08:28win-win to pull the trigger I wanted to
08:29start streaming we knew that it was an
08:32issue we went public in 2002 and we said
08:35eventually streaming will come and we
08:38call the internet delivery because you
08:39know it'd be some mix of downloading and
08:41streaming but we really didn't do that
08:43much on it until 2005 which was YouTube
08:47so when we saw YouTube it was like
08:49amazing cuz even though the video
08:51quality wasn't great you could click and
08:53immediately it was like television but
08:56it was click and watch and that's when
08:58we realized wow it's starting it's
09:00beginning and so we started that effort
09:02then which was a mix of content
09:04licensing and technology development and
09:06then launched that in 2007 and then as
09:10clay probably described the key thing is
09:13not getting into the new business lots
09:16of companies do that they just don't get
09:18in and make money they don't create it
09:20as a profit driver they get in and
09:22dabble with it and lose money in it
09:24essentially and so we knew that the key
09:27was really focusing on it is how is this
09:29gonna grow into its own business but it
09:32was too young too so we hybridized it
09:34with DVD and I buy too young literally
09:37didn't have enough content so we
09:39couldn't have sold a streaming content
09:41service on its own it was part of the
09:43DVD subscription and then as the usage
09:46grew and grew and grew we knew
09:47eventually we'd be able to split those
09:49apart so that took us up to 2010 then we
09:54did our first test in Canada where our
09:57first test of streaming only so we
09:58picked a new country that wasn't used to
10:00our DVD service to see with the content
10:03that we can get can you build a service
10:05that there's word-of-mouth and grows in
10:07a in another country and the Canada
10:09experiment was a rocket ship in the
10:11first three days we got as many
10:12subscribers as we thought would take
10:14three months and so it was clear that
10:16you could position Netflix as streaming
10:18only if you didn't have the heritage and
10:20from then on we focused on you know how
10:23do we get streaming only obviously on a
10:24global basis so the other thing of
10:26course clay talks about about why
10:28companies tend not to be able make this
10:29shift it's because the management team
10:31the the guys people our P&L
10:33responsibility for the old business
10:34consider the new thing to be a threat
10:36right a cannibalization threat did that
10:38happier people inside Netflix running
10:40the DVD business that were like wait a
10:42minute what are we doing you know
10:43probably one of the most painful moments
10:45along that journey was the the DVD was
10:49all the revenue all the profit we were
10:52hybridizing it was streaming and we were
10:54getting more streaming attention and
10:57executives but the discussion was still
10:59a lot around DVDs and then we realized
11:02that we had to kick out the DVD
11:04executives of the main management meet
11:06and that was hard because we loved him
11:09we've grown up with them and they're and
11:11they're running everything that's
11:12important right but they weren't adding
11:14value in terms of the screaming
11:16discussion and we realized we were
11:18always compared herself too compared to
11:20a streaming pure-play what would we do
11:22and so it was very personal we gave them
11:26their own meeting but you know that part
11:28was our yeah you know it's funny it's
11:30almost the reverse of what Apple did
11:31with Steve Jobs did with the Macintosh
11:32where he you have the same issue the
11:34Apple two dominated the business the
11:36Macintosh there's a threat in that case
11:37he took the Macintosh team off site in
11:39this case you kicked the DVD team off
11:41site so to speak so maybe that again if
11:48if the Mac had been an add-in to the
11:50Apple to be abhorred in it or something
11:52you know but our commercial proposition
11:54the two services had to be highly
11:57integrated in the beginning right
11:58because we just didn't have enough
11:59content combination of money to license
12:03the content and studio comfort yeah and
12:06then you know at least my experience
12:07usually with these things is you kind of
12:09you start doing these things and you put
12:10on a very brave face in public right and
12:12sort of every cocktail party in Silicon
12:13Valley the answer to every question of
12:15oh how's your new thing doing is it's
12:17doing great right and then at four in
12:18the morning you're like so did you have
12:21the four in the morning moments what was
12:23your level of confidence along the way
12:24and specifically when did you know that
12:26it was gonna work I think we still
12:29wonder because you know clearly the big
12:33were the beginnings the success but you
12:34know will we be one of the leading
12:36internet television firms of ten to
12:38twenty years is very much open to debate
12:41so we knew technologically it was gonna
12:44work but we didn't understand and
12:46weren't confident up about the
12:47competitive dynamics and you know and
12:50that was frankly as true in the DVD
12:52business so as we were growing the DVD
12:55business we developed new competitors of
12:58Walmart doing a DVD rental service
12:59Amazon doing one in the UK and
13:02blockbuster doing a big one and so
13:05suddenly we were up against three much
13:07larger companies in that battle and we
13:09got through it by focusing on you know
13:12not getting psyched out by focusing on
13:14how do we improve service delivery how
13:16do we win this war of attrition against
13:20and so we've always imagined that as new
13:22services come in for screaming that what
13:25we have to do is not get distracted by
13:27them so we spend a very small amount of
13:30time thinking about competition and we
13:32spend almost all the time trying to
13:34improve the service and that's because
13:36again there's nothing we can do about
13:38the competition if you all think of some
13:41night you didn't watch Netflix god
13:43forbid then what did you do that night
13:46you know some of you watch sports some
13:48of you played a board game some of you
13:50read a book some of you drank too much
13:52some of you went to bed early and so we
13:55compete against all of that and so it's
13:58not just competing against Amazon or HBO
14:01it's really this open competition for
14:04time ok yeah so let's talk about the
14:07original content kind of phenomenon
14:09that's happened so when you started both
14:10Netflix itself DVD business and the
14:12streaming business you were licensing
14:13content from Hollywood studios and other
14:15kinds of content owners and then you
14:16decided along the way at some point to
14:18start funding and making original
14:20content this of course was an
14:21interesting move because if there's one
14:23universal rule of business it's if
14:26you're not in the entertainment business
14:27today do not go into it because you
14:29cannot succeed because you will get
14:31fleeced like they will take all your
14:33and you can name generation after
14:36generation of kind of outside investor
14:37or outside company including most maybe
14:40most notably that all the big Japanese
14:41companies in the 1980s who came to
14:43Hollywood put a huge amount of money in
14:44and I think generally now people feel
14:46like they got the short end of that
14:47stick Hollywood did very well the
14:48Japanese companies didn't so there's
14:51been just like lots of fear and
14:52trepidation in the business community
14:53and certainly in the technology industry
14:55nobody thought they could go make
14:57original content in Hollywood or in the
14:59Hollywood system and you of course it
15:01went directly against that prevailing
15:03belief and decided to go straight into
15:04it so maybe take me through kind of a
15:06thought process of how you decided both
15:08of that was a good idea and also that it
15:09could actually work sure think of it as
15:13we were moving in licensing content its
15:15second or third window the contents been
15:18out so it's got a track record and so
15:20you can do the Moneyball type analysis
15:22on the content to try to figure out
15:24before you buy it and how much it's
15:26gonna get viewed because it's already
15:27it's already built so it's suitable for
15:30heavy analytics and in the Moneyball
15:32and then when you move into taking
15:34creative risk you're buying properties
15:36that haven't yet been made or maybe
15:38they've been made but no one has seen
15:39them so you don't know a general
15:40reaction it's very different and we
15:43tried the first round actually in the
15:45DVD business in the middle of the
15:47blockbuster Wars we started buying films
15:49on DVD out of Sundance and we couldn't
15:52make the economics work about a whole
15:53bunch of films and it turned out we just
15:55spent a lot more money than we got we
15:58generated a consumer value so we were
16:00aware of the risks but by 2011-2012 we
16:05were realizing that many of the firm's
16:07that we were buying from were eventually
16:08gonna want to run their own streaming
16:10service and that we had we did not have
16:13a reliable supply and so there's a bit
16:16of a burn your boats cortes model which
16:18is we had no choice but to make it work
16:21and we had to go vertical because we
16:23were dependent on these firms that it
16:25was not going to be in their interest to
16:26sell to us over time and so my partner
16:30Ted Saran doz led that charge first you
16:33know with house of cards were first with
16:34Lillehammer for anyone who's really
16:36counting and then house of cards and
16:38then we've steadily grown that muscle
16:40year after year now for this calendar
16:43year we're spending about five billion
16:45on content and one billion on tech so
16:48now you know the ratios have been
16:50reversed and you know it's not without
16:53stress but people in the company are so
16:55proud of the content that we're
16:57delivering and we're now very associated
16:59and and all of us identify with some of
17:02the original series right so let's talk
17:04about actually Ted for a second so talk
17:07about talent development because this
17:08obviously is a this was like if you if
17:10the DVD business was one big bat and
17:11streaming was another big bet and then
17:13original content production was a third
17:14big yeah you went outside the company to
17:16to get the leader of that third effort
17:18and a reason bringing up Ted now has
17:20become legendary right in Hollywood and
17:21in the valley today at the time he first
17:23went to work for Netflix I think he was
17:25not that well-known and maybe had a
17:26little bit of a non-traditional
17:27background yes Saran dose which is our
17:30chief content officer has turned out to
17:32be a fantastic creative executive both
17:34on the talent relations and that and
17:36then picking what's gonna win and he was
17:38always a very curious person but he came
17:40out of warehousing so he ran warehouse
17:42literally for block clubs that like
17:44metaphorically warehousing
17:46early workers and then he had moved
17:49himself up to be doing DVD revenue
17:51sharing for a small video chain that was
17:54competing with Blockbuster when we hired
17:56him in his first two years at Netflix he
17:59had to work out of the home because it
18:00couldn't afford an office and he used to
18:02drive down with his crew to Costco and
18:04you know buy 5000 copies and you know we
18:07would load them up and mail them out so
18:09you know he has grounded out from the
18:11beginning and it's been fantastic how
18:14he's evolved to have such a fresh take
18:17on how to motivate the creative audience
18:20and it's certainly inspired by some of
18:22the stuff that we've been all learning
18:24in Silicon Valley about supporting
18:26creative work right so was it like did
18:29you spot like I think a lot of people
18:30Hollywood are like they're so impressed
18:31by Ted and then locate he doesn't have
18:33the classic background where the great
18:34studios I could just come from and so
18:35did you like how when did you know that
18:37he was gonna be the guy who could really
18:38do what he has ended up doing you know
18:40Hollywood is also filled with the
18:41stories of the mailroom people start in
18:43the mailroom become the usually what
18:45have occasion sees yeah that's right
18:46because they have a sense of general
18:50humanity and they don't grow up in the
18:52elites and I think Ted's always had that
18:54connection to you know super broad range
18:57of people and so it's not that unusual
19:00that that story of the common man who
19:02has incredible taste but but it's very
19:05few people do it and I would say Ted's
19:08grown in confidence as he's done more
19:10and more of it he would probably the
19:11first to say in 2010 say before we
19:13started that of you know let's see how
19:15it goes okay great so let me ask you the
19:18same question that when did you know it
19:19was gonna work the questions like when
19:20did you and maybe it's the same answer
19:22which is you still don't know but when
19:23did you know like was it house of cards
19:25specifically was it like premiere night
19:27of house of cards was it the first week
19:29yeah the first weekend well was all the
19:31press leading up to house of cards and
19:33then the first weekend and then there
19:35was the White House Correspondents
19:36Center that year spoofed it we had
19:38clearly hit a meme that we thought wow
19:41if we can do more of this and then when
19:43we did orange is the new black about
19:45three months later then it wasn't a
19:47one-shot lucky thing
19:48it was the pair of those the proof that
19:51you know there would be more and then
19:53whether it's narcos or the crown you
19:56know last week you know there's a whole
19:57series of these majors
20:00you know or daredevil Jessica Jones Luke
20:02Cage you know finding these incredible
20:04franchises that we could co-developed
20:06with Marvel right so I remember just
20:09talking about that the the sheer amount
20:11he said five billion dollars this year
20:12of content acquisition so let's talk
20:14about the sheer amount of content so
20:15five years ago Jeff bukas the CEO of
20:17Time Warner said that competing with
20:19Netflix was like going to battle with
20:21the Armenian Army no was it even their
20:23meaning army no it was the Albanian army
20:25yeah meaning army I should have been
20:27scary they'll be naeun army it was not
20:30intended I believe as a compliment from
20:31him variety or Hollywood Reporter
20:33earlier this year five years later ran
20:35the opposite story saying Netflix is
20:37obviously gonna have a monopoly on all
20:38concha production in Hollywood forever
20:40and so you've gone from the Albanian
20:42Army to the global you know ticket that
20:44Godzilla at the industry quite quickly
20:45in the view of the industry an example
20:47that I remember sitting next to Jeff
20:49Katzenberg at dinner a couple years ago
20:50and he was just in Jeff Katzenberg Rand
20:52isn't you know Disney production for a
20:53long time at DreamWorks that has lots of
20:54experience and he was just he was
20:56literally like mind-boggled at how much
20:58content you guys were buying even then
21:00two years ago I mean he I think he told
21:01me the story of you guys greenlit 200
21:03hours of children's programming in one
21:05shop 400 half-hour episodes you guys
21:07when he did the the Marvel shows you
21:09greenlit 5 miniseries at the same time
21:11and so at least I think in Hollywood
21:13they're all looking at Netflix now
21:14saying oh my god ambitions appear to be
21:16limited so the question is like now that
21:18you have cracked the code for Netflix on
21:20creating original content and shown the
21:21companies from the valley maybe you know
21:23certainly Netflix maybe others can do
21:24this how much content can Netflix make
21:27like how much how far can you push this
21:29you know we'll have to find out year by
21:31year about 8 billion in revenue this
21:34year and we think of it as the customers
21:37all of you are giving us your money and
21:40our job is to turn that into joy what we
21:43have to do is create amazing content
21:45stream it perfectly all over the world
21:47to you and if we do that you'll give us
21:50more of your money and then we have to
21:51turn that into joy and so for every
21:53incremental billion dollars that you all
21:55give us then it's our responsibility to
21:58do the best shows that we can that
22:00convert that into the most joy and we
22:02measure that with viewing and a few
22:04other metrics as possible if you look at
22:07the total global ecosystem we're still
22:10sub 5% of all content being made around
22:13so you know pretty tiny were 87 million
22:17members which compared to Facebook's you
22:19know 1.7 six billion is pretty tiny or
22:23to YouTube's billion so there's a you
22:26know we're well behind internet scale
22:28company so a long way to grow on that
22:30front and what's happening is as smart
22:32TVs or selling and and most people watch
22:35most content on TVs then that's opening
22:37up tremendous new markets so that's a
22:39next 10 years story as more and more
22:41Smart TVs playing not only Netflix but
22:44playing YouTube and BBC and you know
22:46many other networks so it is shifting to
22:49where the risks of us getting squashed
22:51or less and the risks of our competitors
22:55partners and suppliers getting scared as
22:57increasing and it's up to us to play
23:01that maturely where you know we're not
23:03filled with our own sense of success and
23:06instead we're you know just out trying
23:08to do the best shows we can but we're
23:10pretty convinced if we can stay focused
23:12on just the greatest shows greatest
23:14movies over the next couple years then
23:16you know we'll have great progress and
23:18and we'll see how it shakes out right so
23:21another kind of surprise that people had
23:22I think at least when they watched
23:23Netflix as a consumer as for me from the
23:26industry it's very surprised I had is
23:28this like ok Lillehammer like I'm not
23:30sure people knew probably an experiment
23:32and then house of cards in orange is the
23:34new black because I came up back-to-back
23:35and that kind of branded Netflix out of
23:36the gate is kind of edgy kind of
23:38transgressive content right or different
23:40kinds when it's very dark view of the
23:42political future or this very you know
23:44dark view of a women's prison or
23:45whatever and so the I think the view was
23:48ok now Netflix is gonna be like you know
23:49dark edgy you know millennial you know
23:52kind of kind of kind of kind of stuff
23:54like premier premium content and then
23:56you guys started to do you did fuller
23:57house which is the sequel to Full House
23:59which does not fit in the genre I just
24:01described I would watch it if it did but
24:03it doesn't I want that I want the dark
24:05dystopian version of full house if
24:06you're if you're taking if you're if
24:08you're taken requests you did a big
24:09movie deal with Adam Sandler which is a
24:11very completely different genre and and
24:14it appears and you probably saw from the
24:16real like you've it appears now that
24:18you've house crafts for hopscotched
24:19across many genres and so those curious
24:21like is there a Netflix brand of
24:23contents is there a Netflix
24:27viewer or is it truly is it unlimited
24:30diversity or something in the middle
24:31like like how far can you stretch the
24:34generous you know it's often called the
24:36ear of mass customization and and when
24:40hopefully fuller house does not get
24:42promoted to you and it's all the dark
24:44dystopian things that you love and so
24:47you think Netflix gets me and that's the
24:49emotion we're looking for but yeah the
24:51contents incredibly broad that when you
24:53look on a global basis that's wildly
24:55broad we're getting all those Japanese
24:57films and British shows and so you know
25:01what we want to really do is connect
25:02people and not treat them as you know
25:05that's someone who's by these
25:07demographics or that location but treat
25:09them based upon their viewing what's the
25:11kind of content that you want to relax
25:13with and make you happy and so it's very
25:16much focused on you know using
25:18personalization so that you can have
25:20that breadth so if you think of the old
25:22world linear TV there's all these
25:24different channels in the grid and then
25:26if you're gonna differentiate from
25:28broadcast cable which is pretty generic
25:29then you have to have an attitude like
25:31hallmark there's a certain type of show
25:34lifetime FX you know HBO that you had to
25:38carve out an identity but on the
25:40internet because of personalization we
25:42don't need to be associated with just
25:44one type of content and so that's the
25:47the great enabler a great example of a
25:50super smart guy that all of you would
25:52like is Jeff buchen runs Time Warner
25:54who's you know Stanford MBA he's been in
25:57the business ran HBO for 20 years you
26:00know a very thoughtful guy and yet he
26:02missed the Netflix thing and what
26:05happens to people is they associate you
26:07as you are not as what you can become if
26:11the technology matures okay and so he
26:14looked at Netflix in 2002 and would say
26:16things like the internet can't do video
26:19at scale and it was like okay now early
26:22that's true but broadly that's not true
26:24because that's gonna change and so and
26:27he was frustrated that investors which
26:29are pretty good at seeing these
26:30long-term trends kept hitting on him of
26:32what are you gonna do about Netflix will
26:34you into about Netflix and he would say
26:35come on it like barely runs and that's
26:37what in frustration made them be
26:40so that comment that he made will define
26:43one part of his career like Steve
26:45Bombers iPhone you know commercial or
26:49head which you know now that I know him
26:51well as a person you know he's actually
26:53a great and super thoughtful guy but
26:55sometimes and this can happen to any of
26:57you you get trapped into a certain
26:58paradigm you're frustrated about
27:00investors always asking you about threat
27:02acts and then you say something done the
27:05counter positions this is the original
27:07one was 45 years ago which was Ken Olson
27:09I ran Digital Equipment said UNIX is
27:12snake oil and once he said that that was
27:14the end of the company okay because
27:17there's no reason for anybody have a PC
27:19in their home yeah so you know he and in
27:23his time he was an amazing thoughtful
27:25leader so the built one of the best
27:27digital equipment was one of the best
27:29companies of the sixties and seventies
27:30Thomas Watson the founder of IBM Thomas
27:32wasn't senior said in their late 40s
27:34there's only a world market for a total
27:35of five computers yeah so the lack of
27:37imagination amongst us leaders it can be
27:41very high and it's easy to look at those
27:43guys and say what idiots yeah but in
27:45fact they are us you know and so it's
27:47it's very hard to people say things like
27:51only the paranoid survive that was Andy
27:53groves quote and the problem with that
27:55is it over it coats the truth in a way
27:57but it oversimplifies because the
27:59paranoid are delusional they see crazy
28:02things all the time okay and business
28:05isn't that easy you don't get to just
28:08imagine everything is gonna crush you or
28:09you get totally distracted on the wrong
28:11threats and really to be great a
28:14business it's like being great at chess
28:16and you have to anticipate which series
28:19seven eight moves down are likely to
28:21happen and by the time in chess you go
28:23seven or eight lose the tria
28:25possibilities you know is at the limits
28:27of human understanding and so you have
28:30to prune the branches that's probably
28:31not going to happen so I'm not going to
28:33explore that and if you prove wrong then
28:36you get checkmated okay and that's the
28:38same thing in business and so we need
28:40more sophisticated metaphors than only
28:42the paranoid survive to anticipate okay
28:45what are the paths and all the judgment
28:47that it takes of which which competitive
28:49past do you explore most right right
28:52right okay so let's talk about industry
28:54structure for a little bit it'll get to
28:55a couple of their fun topics so other
28:57than the Raisa Netflix in the last five
28:59years probably the most important
29:00structural change in the entertainment
29:01internet telco world that we all live in
29:05was the combination of Comcast and
29:07NBCUniversal just kind of a you know
29:10what once upon a time the movie studios
29:12owned all the theater chains then they
29:13got disaggregated in the 50s dude
29:15antitrust and then that kind of
29:17separated content distribution from
29:18ownership for things like film and TV
29:20for a long time and then and it seems
29:22like Comcast NBC U is kind of putting
29:24that back together again you own the
29:26pipes you create the content and you
29:27have kind of a closed ecosystem AT&T of
29:30course now famously has bought DirecTV
29:31which puts them in the content business
29:33directly makes them a huge customer and
29:35increasingly direct producer of content
29:36AT&T now trying trying to buy Time
29:38Warner is this a trend do you and you
29:41when you play your chess game in your
29:42head do you look out ten years and say
29:44each of the big telcos it's gonna
29:45partner up with a big media company like
29:46this and if so does that mean that
29:48Netflix needs to buy a telco so I think
29:51you're misunderstanding what NBC you and
29:54Comcast is about so comcast serves about
29:5620 percent of US households about 20
29:58million households and then NBC U is a
30:00global content producer okay and so the
30:04amount of interlock they can't take the
30:06NBC content exclusive to boost their so
30:09it's not really much of a vertical
30:11integration so you might say well why
30:13are they even bothering so it's a tax
30:15law thing so if Comcast is very
30:17profitable if you return those tête that
30:19all that money to your shareholders it
30:21gets taxed so the shareholders would
30:23like you to invest it smartly if you can
30:25if your trusted to invest it rather than
30:28return it to them and keep it tax
30:29shielded and so by buying a good related
30:32business and running it well but very
30:34independently then they create a lot of
30:36shareholder value in that but they
30:38haven't like taken the NBCU networks or
30:41content and tried to make it exclusive
30:43you know to that so it again it's not
30:46much of a vertical integration the way
30:48you all might think about it and it's
30:50very similar with Verizon Verizon has a
30:51ton of cash flow they don't want to
30:53because of the tax leakage return it so
30:56the question is can they buy
30:57high-quality assets at a reasonable
30:59price and time warner makes a lot of
31:01money that'll continue to make a lot of
31:03money for a long time saying the reason
31:04they bought DirecTV and so
31:07they're not trying to corner that market
31:09so let me challenge that last part yep
31:11which is 18 t has now said publicly that
31:13a big reason why they're buying both
31:15DirecTV and time order is because they
31:16want to launch it flicks competitor a
31:17full internet streaming service that
31:19won't be attached just to the DirecTV
31:20satellites or to the ATT telecom system
31:23but will be generally available like
31:24Netflix so you don't think that they
31:26will TN t--'s only in the US for
31:28consumers okay so it's in 20 percent of
31:30the global market and so what's the
31:33service they're gonna do I mean how does
31:34that work and Time Warner is a global
31:36service so you might be seeing a little
31:39bit of window dressing for investors as
31:41opposed to like the fundamental
31:42rationale okay so you know do the stuff
31:45that you were able to work with Time
31:46Warner or NBC you before those mergers
31:47you think you'd be able to continue to
31:49do the same things after those murders I
31:50think so I mean evidence of that is you
31:53know we had a big battle with Comcast
31:54about them buying Time Warner and we
31:56were afraid of them cornering the
31:57residential broadband market in the US
31:59and wanted certain conditions which they
32:02were unwilling to provide so it's this
32:04big battle and during the intensity of
32:06that battle they never brought in the
32:08NBC News that we were buying content
32:10from NBC you and they treated us
32:12completely neutrally inappropriately and
32:14you get big enough for these different
32:16divisions and you end up having to do
32:17that or you get a lot of government
32:19problems and and they ran it very
32:21thoughtfully maturely and 18 T's the
32:23same thing which is you you spend all
32:24that money for Time Warner which
32:26monetizes the content globally then you
32:28know you want to monetize that globally
32:30and yes they own a lot of mobile types
32:33in the US and and kind of 10% in on
32:37residential but all in the US so it's a
32:39I don't think then we want to be treated
32:42the same as HBO's bits in terms of your
32:44rating and net neutrality which is a
32:47relatively minor condition I don't see a
32:49big problem with it and then so as I
32:52said so do we need to buy a telco no
32:54because we're not trying to but you know
32:56we work with over 500 ISPs around the
32:59world okay so just like Facebook or
33:01Google or anyone we're an Internet
33:02company right the last thing I mean you
33:04know how well is Google Fiber worked out
33:06for Google you know it's like not so
33:08well it's hard stuff and it's much
33:10better to just add incredible value as
33:12an application layer okay got it now
33:16that respect to Silicon Valley so now
33:17that Netflix has proven that Netflix is
33:19instance of one that
33:21previously there were zero now there's
33:22an instance of one of their can be a
33:23scaled Silicon Valley technology first
33:25class technology company run by a first
33:27class technology team that can actually
33:29go by and create content at scale so now
33:31that the what now looks like a myth of
33:33the past that that was you know not
33:34possible so Pixar EA
33:36well okay so it's the broader universe
33:39that then you're in your thinking so you
33:41know obviously Pixar you all know but EA
33:45in the gaming market has been
33:46tremendously successful
33:48you know based in Silicon Valley and
33:50yeah there's some tech in it it's
33:52fundamentally a creative enterprise so I
33:54think of it as when you need to develop
33:56a new muscle as a corporation if it's
33:59essential that you do it and you kind of
34:02allocate say a third of your resources
34:04to it you can master a new skill it's
34:06not impossible what's impossible is to
34:08dabble in it okay for a non tech company
34:12do a little bit of tech on the side that
34:14will never work out but if they must get
34:17good at that area and they're good
34:18management team and they put say a third
34:20of the company to it they can figure it
34:22out including on the creative barrier
34:24and so that's why I think it's more
34:27permeable and it's less magic you know
34:30in some in some other way
34:32but you know definitely the stresses and
34:34ei faces this Pixar did between the tech
34:37people and the content people is our
34:40material but again if you think about
34:41Apple what they really did with the iPod
34:43is combine fashion and technology and
34:46because they successfully sold it as
34:49fashion they made you know they made us
34:51all get them and none of the fashion
34:53houses could do the tech and none of the
34:55other tech companies could do the
34:56fashion and so for many many years they
34:59owned that space and you know what we're
35:01trying to do is combine personalization
35:03on demand content Smart TVs all these
35:07very geeky things with this incredible
35:08content and if we can combine the two of
35:10them better that protects us against HBO
35:12which very good at content but not so
35:14good attack and you know a tech company
35:17that's trying to move into content right
35:20so then so then let me let me ask
35:21directly then so in the case of an Apple
35:22which i think is just now really
35:24starting to put his foot in the water on
35:25this stuff Google which seems like it's
35:27exploring increasingly original content
35:28and obviously Amazon has gone in I think
35:30you know it's dove into the water and
35:31it's now making quite a bit of actually
35:33I'm quite very good programming
35:34man in the high castle and and other
35:36shows like that how do you handicap the
35:38other major Silicon Valley companies
35:39like we're sitting here in five or ten
35:40years will it be an increasingly routine
35:42thing for scale tech companies to be
35:45doing this or do you think it will still
35:46be a relatively idiosyncratic thing that
35:49only a few company you know a small
35:51handful of companies we go to you know I
35:53think if for the Silicon Valley
35:55companies so Google Apple if if they
35:57want to spend a third of their
35:59management resources in this area then
36:02they could probably get in and be big at
36:03it but that's a big chunk and they're
36:05oriented around other things in Amazon's
36:08case I would say they've exceeded the
36:11amount of investment that I would have
36:12thought they'd put in and they spend a
36:14tremendous amount of money in the area
36:17and some of the shows as you said are
36:18working out but I would imagine that
36:20from a focus standpoint it's just not at
36:23the core of what they do that the core
36:25of Amazon retail and AWS are operational
36:28excellence and margin efficiency in
36:30entertainment is a very different thing
36:32but I say that and then I look at Jeff
36:35Bezos and I think not only is he running
36:37one of the most amazing companies in the
36:39world but then he's also doing Blue
36:40Origin and also doing the Washington
36:42Post right right and so I feel like
36:44we're competing with you know an unusual
36:46person and so the normal limits of you
36:50know you normally you could not combine
36:52all the competencies that they're trying
36:53to do in Amazon and have that work with
36:55entertainment but because Jeff's there
36:56it's kind of scary he said you know
36:58we'll see but again even if they succeed
37:01wildly you're gonna watch some of their
37:03shows in some of our shows so you know
37:06each show as its own constituency and so
37:09it's not you know we compete again as
37:11much against video gaming and the NFL as
37:15we do against Amazon shows yeah so the
37:17most along that young folks that are
37:19firm that number one question everybody
37:20had was they want me to ask you about
37:21stranger things which is the cult hit of
37:23the last year for those people haven't
37:25heard of it it's a it's a genre piece
37:26it's a sort of a loving omage to like
37:29the Steven Spielberg movies in the 80s
37:31so it's kind of coming of age in the
37:33early 80s but with like sci-fi kind of
37:37you know horror kind of elements to a
37:39supernatural cross Stephen King crosses
37:41yes he kind of thing very very fun very
37:43very great just fantastic show amazing
37:45child actors you know great cast and I
37:48Seneca very big success rate for Netflix
37:50and so I read an interview Rolling Stone
37:51interviewed the tougher brothers who are
37:53the archers who created the show and
37:55they of course told you know the classic
37:57story that a lot of the entrepreneurs
37:58here will I think probably sympathize
37:59with which is you know they came up this
38:01idea and they had done a few things in
38:02the industry but not a lot and then they
38:04shot their idea to you know the studios
38:06and the network's and they said they got
38:07passed on 15 times 15 nose and then
38:10Netflix said yes and so take us through
38:12like if you want like with that is a
38:14specific example like how do you how do
38:16you think about that process what makes
38:17you bet on that property at that time
38:19with with with people like that
38:21well I think one of the things that
38:23makes Silicon Valley so healthy is that
38:25there are so many venture firms to go to
38:27and that they're constantly competing
38:30for the entrepreneurs attention and I
38:32think it's a similar thing about
38:33television networks that there's lots of
38:36places to go to for successful creatives
38:39and you know our main reaction was why
38:42did you go to 15 before coming here
38:44awesome when we saw it to be fair and
38:47when many other people saw is a little
38:48different than it is today but what we
38:50saw is the potential just as you would
38:51back an idea you know the initial idea
38:53that the entrepreneur had is different
38:55than how it actually ended up there's a
38:57lot of that in the creative process so
38:59it's a pretty similar process except
39:02that the kind of minimum going in and
39:04you know there's no a funds and all that
39:07you know you're in for the whole thing
39:08at you know 30 million 100 million
39:10dollars so the size bets that you have
39:13to make on these are larger but
39:15otherwise it's a pretty similar
39:16structure in many ways with
39:19entrepreneurs coming and what's great is
39:21that our guys had a fresh take on you
39:24know we didn't the the lure was you
39:26couldn't combine kids and scary stuff
39:28and this wasn't gonna work and and what
39:31we saw is the potential we turned out to
39:33be right but there'll be a you know
39:34other things that we probably will back
39:36in the future that don't work and so
39:38that's okay obviously just as it is you
39:41know for you guys yeah and then a
39:42concert kind of question the value of
39:43course is like how much experience for
39:45entrepreneurs need it you know working
39:46other places getting trained before they
39:48can start their own companies and
39:49there's you know some stories you know
39:50kids who just start immediately launch a
39:52company other stories that people who
39:53work in industry for 20 years and then
39:55so stranger things is an interesting
39:57case where they the guys are the young
39:58guys to true brothers yeah
40:00my understanding they had they've done a
40:02few like they did a few episodes of the
40:03one of the Fox shows wayward Pines like
40:06they were like directors but they had
40:08not actually done their own project in
40:10any level scale like this is the first
40:11big thing they did on their own and what
40:13like what made you think that they or
40:15what made your folks or maybe Ted think
40:17that they were these guys will be able
40:18to do it and the other you know hundred
40:20presumably that you turn down to the
40:21same month you know where you know I
40:24think it's largely like your venture
40:26capital vetting process where it's a set
40:29of subtle factors of who does it appeal
40:31can they evolve are they gonna listen
40:33you know to the feedback do they have to
40:36create a vision and then it's a gut call
40:38and the dumper brothers were very
40:40compelling in the pitch and so I think
40:43if you set in on those pitch meetings
40:45you'll be like oh my god is it just like
40:47us so with that probably the big
40:49difference is you know in the best case
40:52these franchises go on four or five six
40:54seven seasons you're not building as
40:56long a franchise so if all of your
40:58companies got acquired it would be kind
41:00of like that that is we're building
41:02something that that's gonna get plugged
41:04in somewhere else and then let's talk
41:06about so creative control so one of the
41:08things they said in the interview is
41:09they said one of the pieces of feedback
41:10they got from the other studios that
41:12they pitched before they were smart
41:13enough to come in to pitch Netflix was
41:15basically they were in Hollywood in in
41:18in the valley we have this concept of
41:19board meetings where we come in and tell
41:20the founders what to do even though we
41:21don't know in Hollywood they they call
41:23this notes and so it's famously written
41:25up as notes and it's literally you know
41:26it's like the Hollywood executive from
41:28sending you know the thirty ideas on how
41:29to change and in the case of the
41:31creators you you know ruin the the idea
41:33and so the the duffer brothers have this
41:34classic story of they got all these
41:36notes back during the pitch process
41:37mother studios and the quote I have is
41:39you either got to make it into a kids
41:41show right which it very much is not
41:43sort of this but it's really not or make
41:46it about the detective character
41:47investigating paranormal activity around
41:50town all right making it like a yep
41:52monster of the week x-files kind of
41:53thing and of course both of those were
41:54wildly off vision from what these guys
41:56wanted to do so the question is like it
41:58at least Netflix the reputation is you
42:00guys given a usual level of creative
42:02control to the creators relative to do
42:04the studio's do you think that's true
42:06well look imagine Silicon Valley if the
42:09original six venture firms from the 1950
42:13sixties with the only venture firms
42:15around because of some other constraint
42:17and so that's what it's like in
42:19Hollywood there's the original six and
42:21they've got their networks and if that's
42:24who you pitch and so it gets oh there's
42:27a lot of dysfunction that comes out of
42:28that which is there's not enough
42:30competition they all move between each
42:31other it doesn't really change very much
42:33no one's trying to innovate much and so
42:36if you can try to imagine Silicon Valley
42:37with just the old venture firms and that
42:39was the only places to go that's how
42:41Hollywood is and so if you think about
42:44you guys in the modern venture firms
42:46differentiating from the prior
42:47generation in terms of being founder
42:49friendly what's the same thing for us
42:51with creative freedom right you're
42:52looking for a differentiator because the
42:55existing system has misunderstood
42:57something and you get to encode and
43:00hopefully be branded around some truth
43:01that then really helps you differentiate
43:03but again it's it's much you would find
43:06it a much softer target there than in
43:08the venture capital side because if you
43:10didn't own cable networks you couldn't
43:12you didn't matter you couldn't break
43:14into the business and so there was a
43:15significant constraint which gave them
43:17huge margins so cable networks have been
43:20running a 50 percent gross margins and
43:22you know like this unheard of in US
43:25business right you have to be up at you
43:27know windows monopoly levels to get to
43:29there okay good so I want to ask you the
43:32question of the question I'm sure you
43:33always get asked to sort of the future
43:35of TV and ten years but given that we
43:36just don't election don't ask you the
43:38sort of the broader question of the kind
43:40of intersection of politics and media
43:42and this is not a political question
43:43this is a media question Donald Trump
43:44one of the things he said was basically
43:45television commercials television
43:47commercials for political campaigns
43:49don't matter anymore they're not
43:51relevant that's not how the message gets
43:52he's an absolutist on this he says the
43:54the message it's entirely social media
43:56so he takes her to one extreme for you
43:58obviously the counter argument would be
44:00that television is the time-honored way
44:02of candidates putting messages out and
44:03there that's still where most of the
44:05money goes how would you advise him to
44:06think about media about how they should
44:08get a message out this is a coded
44:10question because marks gonna run and he
44:12wants my advice and I would say go back
44:15on Twitter be your iconoclastic self
44:18and people are looking for Mavericks
44:21mark and I will vote for you baby
44:24mayor Palo Alto roads governor whatever
44:28it is we need people like you in office
44:30well we're for mr. Thom yeah we stopped
44:33commercially we spent a couple hundred
44:35million on advertising on the Netflix
44:37service and we stopped advertising on
44:39linear TV a couple of years ago and all
44:42of our advertising is online because we
44:44want to target the show to the person
44:46and so that's been very effective for us
44:48so you know I think that definitely
44:50you're gonna see a lot of shrinkage in
44:51linear TV advertising around the world
44:54and in general linear TVs been amazing
44:57we've had it for 50 years but it's like
44:59the landline phone that was an amazing
45:01invention - and now it's been replaced
45:03with mobile phones over 30 years and
45:05linear TV 10 20 years from now will
45:07disappear it will be once in a while
45:10you'll see it in a hotel like where you
45:12see a fixed line phone but other than
45:13that you know you're not going to see in
45:15everyone around the world will be doing
45:17Internet video as well as internet
45:20everything else good good thank you Reed
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