Sharp Tech with Ben Thompson - Encouraging Netflix Earnings, Continuing Questions, and How the Model Might Evolve

Episode Date: January 23, 2023

Parsing the good and bad from Q4 earnings announced by Netflix late last week, dreaming of a free, ad-supported Netflix in the future, what Reed Hastings got right as founder and CEO, plus emails on streaming cost structure, electric vehicles and Acorn computers in British classrooms.

Hello and welcome back to another episode of Sharp Tech. I'm Andrew Sharp and on the other line, Ben Thompson. Ben, how you doing? I'm doing well. Happy Chinese New Year. It is the holiday season here in Taiwan. No one is working. The roads are clear except for me.

I'm here with you and happy to be so. Absolutely. Here we go. Before we get started, I have two notes. Number one, the usual reminder. listeners can email us at email at sharptech.fm, and we'll try to respond on the show. We're running low on questions for the second show this week. So hit us up if you've got topics.

Your big opportunity is the first open. I think it's our first explicit ask for questions since we got started. Exactly. Well, I mean, I love when people come out of left field with stuff they want us to cover. So if you've got any kind of wild card ideas, now is the time. and the second note, Ben, is a take. And it's based on a tweet I saw about five minutes before we came on to record. The tweet said, chat GPT just passed a Wharton NBA exam, time to overhaul education.

Based on that tweet, I would like to announce here on the show, I am short selling ChatGPT's impact on education. and I am buying long-term stock in blue books and any AI that allows teachers to read students' handwriting from blue books. What do you think? What is blue books? You never used a blue book out there in Wisconsin? Are those those things that, like, they summarize something in like a shorter amount of space or something? No, it's literally a blue book filled with notebook paper and you just handwrite your exam answers in the blue book. Oh, got to, got it. Yes, yes. I guess, I mean, were they blue books? I mean, I don't know. I'm not, I'm actually, maybe I'm maybe I'm too. I'm sure blue books are probably like 300 years old. I'm saying like I'm too old or something on those lines. But yeah, we hear this about education. I mean, you know, everything's going to disrupt education. I think the question you have to ask is what is the education actually providing? In the case of a Wharton MBA, is it what you actually weren't in class or is it that you're a Wharton MBA?

right and uh and that doesn't mean that's impervious either but you need to be super clear in understanding about what's actually being attacked here there's been many many many many a startup many many a business that has their founders are convinced it's a home run and is only after the fact they realized they were attacking something that that was like a it was perceived to be what it was but actually the reality was something very very different and i think education is probably, you know, example one A of that. Yeah, well, and I'm trying not to zag too hard, but for like six weeks straight, there have been all these breathless tweets predicting crisis for the education community.

And they're all coming from like these viral influencers in tech. And I just want everybody to sort of settle down here. It's the tenor of every chat, GPT conversation is a little bit crazy. I am open to the idea that it can transform certain sectors of society, but I think education is not necessarily going to be completely revolutionized by this technology. Well, what if those tweets are being generated by chat GPC? It sort of feels like they are. They all have the same cadence. They're all super dramatic about what this is going to mean for society. But in any event, we're not here to talk about chat.

I think relevant to that question is with all new technologies and their impact. It's one thing to talk about what's going to happen. It's a completely different thing to get the timing right. And that is absolutely a segue to our topic of the day. There you go. Professional podcaster Ben Thompson. Yes, we are here to talk about our old friend Netflix. We'll kick it off with the Wall Street Journal. They write, Netflix viewers love a good mystery, but the streaming giant wisely isn't keeping investors completely in the dark as it enters a new phase of life. Fun lead from the journal there. The company's fourth quarter report Thursday afternoon contained a few pleasant surprises.

About 7.7 million net new subscribers were added during the period, 70% more than the company had previously forecast. Revenue also slightly exceeded its projection, suggesting that the new, advertising-based service tier launched during the period didn't spark a massive trade-down among current subscribers from more expensive plans. The recent quarter benefited from strong programming that includes the popular Adams family spinoff Wednesday and the movie Glass Onion. The latter, a quasi-sequel to Knives Out, is now the fourth most popular movie ever on Netflix, despite a week-long run in movie theaters before its streaming release. Really happy that Glass Onion is a success despite its seven days in movie theaters.

I hope that makes Netflix more comfortable with the two-tier model where they release in theaters for a couple weeks and then release it on Netflix because I like seeing movies in theaters. But as for you, you've been a longtime Netflix bull. Do you regret that you were a responsible? analyst who was thoughtful about your potential mistakes with Netflix instead of defiantly doubling down as a takesman when everyone was losing their mind like nine months ago. A little bit.

I mean, so what's happening, I think big picture. I actually think Netflix's results, there was an aspect that they weren't that impressive. I mean, there really wasn't much growth like their average revenue per user. It is going down. I mean, this bit about, you know, oh, they're not losing that many people to ads. Well, in the long run, the ad supported tiers, we see this with Hulu. The ad supported tier makes more than the for-pay tier because, like, advertising is very valuable, right? And so that's like, I think the wrong mindset about this, although in the case of Netflix, because they're starting from scratch, maybe it would be more of a concern.

But my long-term bull case did always stay intact, which is the, again, I've said this a million times, so sorry. to like pat myself on the back here, but it's important because I think it's important context. You go back to 2019, 2018, when all these other streaming services were ramping up, they were losing friends, they were losing the office. And I kept saying again, again, look, the next five years are going to suck for Netflix. It's going to be brutal because all these companies want to try their hand at streaming, and it's going to have a double effect on Netflix. Number one, they're going to have a harder time keeping users attention because there's going to be other alternatives.

And number two, they're going to, well, actually, three things. Number two, they're going to have less good content because that good content like the office or whatever is going to be on other networks. And then number three, they're going to have to pay more for content because there's more people bidding for it. But in the long run, and I put it at about five years, all these other companies are going to realize that this is a really hard business. We're not very good at it. We are content makers, not content sellers. Those are very, very different jobs. Yep.

And they're all going to sort of bail and back out. the market and they're going to reduce their expenditure and Netflix is going to be there sitting waiting with a huge audience to start buying their content again. And Netflix is going to get a better price. They're going to get better content. It'll have cemented their long term advantage, even though the five years will be difficult. Now, a bunch of interviews have happened. Number one, I've talked about ATT spinning off time Warner to Discovery did shake my faith in that

thesis a bit just because like now you have another company that's basically all in with really, really great content, right? Whereas AT&T, I knew that was going to fail. That was inevitable. If anything, the only thing ATT gets credit for is sort of giving up sooner than I expected them to. But number two, then the COVID came along. And COVID came along and Netflix's subscriber editions shot up, even though they'd been

really flatlining, particularly in their most expensive markets. And that actually, I think, made the last year worse because they had like this hangover where they probably got too many subscribers relative. to the normal sort of growth of the business. They lost a lot of those. Growth didn't just flatline. It actually started to decrease. And then you had all these other services come along that, you know, again,

I was particularly taken by the HBO Discovery one. Now, I do think this, in retrospect, maybe not so good for shareholders, I lost a lot of money, but this was probably a good period for Netflix. Because I think that Netflix had gotten a little stuck. in a rut. And that rut is, you go back when your management, right? Like at the end of the day, you build to what you measure, right? And this Wall Street Journal article is always, what does it lead

with? It leads with net new subscribers, right? That's always been the Netflix narrative. How many new subscribers do they get? And with the assumption that everything else would take care of itself. And that just wasn't sustainable in the long run because they had so many subscribers, particularly in the countries where they charge a lot. That's 7.7 million new subscribers are almost all in countries where Netflix charged. is very, very little. So that's why their average revenue prescriber actually went down this last quarter, even as they're going up.

Profitability actually was not as good as expected. But we'll get to why it was okay. Okay. So you have all this going on. And meanwhile, Netflix clearly should have had an ad tier, right? Like if people want ads to pay less, give them ads, and it's going to be fine because, again, as we've seen with Hulu, you'll actually probably make more money. And just for that reason alone, this was probably like, it was a nice crisis for Netflix to sort of wake up and say, hey, we need to like- Shake them out of their comfort zone a little bit.

Yeah, they're like, they're just doing the same thing again and again and again and again. The one other thing I would like to see them change. And this actually goes to the investor letter. So I'm going to quote from the investor letter. Okay. We believe people typically sign up for a streaming service because they've heard about a title, you simply must watch from a friend. seeing the excitement on social media or read about it in the press. Generating conversation is our primary marketing goal because we see that it drives acquisition

and encourages existing members to watch more, which in turn helps with retention. Then why are you releasing your shows all at once? That's the other like sacred cow of Netflix that just I don't get. If you have a super popular show, release it once a week, let the review cycle click in, let the ringer build a, like where's the ringer stranger think section? It doesn't exist. because there's not the cadence. It can't exist.

Right. And nobody's watching it at the same time. There's not that weekly conversation. It's like some people wait two weeks to, you know, bang it out and a couple sittings. And it, it, some people watch on opening night. And so it's honestly like untenable for Chris Ryan to host like a stranger thing show. Disconnected from the conversation because of their release schedule. Now, again, I think for some shows, the release schedule makes sense in, in sort of, you know,

different sort of ways. But I continue to maintain this is a big whole. Now, they've made some shifts, right? Stranger Things actually released in two parts instead of like all at once, right? They did the live special with Chris Rock and then it was sort of, you know, available for streaming afterwards. They did this Knives Out thing where it was in movies, theaters first and then available. And that helps them tap into the review sort of cycle, right? It's now it's like a real movie and you get a like latch on to that infrastructure that exists for these sorts of.

of things. And so to me, that's one more change I would really like to see them make. And if they do that, I think that, you know, there's an aspect where this real kick in the pants has been useful for Netflix. Now, as for me personally, can I just say, I have loved that there have been so many twists and turns with this Netflix take to open the show. So I'm excited to hear about Cable's Last Laugh. Well, okay. So the point there is the opportunity. I saw for someone. And so that was a two-part article, right? There's an opportunity to sell this stuff and bundle it together because all these

streaming services, as they read saturation, their biggest concern becomes churn. And a good way to avoid churn if you can't get everything is to be in a bundle with lots of other folks that help you sort of fill in the gaps, right? It's a win-win situation. Cable already has a billing relationship with tons of customers that's video-oriented. That seems like a natural entity to take that on. Now, that cable part, I think, was probably a bad take. It's been a rough, rough nine months for the cable companies.

It has been. It has been. But the point about Netflix wanting to reduce churn and be locked in, I think is valid. But, and this is the big sort of thing about these earnings and why they're good. Just being competent in having free cash flow means Netflix isn't way better shape than everybody else, right? Because the other part, my long running prediction, that all these other stream services are going to get their asses kick. That's exactly what's happening. They're all losing money.

They all have tons of debt. Carrying lots of debt right now is not great. Netflix has debt, but all their debt is at the previous interest rates, right? They have no debt maturities this year. They don't have to roll anything over. They only have like 400 millions of debt rolling over in 2024. So they're locked in with their carrying debt at super low interest rates. You know, they're just paying the interest.

It's totally fine. And they have free cash flow. And the profits are profits with streaming are a little tricky because you're amortizing the streaming over a number of years, which by the way is probably a bit iffy because it does turn out that it's really immediate stuff that matters. I mean, the other thing with this in Netflix's sort of investor letter and stuff, there were a lot of admissions that actually validated some of the bare cases. They kind of said in the letter, yeah, we got to keep releasing new stuff to make this model work. Right. They're kind of an admission that the back catalog isn't worth as much as we thought it would be. They also said, yeah, it turns out people really like local content.

The squid games was kind of an aberration, this idea we're going to get a show from South Korea. That's going to be a worldwide thing. Another sort of bare sort of thesis on Netflix, which is that, you know, one of the both is that you release content one place, it spreads all over the world and you get this sort of huge leverage on your costs. Maybe not so true. So it's funny, you could absolutely have this earnings call with all. all the same comments come out like two years ago,

the reaction, I think, would be very, very different. But the overall environment is so bearish on these services. And by and large, fairly so, that Netflix, just by having free cash flow and seeming like they have their crap together looks great by comparison. Well, I'm also glad that we could continue the tradition of Wall Street wildly overreacting to whatever subscriber numbers are reported by Netflix. Well, one of the things Netflix did do is they did change this.

And it's taken, of course, it takes a while to undo it a narrative. But their headline KPI is now revenue, right? Yeah. And the reason why that makes sense is because the reality is they're saturated in their most high-end markets. And adding subscribers in Asia and Latin America is great, but it's not moving the needle a huge amount. Again, because these prices are sort of very low cost or the prices are very low. And so they need to increase revenue Whether that be through adding ads,

whether it be through increasing prices, whether it be through this sort of kicking your friends and family off your plan because you've been sharing it, willy-nilly. All those are revenue drivers and not necessarily new subscriber drivers. And it's okay. It will take a while for the narrative to catch up to that. It's good for Netflix internally, right?

Like their internal guiding light was new subs, new subs, new subs, new subs. And the reality is the Netflix bulkcase still depends on them still increasing price a lot, right? And not churning users. And that's going to be the main route of growth going forward. And yeah, they still need to pull it off. They still need to make compelling new content as they just admitted in their call. And that's still kind of tough, right?

To be a consistent quality content producer, which is why they spent most of the call listing every show that was successful this year because that, at the end of the day, that's it. And I do think that is a little bit more bearish in the very long term compared to my thesis. When I was a super big bull, I was a little more blasé about the content sort of angle. I do think in the long run, the real value, the real value of place for Netflix to get to is getting back to other people making content and selling it to them and they distribute it. That's the place they really need to get to. And I think there's a good chance they can get there. Like, again, most of these streaming services should not exist, particularly in the current environment.

Investors will be putting a lot of pressure on these other entities. And that is an opportunity, you know, that sort of aligns with the long-term thesis. Yeah. It's a reasonable assumption that when we get five to seven years down the line, a lot of these, you know, money pits. Like, I don't know what the numbers are at like Paramount Plus, but they can't be that. It's insane. It's insane that exists. That and Peacock are the two, just Peacock in particular blows my mind.

I mean, it's counter to all of Comcast business. They're putting like football on there, like the one thing that still drives cable subscriptions and live TV. It's total tailwaying the dog behavior. And yeah. And look, Netflix needs those services to fail and needs that content because I think your point at the beginning of all this was a really good one to distinguish. people who are great at making content from people who are great at selling content.

Netflix has not proven to be that great at making content, and it's super expensive for them to make content. And if they're not going to be able to go back to that licensing model, I mean, it's never going to be as cheap as it was for them at the beginning. But at least if you're able to license shows from some of the networks, like some of the comfort TV that keeps people addicted to Netflix as opposed to like the splashy show that convinces them to sign up. That is the core of their business and they need that to come back. Like not having the office is a big deal for a lot of people. And I really, I think one of the mistakes I made in this space generally was underrating

and underappreciating comfort TV. And it's kind of interesting because I think there's a broader sociological sort of context here. Like is there any comfort TV being produced? today is it even possible to make comfort TV, right? When the world is so fractured, everything is a niche and you can get the exact sort of show that you're interested in, but that show doesn't resonate. Nothing resonates like Seinfeld used to resonate or friends used to resonate or even or the office.

Yeah. And I think there's like a cultural aspect where that might actually be the most valuable content in the world just because there's really never going to be anything that replaces it. Like we might be watching episodes of the office like in 50 years. Well, and it's interesting too, because the office was part of the Thursday night with 30 Rock and Parks and Recreation, all great shows. Right, which I mean, you're a young person, but for me growing up, it was Seinfeld and Friends. Yeah, exactly.

And so NBC was able to replicate that, albeit at a much smaller scale than the Seinfeld and Friends peak. But still, people would tune in and watch NBC and sort of fall in love with those shows. And when they pop up on Netflix, everybody's like, oh, man, this is awesome. But now young people will watch them just because like it's like a thing to do, right? Because it's there. Because it's there. Yeah, exactly. Yeah.

And so now all of that happens on Netflix. They just haven't been able to crack the code to generate their own network comfort show that has 22 episodes per season. Like they haven't been able to. Right. I don't know if anyone can ever do that again, honestly. Like, you know, because like you needed the context. of Thursday night, needed the context of a large audience,

you needed the context of, you know, there was no social media to pick it apart, right? So you would maybe talk about it around the water cooler the next day. I don't know. Can we ever have a broad-based comfort food show

like those ever again? I think is an open question. To that point, from the Hollywood reporter, so I've always been a Netflix bear. I should say that up front. This is one possibility that makes me wonder whether I should be more bullish on Netflix's future prospects. So the Hollywood Reporter says, is a free ad-supported streaming service in Netflix's future.

The company's top executives seem quite open to the idea. Asked on the company's Q4 earnings call whether Netflix would pursue a so-called fast service, newly minted co-CEO Greg Peters, smiled and passed the question onto his colleague, Ted Sarandos. We're open to all these different models that are out there right now, Sarandos said, adding that we're keeping an eye on that segment for sure. However, the Hollywood reporter writes, Sarandos noted that, quote, we've got a lot on our plate this year,

both with the paid sharing and with our launch of advertising. So, Ben, is it possible that the ad-supported 699 tier acts as a brawl? bridge to a completely free version of Netflix with ads. Well, sorry to puncture your burgeoning a bull bubble, but I think no. So fast, you know, free ad-supported streaming TV. The leaders in this segment are things like Roku, for example. I think Amazon has a version, Walmart has a version, Pluto TV is, I think, is another one. We use Roku as sort of a stand-in for this, right?

So you get a Roku, and they have channels there with TV you can watch for free. and there's obviously lots of ads. That, I think, is what Netflix is thinking about in terms of this space, where remember, they have this huge back catalog. And one of the perhaps wrong bull feces was that this back catalog was valuable for attracting new subscribers and that people would go back and watch old shows like, oh, I remember that show I heard about, you know, eight years ago, I'm going to go watch it now that I get it. Turns out that's probably not the case.

And this is why Netflix is. profit number is kind of iffy to look at because they're amortizing shows over like four years. And the show might actually only be valuable for four months. And so we have free cash flow, I think is is a much better way to sort of think about things in terms of Netflix. But the fact remains, they still have all this content, right? What are they going to do with it? That's content that that that they're arguably under monetizing to date. And so where I think the fast angle makes sense for Netflix is selling that content to an entity like Roku or some, you know, into these other free channels where, and this is the classic model, right?

What, what did you do after those Thursday night shows? Then you sell it to TNT so they can stream it, you know, or they can show it every single night at 6 o'clock, right? So whatever Seinfeld was on, right? Once you make the content, it's valuable. You want to monetize it as many places as possible. And I suspect Netflix wants to retain the perceived value of their service. So I think Netflix will always have a subscription price attached to it.

Some of those prices may be lower because it's ad supported, but I would be surprised, particularly in the near term, there's ever a purely free version of Netflix. But they still have all this content that they can sell off to the Roku's of the world and they can make a licensing fee on it. And then Roku can be the quote unquote cheap option that's giving it away for free. So I think that's where this is going. And I think that makes sense. I mean, you can definitely make the argument that having purely ad supported and just, shifting wholesale, where basically, you know, broadcast TV with ads make sense. But that I think that is, I think that that's almost going too far and destroying what,

like, Netflix stands for and what the, with the, with the brand sort of is. My argument would be, I just Googled this, Netflix had nearly 231 million paid subscribers worldwide as of the fourth quarter of 2022. if it's a free service, that number probably jumps to like a billion or a billion five. And it's how a lot of people just experience TV in the same way that in a lot of countries, Facebook is the internet for people. And Netflix could do that with TV. And if it's free and the audience size jumps like 10fold,

suddenly you're making a lot more money from the ads that you're selling. And I mean, I don't necessarily think that it has to cannibalize the, like, core subscription business. Obviously, it would to some degree. But I think the money on the other end of the spectrum with ads and an audience that big is, you know, pretty tempting. And, you know, I just long term, it might, that model might make more sense than trying to do it subscription based, primarily at least, and spending all that money on the, on the, on the, on the, original content. Like, that just seems unsustainable to me, but there may be a third door for them. Yeah. I mean, it's funny. Like, I feel this personally. I mean, you know, obviously I'm a huge

advocate of subscription models. My entire business is built on subscription. But the ultimate monetization model is it always will be advertising. Again, to your point, because you remove all sort of cap on growth, right? You dramatically expand your addressable market. And, and, you get into your point, And the fact of matter is that attention is really, really valuable. And because with subscription, you always have this tension of adding the marginal subscriber, like how much are they willing to pay versus like monetize your best subscribers, right? If you could perfectly price discriminate where, you know, the people that get it the most, you charge them all the way up to their marginal value and the new person you charge them only X, Y, Z.

Yeah, then you could make the most money with subscriptions, but that's not the world you sort of live in, right? You know, just for simplicity, like airplanes can maybe do that. But I'm not charging a checkery like, oh, this person finds it super valuable in terms of $500. And this person isn't sure at all charge them $1, right? Yeah. It doesn't, it's hard for, especially at my scale to pull it off. And so like, yeah, like advertising at the end of day can make the most money, right? There are podcasters that make a lot more money than I do by being ad-based.

And, you know, it's easy to look over saying, hmm. Yeah. But, but the problem. is I have a very nice revenue base that I don't necessarily want to cannibalize and give up and sort of make that leap, right? So, so that's just me personally, but I think that applies to Netflix sort of broadly. This is what their business is. How much can you really charge for an ad-free version if you're also giving it away? I mean, again, maybe five, ten years down the road, this is something that might make sense or maybe some aspect is free.

Like, the only way would ever make sense to get into sports is if the stuff was free. although again, they appropriately dismissed sports, which they derisively referred to as renting content, which is exactly right, right? And so I don't see it. I think what I do think will happen at least in the short run is expanding the ad offerings. Every tier should have an ad offering, right?

It shouldn't just be the lowest tier with the crappiest offering. All the tiers should have offering. They should want more people on their ad tiers, Because to your point, the bigger the audience, the more scale you get, the more effective your advertising becomes. And, you know, they talked a lot about investing and targeting and they have all this first party data, which again, ATT has sort of actually helped make the market that much more attractive for them because they're well positioned. And, you know, as cable and broadcast TV continues to struggle, those advertisers are going to want to go somewhere. And Netflix is obviously going to be an attractive option. So I hear your argument.

It's a really, you know, you can make the case for it. I think you did a good job, but I have a hard time seeing it happening. I don't think it'll happen in the short term. In the long term, I'm more intrigued by that possibility than the possibility that Netflix absorbs all the failed streamers and starts to license their content and continues to produce their own original content and wins the day that way. I think that has a shelf life in its own right. So I'll be very curious.

see what they do. Another thing they did, Netflix founder, Reed Hastings, is stepping down as CEO about 25 years after he founded Netflix in 1997. He'll step aside and Ted Sarandos and Greg Peters, their former CEO, their former C.O will be co-Cfeaster there. Can you give me a three-minute take on Reed Hastings and his legacy at Netflix? Well, I mean, I think building a company of Netflix's scale is always impressive, no matter who does it. I think number two, Reed Hastings, clearly, I think there's an analogy to Jeff Bezos where thinking through what the internet means from sort of first principles and then following through to its logical conclusion and building to that logical conclusion is exactly what he did. In the case of Amazon, it's like, look, you have infinite shelf space and we can reach everyone. Like what does that mean?

And then you back into selling books, right? In the case of Netflix, it's like, look, if we're no longer constrained by time and we can deliver to anyone, what does what does that look like in the future? And then sort of like sort of, you know, backing into that. I think that the, and so, you know, Netflix is by far, they've executed well. They've always had very, very great products. They're well known for sort of their culture being pretty hardcore in a, we're going to trust our employees a ton. We're going to pay them a ton. or we're going to have exceptionally high expectations

and you're going to get fired if you don't meet them. And which, you know, is a great way to run a business. Like it sounds harsh, but if you think about it, if you're, like, isn't that the sort of environment you would sort of rather be in if you are a go-getter and a hard charger? And I think they've been a model for that and something that a lots of other folks that have sort of looked up to. I think sort of tactically, it's interesting because until the previous biggest

Netflix plunge and sort of value was the whole sort of GetFlex thing where they like spun out their DVD business. And, you know, and that was arguably a case of just it was right, but it was like way too early. And it's funny in this case, the second plunge is like they're maybe too late in adopting advertising and maybe like thinking their model. So which I think is natural, right? You kind of overcorrect maybe for what happened before. I don't know to what extent that occurred to Hastings, but it is sort of interesting to think about the two sort of big plunges with Netflix. But just by and large, I think it goes back to what I said at the beginning.

He had a vision of what the internet implications would be and relentlessly built in that direction. And yeah, you know, anyone who builds a company of Netflix's scale and size and impact and value is very impressive. And that certainly, you know, that certainly applies to read Hastings. Yeah. Well, Brad Stone had a nice column at Bloomberg. and one of the things he pointed out was that Hastings, he always knew that streaming was the future, but he was also perceptive enough to realize that the tech wasn't where it needed to be for streaming to really resonate if he launched it in like 1999 or 2000, like around web TV and stuff like that.

And so it was incredibly beneficial to Netflix that he found sort of a middle point with the DVD delivery service to bide his time and build the business that way. Right. And build the customer base that gave him leverage going forward, right? Exactly. That is the foundation of Netflix. Like, and this is where, you know, there's lots of bases, Netflix and aggregators and aggregator. What they do have is they have a large customer base that gives them leverage in all sorts of areas.

And that was built with, with the DVD. It was built with those paper packages and DVDs. Like I had a positive association with Netflix before I'd ever used the streaming service because they made movie rental. so easy and they had that sort of incumbency advantage. And they also, I didn't realize that they had like a quote-to-quote like hardcore culture, but operationally, they are still so much easier to use than anyone else on the market. And that advantage was huge at the beginning. And it's disappeared to some degree because a lot of it's about content. Disappeared. Yeah, because content matters, right? And I think that's, you know, that is the challenge.

fundamentally, just to take this sort of full circle, is at the end of the day, Netflix looks great relative to their peers, but it is a little less sunny than it used to be just because it turns out that at the other day, it's just all about content. It's hard. Making content's hard.

Yeah. All right. One more question on Netflix. Simon asks, could you guys dive a little deeper into the marginal costs of TV shows and movies for Netflix? In your article, Ben, Spotify and Netflix, you say that, quote,

whereas Netflix had always acquired content on a wholesale basis, first through licensing deals with content owners and later by making its own content, Spotify licensed content on a revenue share basis. What I'm confused about, Simon says, is the bit about acquiring content on a wholesale basis. From what I understand, the reason why Zazlov is removing a lot of back catalog of TV shows

like Sesame Street and all of Westworld is because they have to pay out the people involved in those projects over time. So it makes sense from Zazlov's point of view to remove content with marginal costs that's not helping with retention and growth. And my understanding is this is how it works in the cable networks too. So does Netflix not have this issue? Do they just pay out so much up front to the creators and other associated people that those people don't get the payments later on?

What do you think? Yeah, that's exactly it. Netflix would pay out a lot of money up front and basically not pay out residuals, which is this idea that you're sort of paying out over time. And residuals sort of like made a lot of sense when you think about this bit about content where you want to make it once and monetizes as much over time. And the idea then is you want to, you know, reduce your cost of making it up front by paying the talent less. But if that content is really successful and resonates, then you'll pay them out over time.

I mean, sure, you don't make as much in the long run, but you reduce your risk up front and everyone sort of wins and everyone's sort of happy. And Netflix came along. I was like, look, no, we want our models predicated on we're not charging very much money. We're only charging, you know, $8 a month, $10 a month, $15 a month, it's got up. But still, relatively speaking, we're not selling a piece of content like a movie ticket that is discreetly monetized. We have a different monetization model, so we want to compensate differently. We're going to pay you a bunch of money. up front, but then it's ours forever. And we get to sort of monetize it as long as we want to

and we don't have to be be sort of paying off. That was a very explicit strategy on their part. It has led to pushback and controversy, you know, in Hollywood because, you know, people like, hey, where's my money? Like this is like actually this turns out to not be good after all. And so Netflix, I think, has softened a bit on this, but you still have the fundamental measurement issue. If you're monetizing via subscription and not by discreetly selling a piece of content, how do you actually compute residuals, right? It's not even clear how that sort of works. Now, one of the things Netflix did,

another point that they sort of reiterated on their call is, look, we don't have the old business model to, like, work against and fight against. They kept saying that again and again. It's an advantage for us to be a pure play streaming service because we can be totally focused on this. And this is sort of an example, right? You have all this old content, all these companies that were, they assumed the content was monetized in a certain way.

And that lots of those assumptions are locked into the business all the way up and down, even down to how you sort of pay for content on a streaming service, like the issues here with Discovery, you know, Time Warner. And, you know, Netflix has, because they've been focused on where they're going, again, in a credit to Reed Hastings and sort of vision where they're, like, if you know this is the output, you want to have a non-winear, you know, on demand sort of service, you need to back all the way down.

How are you paying for content needs to be in line with that sort of output? And Netflix has by and large, their decisions up and down the stack have been aligned with the future goals they're going to. And that does put them in a more advantageous position with this sort of stuff. Now, again, Hollywood, like, it's controversial. Well, it's also,

you need content and you need big stars, right? They actually do help move the needle. And they are going to push, you know, as content is perceived to become more and more important to Netflix, Netflix is going to have to give ground on this sort of stuff. But they have sort of set a stake in the ground. This is how we prefer to do business. And they will come off that more and more over time, I'm sure.

But they're starting from a much better place than everyone else. Yeah. Well, and within the entertainment industry, there's a really complicated relationship with Netflix because on one hand, they're like showering money on people. But on the other hand, the traditional model, where artists from successful shows, whether it's writers, producers, directors, or actors, like the residuals they get and the deals that they have to make money on the back end are unbelievably favorable to, you know, all the talent.

And removing that. And Netflix has been forced to move in that direction. I actually think there was like a ruling against them or something. Oh, really? And so, like, it's getting chipped away. But to date, they didn't really have that limitation. And so it was an advantage for sure. Yeah.

Well, and the other thing Ted Sarando said on the call was Netflix has never canceled a successful show. Shows are well intended but need to perform to their budget. A small show has to talk to a small audience and a big budget show has to speak to a big audience. And as a content consumer and someone who loves movies and shows, I will say this is where people get a little frustrated by Netflix because, like, If Netflix is going to be the most influential entertainment company in the world, then it's a little depressing that their definition of a successful show is like increasingly focused on what performs well in a revenue context as opposed to like artistic merit. It is a business.

It is a business, but it's also, I mean, they call it the arts, Ben. That's why Uncle Tim is here to give buddies to your Apple TV Plus shows so that they can pretend like their servant is from the stream is all about art, is not actually about extracting rent from the app store and getting paid by Google. Yeah, well, that's a real win-win for everyone. You go back through time and some of the best movies and shows that have ever been made weren't necessarily like commercial hits or instant success stories. And so I hope that those don't get eroded too much over the next 10 or 15 years, but

we're not trending in the right direction. Right, but you can see the connection here, right? Like this weakness you perceive in Netflix is actually very much tied into this way they've tried to pay for stuff, right? Where if we're paying a bunch of money, it better perform. Whereas if we're not paying much money because we've offloaded the risk to the talent such that we have to pay out over time, that actually gives you more patience in some respects because, hey, we're not spending that much money anyway, right? And so there is an aspect of this business model choice that has probably driven them to be more aggressive as far as cancellation stuff go just because they're paying so much money up front. And so they need to make sure that it's working more quickly. So there's pluses and minuses to all these for sure.

Yeah. And it's unfair to frame it as strictly a Netflix problem because the reality is a similar story has played out across all of the entertainment industry over the last 10 years. shows, honestly, that have great first seasons and probably should have ended them. And then they stretch out the show for ages and it just goes completely off the rails. I'll put together a list for a future episode. Homeland comes to mind first and foremost. But to keep it moving for something completely different here, Vanit says Ben wrote about this company a while back called Gogoro.

Recently, this company has been signing deals for battery swapping in India, but has also, on the other hand, paused its ambitions to grow in China. I've not seen an update from Ben here, and I would love it if he could share more insights into what's going on. I'm sure many users will get to hear his insight on EV, and especially for bikes, since they get less press time on Stratory. I apologize if I'm wrong about it.

No need to apologize. No apology. Yeah. Listeners want to hear Ben on EVs for sure. Hit me with some go-goro takes. I don't have so what I did write about gogerows just because they they did a SPAC and so they went they went public and I happened to own a gogero and it's it's pretty interesting it's an electric scooter so it's a relatively large scooter so I mean scooters are are fairly common here in Taiwan so it's like 150 cc equivalent so I mean you can go like 100 kilometers an hour or something like that right it's not a little dinky dinky sort of thing but the model's kind of cool where you pay a subscription fee And there's batteries. And instead of going to the gas station, you pull up to a battery exchange kiosk, basically.

Oh, yeah. And they're just scattered around. You open your seat. You pull up to batteries, put them in, take out two batteries, and then you're good to go. It's plus and minuses. A battery charge does not last as long as a tank of gas used to last, which is kind of annoying. On the other hand, where I'm at, there's actually very few gas stations and there's a bunch of

these kiosk. It's more convenient in that regard. So I more wrote about it from the context of, hey, this is kind of nifty. People are, you know, it might be interested in sort of firsthand experience of this product. I haven't dove super deeply into the business. You know, they're very bullish on the battery replacement network as sort of a neat sort of referenced. And there are other scooters now that use go-gros. Like Yamaha, for example, has always been one of the biggest scooter makers.

They have an electric scooter now that uses go-go-go-go-battaries. And so it's sort of like the Tesla supercharger sort of thing. But whereas Tesla has kept the supercharger sort of exclusive and that's a reason to buy a Tesla, Gogoro is more actually in the long run, the way to make money is a subscription business and maintaining all these kiosks and the battery business and what other people make scooters. And then we'll sort of take a tax sort of on top of that to have this network in place. That is super interesting. It is interesting. Yeah.

And, you know, they're like, we need to cede the market by building our own scooters. And they've been pretty successful. I think they're, you know, like 10% of scooter sales in Taiwan or maybe it's higher than that. I can't remember. But, you know, I think just broadly speaking, I'm one person. I don't have time to dive into the financials of electric vehicles and sort of stuff. I know my friend Horace Deju has spent a lot of time on micro mobility and these sort of angles. Good for him.

I just, I, there's a reason I wrote about my personal experience. not about getting deep in the business. The industry at large. It's a bad thing. Yeah, to be totally honest. You know, the other problem with electric vehicles is that involves analyzing Tesla in which, you know, I was very early to the like, well, no, no, no, no, no, this is going back to 2015 where I think I wrote a great Tesla article, which basically was talking about the power of Tesla was the brand. And that's important. And changing the perception where electric vehicles were cool was a dramatic shift, right?

you go back to the early electric vehicles, they would just, they would purposely make them ugly. Maybe the car companies were trying to make them, no one buy them, I'm not sure. And making electric cool was a massive triumph. And,

you know, when the Y went for sale, or model Y, and you had a million signups like overnight. Like that was super impressive and was a meaningful shift. And the fact that every single, you know,

the biggest threat to Tesla is all these real car makers, real as they made, you know, ice vehicles previously. Now they're making electric vehicles is because they were forced to respond by Tesla, right? And no matter what happens to Tesla, we are undergoing a massive shift to electric earlier than it probably would have happened. And it's like single-handly because of Elon Musk and Tesla. That's super admirable.

So I write that article. And then like two weeks later, he undertakes this insane transaction to get like Solar City or whatever it was, like his cousins. like solar company that made no sense. It was losing money in the super competitive market. And it was insane. And like it should have tanked the stock and no one like Tesla bulls like, oh, they were spinning these crazy fantasies about how you're going to have solar panels on

your roof and your Tesla battery. It's like, yeah, you can have that fantasy without Tesla. I'm needing to own it all, right? Like it doesn't make business sense. And I realize this is a company that's kind of impossible to just sort of analyze at arm's length because you have this musk impact and this this fanboy impact i mean that in a positive sense right having fanboys is super powerful it's the root of apple's power and uh so it's really valuable but it's really hard to analyze particularly if you're not in that industry and so that's why i didn't

really i haven't been a regular tesla analyst for example it's just it's an industry that is not my forte with a particular dynamic that is very hard. It's really, there's so much about Tesla has been about like expectations and, and investor sentiment as opposed to the fundamentals. And that, you know, what does that to do with EVs and go-go-go-go-o? Well,

maybe not too much, but just if I'm going to say something, I want to feel really confident about it. And I'm just, it's not an area I'm super confident about. And I try to sort of be humble about that and not, not get over my skis too much. Sure.

I mean, Tesla's been completely irrational for over the last, like seven or eight years. Like I've said before, Alice invested in Tesla. But my best friend, one of my best friends who manages her money and manages her investments, every time I would talk to him about it, he'd be like, this company should not be valued nearly as much as it is. And like the stock price is just completely out of whack with the fundamentals. And that's been sort of the story for most of its tenure. And now the brand has taken a hit. She did. She did. She sold before it got dicey the last year and a half

here. But yeah, and the only other thought I have as far. And don't please, we asked for email. No email about Tesla valuation. Like I what I'm really clear is it's not my forte. I respect your take, whatever it is.

And so yes. The one thing, yeah, I don't necessarily need to hear from Tesla bulls or crypto bulls. I read all the email to prep for these shows. So, you know, you can explain that to somebody else. We're all set here.

And on the scooter front, my least favorite venture funded business of the last several years are these rentable electric scooters that have popped up in cities all over America. In D.C., there's a company called Lyme that allows you to rent a scooter. And part of their business model is you can just, or part of their sales pitch, I guess, is you don't have to leave it at like a stand or anything. Like once you're done with the scooter,

you can just leave it on the street and someone will come pick it up. And so what that means, I live close to a college campus. What that means is people just leave scooters like all over the street and also are like scootering around in the middle of traffic. And I just really don't love all of that stuff. And so I just want to officially register my objection here. Yeah, that was probably one of the ultimate symptoms of just the general irration market being out of control and easy money and all that sort of stuff. I mean, I wrote about it when it really exploded and I was like, what form of differentiation is possible in this phase?

It doesn't make any sense. You had like 10 companies come up all doing the exact same thing. Exactly. And yeah, I do. It's funny because there's this real tension. And you really saw this, I think, with Uber and Airbnb sort of coming up together where it was weird because Airbnb generally had real positive press and Uber had real negative press. And I thought it was odd because it feels like to me the externalities of Uber, for example, is like fewer drunk drivers, fewer people out on, you know, like more commerce. Like people can go out and people can, like it seemed in general Uber was generally a good thing.

and they got super bad press. Airbnb, like, why do I want my apartment building to become a hotel, right? Or my neighborhood or whatever might be. And as a traveler, I mean, I feel that it's very early to this trend. Stay in Airbnb stinks. Like, like the hotels exist for a reason. They're good at what they do. And, like, if I'm on the road, I want all that stuff to be taken care of.

I don't have to clean the place. I'm like 47 cleaning fleas. Yes, there's some situations. if you want a big house, you have lots of people. Aaron B's amazing and it has opened up new stuff. But it just always struck me as odd that like the public perception of these companies was so different. And I think the scooter one is a good example of these externalities stink. Like why do we want these scooters everywhere?

And yeah, people riding and behaving sort of recklessly, you know, so yeah, I'm with you on that. Thank you so much for standing side by side. me in my fight against big scooter. Yeah, it makes me feel like a cranky old man, but come on, just at least like put them somewhere, have a stand for people. I don't need scooters in the middle of my sidewalks. Yeah, so go-go-ro, these are big scooters. Like you're, it's like you're sitting on it, right? Okay. It's a, uh, you know, we had, there was a lot of, I think they're also called mopeds, right? Uh, there were a lot of mopeds at the University of Wisconsin. That was sort of the thing. But mopeds there were not nearly as good because you had to follow the car traffic laws.

Being in Taiwan is interesting because it's like the assumption is it's kind of like California where, you know, it's actually kind of insane given how much traffic there's in California. But all motorcycles are allowed to like weave between cars and stuff like that. It's like that in Taiwan. And it's funny, like at a red light, there's a big collection area at the front for all the scooters. Because the assumption is the scooters are going to be weaving through all the cars and getting to the front to the red light. light. And it actually, there are a fair number of commutes where taking a scooter is much faster. And the reason we have a scooter is we only use it sort of around here where we live, but it's impossible to park here. So if you need to go even just a little bit longer than walking distance than just having a scooter is so much more convenient. But they are, they are

dangerous. I used to have like a big scooter back in the day. And then I got taken out like clipped right in front of a bus and I was. Oh my God. So I gave it up. My daughter had just been bored. I'm like, I can't die. And I do have a problem. If I'm on a two-wheeled vehicle, I want to go very, very fast. I bet. Yeah. Which is not, not healthy. Probably not a good thing. And any major city in the world is full of so many terrible drivers that you really are sort of taking your life in your hands if you're putting yourself at their whims. And so I'm glad you made the responsible dad choice, you know. Well, no, but I got another one. But I only, I only write it around

in the neighborhood. And you're not zoom it all over the city. Yeah. I'm going to give you the benefit of the doubt on that one. All right. Let's close out with a couple quick ones. Andrew says, in your latest podcast that included the beginner's guide to arm, Ben talked about arm chips being used in embedded systems and mobile devices, but not at

desktop computers. However, I was at school in the UK in the 1980s and was introduced to computing through the government-sponsored BBC computer literacy program, which saw Acorn Concord computers appear on trolleys in almost every school in the country. We started with the Acorn BBC Micro, a classic 1980s 8-bit machine. In 1987, Acorn released the Archimedes, which was powered by a 32-bit arm-two processor. Ben, are you familiar with any of these devices? Yeah, no, this is a great email.

You actually cut off a bunch of it, I assume, for time reasons. but credit to Andrew for an excellent sort of overview and history of this. He says this sentence towards the end. The platform never really took off. It felt like the beta max of the home computer platforms. Better technology than X86 PCs, but without the ecosystem developers and users required to keep it going, which is the most important sentence because that's exactly right, right?

Intel knew that risk was better, right? It was a big thing there. But the reason why they stuck with Cisco and stuck with the X86 is because the ecosystem was already developed. and they realize that as long as we keep the chips fast enough, this is going to be dominant and the place to be. And so, yeah, Andrew's exactly right. Arm was always really good technology. It made sort of a lot of sense,

but it never got that ecosystem around it, which is why I sort of skipped ahead to the 90s and 2000s where it's mostly used in embedded applications. It's mostly used in places where you're writing a custom OS just for that sort of thing or, you know, firmware, you're not, you don't need a developer ecosystem. You don't need all this sort of stuff that you would need for a PC. What happened with mobile was mobile was a reset where basically because there was such a power constraint, because you need to use so little power and you had to be on battery

life, everything needed to be rebuilt from the ground up with that assumption in mind. And so that was, that was an opportunity. Right. Right. And x86, actually, I think Intel gets in some respect. a bit of a bad rap about mobile because they were just fundamentally

they had no advantages in mobile. The only advantage they had was their manufacturing capability. X-86 was never going to be the right thing for mobile because you had to like it wasn't the best architecture and if you're going to start fresh and made sense to start somewhere else

and it built up on arm. The mistake Intel made was not recognizing that and becoming a foundry much earlier where we, will build arm chips for other people using our most advanced manufacturing. One of the first articles in order to checkery was about exactly this, right? Like, look, it was a mistake to ever think X-86 would be competitive, but Intel has this huge

advantage of manufacturing. They need to open up, and they didn't, and then TSMC came along and sort of ate their lunch. And so, you know, this is the challenge with a lot of these disruptive sort of things, where you've built up an entire ecosystem and company and assumptions all around one thing, which in the case of Intel was we need more performance, we need more performance, we need more performance, people are building these complex applications that aren't fast enough, we will catch up with the chip, we need more performance. You don't turn that ship and suddenly say, we're going to build an efficient processor for mobile phones.

And you needed to have a reset. And when that reset came along, Arm was already a better architecture and it was an open field to rebuild all the stuff that needed to be built. So, and you know it was better, in part because you go back to the 80s and this was great stuff. It was great stuff, but yeah, it was Betamax. It didn't have the ecosystem. And mobile made the opportunity to create a new ecosystem.

Well, as you said, it was a great email. And I particularly enjoy the image of giant computers being wheeled into British classrooms that kids could learn on. So shout out to the BBC computer literacy program. the trolley computers. I do have one question to close this out, though. Rumor has it that you have adopted the Sharp Tech social movement and instituted your own cigar night there in D.C. We need a report.

How was it received? How did it go? I myself had an excellent cigar night last night. So I'm feeling good about the whole concept. What do you have to say? Well, so first of all, I should. Credit you and or blame you for introducing me into the cigar lifestyle because I really, you know, became infatuated with it after traveling with you, our time in Vegas. We had some fun times in New York and Philadelphia in the fall.

And so, yes, credit to Ben, blame to Ben. I'm now a cigar guy. And the Saturday night, though, it was a huge success. I had a couple friends who needed a cigar night more than they really. realized and they all sort of went in with pretty low expectations for what it would be. But we bought some nice padron cigars and they lasted about 45 minutes. We sat around a fire pit in 40 degree weather, 35 degree weather. It was pretty cold, actually.

But that didn't bother us because we had the fire there. We had our cigars and just sort of hung out. It had a very civilized night catching up with friends. Yeah, and for the haters in the audience, you don't have to smoke cigars. And, you know, yes, they're unhealthy. Disclosure, disclaimer, XYZ. What is important is hanging out with people in the real world. And it makes a huge difference.

I love the idea of low expectations and everyone leaves like, wow, that was amazing. It was so great. You don't realize how amazing it is if you haven't been doing it for a while until you do it, right? You know, what's the phrase the young kids use, touch grass? Oh, yeah. Well, I hardly touch grass, start a cigar night or something similar. I don't drink, so I need cigars as like my vice. I used to smoke cigarettes and had to quit those.

So cigars are like a- Now I feel guilty. I might be messy with fire here. Yeah. Well, I don't know. I was enjoying myself. So no blame, all credit. And on that note, I look forward to coming back later in the week.

email at sharptech.fm. We'd love to hear from you. And we'll keep this rolling on Thursday, Ben. Sounds good. Talk to you then.