Sharp Tech with Ben Thompson - Good News for Netflix Believers and the Latest TikTok Reporting

Episode Date: October 24, 2022

Netflix's Q3 response to all its Q1 critics, sorting through the threats elsewhere in the streaming landscape, what to look for as Netflix makes its foray into ads. Then, responses to a new report on TikTok that was published hours after last Friday's podcast.

Hello and welcome back to another episode of Sharp Tech. I'm your host, Andrew Sharp, and on the other line, Ben Thompson. Ben, how you doing? I'm doing well. I'm doing well here on a Monday. It's a beautiful day. Red Bull just beat your terrible Mercedes team, so it's all good. I was watching that race, and I was texting Dumbin during the race and said, I'm so glad that we will have recorded before Ben has a chance to watch Red Bull win this.

because as you know, Lewis Hamilton took the lead. It looked like it was going to be a breakthrough victory for Mercedes. And then, lo and behold, Max comes back and steals it with 10 laughs left. Maybe spent more time racing instead of trying to, you know, complain to the referees. Oh, my God.

A listener asked us, they were like, what is Ben's favorite Formula One team? And we haven't had a chance to get into it. I will just say you are the most insufferable Red, Bull fan on the planet. This is your first season watching F1, and you've cast your lot with the defending champions. And even worse, you didn't watch last season, which sucks for two reasons.

First of all, you never show the proper deference to Lewis Hamilton, who was amazing last season and has spent this season losing and complaining the entire time. So he's sort of an easy target. And then also last season, Red Bull ended the year in the most corrupt way imaginable. Well, you know what? If Mercedes didn't run their competitors off the track like they did last year in Silverstone, I went to an issue like they did again today. But I mean, people complain when I talk about sports on dithering.

So us talking about F1 on Sharp Tech is definitely going to drive people insane. So we should probably move on. But hey, congratulations to Red Bull. You know, well-deserved. Constructors Championship. It's all good. All I'm going to say last season in Abu Dhabi was probably the most corrupt sports outcome of my life. It was basically the 1974 gold medal game.

And Ben Thompson chose to respond to that travesty by coming back rabidly pro-Soviet the following year. And here we are with another Max title. It's really terrible stuff. I'm sorry. I'm sorry you hate X-Dak sense. Oh, God. Really terrible across the board. But in brighter news, there was good news coming out of Netflix.

I'm going to read an excerpt from Bloomberg last week, summarizing things. Netflix is growing again, and Hollywood can breathe a sigh of relief. The streaming leader added 2.41 million customers in the third quarter, exceeding internal forecasts as well as expectations on Wall Street. Netflix grew in all regions of the world and set in a number. a shareholder letter on Tuesday that it expects to sign up another 4.5 million globally this period. And then later in the article, Bloomberg writes, shares of Netflix rose as much as 14% in pre-market trading before New York exchanges opened on Wednesday. The stock was down 60% this

year through the closed Tuesday in New York. Other streaming companies such as Roku and Walt Disney also rose. And then I want to read one bit from Netflix's letter to investors. They write, our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard. We estimate that they are all losing money with combined 2022 operating losses well over $10 billion versus Netflix $5 to $6 billion annual operating profit. So along the lines of that last excerpt, first and foremost, you mentioned this in your analysis. Can we talk about how defiant Netflix was throughout this letter? Because I really enjoyed the tone of everything from them.

So you like defiance in some areas, but not another. Yeah. No, it was really striking. I mean, because like they, so they basically had to give up on this big, like, principal, quote, unquote, stand that they had around like, we don't have. advertising and they're like, oh, I fine, we're going to do advertising. And as we've talked about, they came out on that initial call six months ago.

And it's like, it felt like they literally decided five minutes before the call. We got to do advertising. Let's start out there. And they're talking all this nonsense about like, we're doing programmatic advertising or do X, Y, Z, none of which made any sense at all for what they were doing. And number one, we can get into this.

But I feel the speed with which they have built out their advertising product is very impressed. They've course corrected all the crazy things that they said, and they're doing exactly building the product that they should build. We can definitely get to that in a moment. But what was funny about this call, and you put your finger on it, is they're like, okay, we grant, maybe we were wrong on this one point.

But every other single thing we were right about, and we're going to double down on it, we're going to win. Screw you. And it was very tangible. And it's funny because I didn't listen to it. I was just reading it, but it was particularly the investor letter, which it's not like off the cuff, so speaking.

They had to write this down. It had to go through multiple reviews. And that letter felt like a middle finger to all their critics. It was beautiful. I enjoyed it. No, exactly. And they're not only touting their own gains, but they're saying, look, all of our competition is losing money in this same market. Which is true.

Yeah. It really did come off as like a middle finger to all the people who were giving Netflix eulogies like six months ago. in general though in the past you've described yourself as a Netflix bull so what's your big picture reaction to the shift here because it's been a hell of a ride for Netflix over the last nine months or so yeah I mean they basically articulated what has always been my bull case so you know I we've definitely talked about this on this podcast I can remember if it was beta episodes or ones that we've actually recorded but my I wrote this back in I think 2018 or 2019, or actually

just that whole run up there when you saw all these new streaming services that were coming along, right? You saw, you know, Paramount Plus coming, the HBO Max coming, you saw the, what's the other, the CBS and whatever it is. Like, and along the way they're pulling the super critical Netflix content

back, whether it be like friends or the office, things along those lines. And I wrote at the time, like, look, the next five years are going to be really, really rough for Netflix. And the, that didn't happen because the pandemic came. And the pandemic came and it not only forstalled any sort of pullback as far as Netflix goes. It actually accelerated their growth because all these people stuck at home with

nothing better to do than watch TV. And so that prediction was wrong in the timing because of the pandemic. But it was definitely spot on as far as the, you know, Netflix hitting a rough patch. And in many respects, the pandemic made the rough patch worse because they arguably like oversaturated the market. Like they had, you know, people subscribed that normally wouldn't have been. And so the come down and slow down and growth was even steeper than it might have been absent that. And that's what sort of happened, you know, sort of, you know, over the last year. They had this huge slowdown just as all their competitors are coming online. And so it's not just a competition for time, but also it's competition for content. And the content is, you know, one thing I do think

I underestimated is just how important things like the office and friends and stuff are. having that sort of just ongoing high quality sort of filler content. And so they lose all that. And then meanwhile, you know, their challenges in original content that breaks through, we've certainly definitely talked about. And so my core sort of bulk case was, look, after that five years, all these other companies are going to realize building a streaming service is really hard. It's really, really expensive.

And it's expensive in two ways. Way number one, it's just. just costs money to build, right? Like, you have to actually build all the infrastructure. You have to serve all the customers. And the economics of these, you have to spend all this money sort of upfront on both content and infrastructure and customer service and all these sort of skills, none of these companies have. And then you have to amortize that over your number of subscribers. And the number of subscribers are not going to be that great. So this is also, though, where the pandemic hurt Netflix, because a lot of these streaming services got way more

subscribers way more quickly than they would have otherwise. Again, because people were sitting at home, you know, looking for stuff to watch. So that aspect got worse. But my bulk case at the beginning was, look, eventually they're going to come to their senses. They're going to realize, number one, this costs a lot of money to build. And number two, we're foregoing a lot of money by not selling this content to people who do this better than we do, like Netflix. And so my prediction was, look, after five or six years, Netflix is going to be sitting pretty. All these companies are going to give up. They're going to go back to just be, like, we're good at producing content.

We're actually not great at being a streaming service. Yeah. And they'll start selling to Netflix again. And that's basically what Netflix articulated in this earnings call. And that section that you pulled out from the letter to investors are saying, look, they're losing a lot of money, just like we predicted, we're going to be sitting pretty at the end. And we can get into why that's maybe a little dodgier than an, than it was when I wrote that, you know, three or four years ago.

But they certainly still believe that's the case. Okay. So why is it dodgy then? Because my reaction when they talk about various competitors losing money is that some of those competitors are going to be happy to continue losing money in perpetuity or if not in perpetuity than for like another 10 years or so. I mean, it's not even clear what Amazon strategy with Prime Video is. And so as you forecast out, like I think you're absolutely right that some of the of these are going to fail and be good targets to sell content to Netflix, who just does it better

and has this massive base. But is that what you're talking about when you say the logic may be a little bit dodgier than it seems in the investor's letter? Well, the first thing that made me a little wary about this strategy, I think we've talked about this previously, but was when AT&T spun out Time Warner to join up with Discovery. And the reason is because I had AT&T definitely pegged as a company that would cover to their senses and realize that this is badness. And the only way to properly monetize this asset is to put it back towards content production and selling to the highest bidder. Like there's a strategy that sort of Sony's pursued and has made a whole bunch of money sort

of doing that, like filling their sort of natural spot in the ecosystem. And instead 18, what I think was it was a smart move, spun it out to join up with sort of discovery. And that was problematic because prior to this five years, you saw two companies that were in it for sure, which was Disney and Netflix. Now it felt like there's three companies that are sort of in it for sure. And I think the big question as far as Discovery Time Warner is they're definitely being, you know, very aggressive on their costs. I think it actually makes more sense than a lot of people think because that sort of middle ground of content that costs a fair bit to produce but doesn't draw new subscribers just doesn't make much economic sense.

You kind of either want tent pull stuff that draws subscribers or you want filler. And Discovery is sort of the king of filler. But I think that's a well-placed opponent, but they have a huge debt load. And, you know, TBD, they still have this big sort of cable dependency that we've talked about in the context of TNT and basketball and things on those lines. But the competitive landscape, I think, is more difficult than I anticipated because of that tie-up. That's number one. Number two is this pandemic effect. the fact that all these subscription services, if you take away the pandemic and they're all

like have, you know, 20 million fewer subscribers or half as many subscribers as they do, those economics are looking way worse than they are now. And so you have this bit where they get off to this huge jump and it's like, wow, maybe this business is going to work. And, you know, it almost like strengthens the resolve for a little longer than it should be. So I don't know. I kind of don't know. I feel like the fundamental economics are still in Netflix's favor because of all the, you know, just having more subscribers is a big advantage and when it comes to advertising costs and your, you're buying power. But the big question is how long do these other companies sort of keep up with it?

Right. How long do they keep pursuing it? And I think the thesis still makes sense. I'm just a little less sure of it than I was, you know, when I first put it forward. And to be clear, when I look at the competitive landscape, I think that the challenge is that the longer these players are in the mix driving up the costs of content, then Netflix is going to have more trouble than they might if, if like Amazon and Apple didn't exist, acquiring high quality content. It's not that these people are like eating into Netflix's audience necessarily.

That's not the threat. Yeah, no, the Amazon and Apple ones are sort of a different category because they have unlimited funds. Yeah. And that's obviously, that's obviously a tough thing to compete with. I mean, it kind of looks like the Lord of the Rings thing is a bit of a flop, which maybe will sort of temper Amazon's enthusiasm and willingness to expand. It'd be very interesting if Amazon ends up like doubling down on the live stuff. Like, obviously they're doing NFL football and things along those lines.

But they're definitely a real wild card and a real challenge because they're not going to feel the same sort of, you know, profit. Like the stock price of Amazon and Apple is not driven by the success. of their streaming efforts. On one hand, that can be bad because they, you know, can be very inefficient in waste money and maybe make bad decisions. On the other hand, the recipient of that bad decision making or the, the, one of the victims of that bad decision making is Netflix, because they're, you know, they're competing for that content. They're competing for attention with those companies. So I, so that, that definitely is, is a, is an issue. I mean, I, I, I like it. I, like that Netflix sort of is doubling down here.

I don't agree with all the things to domming down on, but I like the moxie, right? Like I like, and maybe there is a bit they put in there where, look, we're the only pure play streaming service. And maybe that is sort of like their biggest advantage in the long run where like they're in it to win it because they have no choice. And there's often a lot of value in sort of not having any choice in the matter. Yeah, you can't overthink it and get cute. You just have to go for it.

Yeah. Yeah. I mean, first of all, you mentioned. Rings of Power on Amazon. I don't know what they spent on that show. I know it was pretty exorbitant. And I just wish they could run that by Normie Andrew Sharp. I could have looked at the script and said,

look, I don't think this is going to be like a transformational vehicle for you guys. I understand the IP is valuable, but I wouldn't pour gobs and gobs of money into it. And that also brings us to my favorite part of the letter, where NetFle writes, we think our bingeable release model helps drive substantial engagement, especially for newer titles. This enables viewers to lose themselves in stories they love. As the Google Trends chart shows, the ability to watch all of Monster, the Jeffrey Dahmer story, helped drive significant interest in the show. And then they have this big chart showing that way more people Googled Dahmer than House of the Dragon or Rings of Power.

And I just have to say... A hilarious chart for many reasons. Well, I mean, look, I spent 10 years in digital media. So one thing I know for sure is that anytime somebody brings up Google Trends and uses it as evidence of some sort of success, it's generally a sign that they are full of crap. And in this instance, in particular, I mean, of course, people are watching a show about a real serial killer. they're going to Google the real story.

They'll use Dahmer's last name and Google about Jeffrey Dahmer to look for more information on what really happened. Nobody's watching House of the Dragon and saying, like, let me plug in House of the Dragon into Google to get the real Targaryen story. So I was pretty amazed by the audacity to use that chart in there. But I do think doubling down on the bingeable strategy is pretty interesting to me because we were. We've talked about this in the past, and we've talked about how there are real advantages to having sort of a water cooler show that builds buzz as you go and you capture audience for much longer that way. And you also make that tent pole show into more of an event for your platform. And HBO does this like once every quarter. There's a show that just everyone you know seems to be watching.

On the other hand, though, I do understand Netflix's argument that basically, if your business depends on people discovering new shows and then getting obsessed with those shows and telling friends about it, there are real advantages to the binge model. Yeah, I agree. I mean, and I made this point back when Squid Game became a big hit

that it's hard, the binging aspect helped make that a hit without question. And because, you know, to your point, like you, you have to jess, generate the enthusiasm before you can sort of harvest the enthusiasm. And so if you're Netflix, you have this international strategy,

you watch people watching shows from other countries, and you're producing a bunch of new IP that is no sort of necessary that people aren't coming fresh to, then yeah, like that upfront investment in time from people makes them more likely to be fans and evangelists and you get that free sort of, you know, buzz and marketing and customer acquisition aspects. So I definitely think that the binging model makes sense for those sorts of things.

What I would personally think makes more sense because I do think there's real value in the event-driven nature. There's just never been any, for any Netflix show, any sort of like ongoing chatter and the whole like, you know, post-show write-ups and, you know, analysis of what's coming that you get for like a Game of Thrones or House of the Dragon or, or whatever. Your typical, yeah, your HBO show. And it seems like it would behoove them to once the shows off the ground and once it's already popular like a stranger thing or something on those lines, those shows deserve sort of the weekly cadence. And I kind of feel like, again, I'm coming at this as an notorious low TV watcher. I mostly watch sports. But it seems like there's an aspect of the weekly release that's kind of annoying. but also kind of fun, right?

Like, there's like a communal aspect to watching a real popular show that Netflix never gets to take part in. And it seems like a hybrid strategy where, yes, the bingeable helps get shows off the ground, but if those shows are big, then take advantage of that. Like, it doesn't have to be sort of all or nothing.

And it kind of reminds me of the advertising, like, adamants from them. Like, they seem so binary about this stuff. Like either there's no ads at all. And then it's like, well, no, actually, it's fine to have ads if people want ads and you have plans that don't have ads for those that don't and that's okay. It's like

it makes sense to sort of maximize your possibilities and your opportunities, but they love the sort of black and white sort of this is what we are, this is what they are and that's the way it's going to be. Yeah, well and I think if I'm being honest, my endorsement

of the binge model for Netflix is the most condescending pat on the head imaginable where I look at them and think, you guys don't really have any of the tent pole shows that are going to monopolize culture that way. Although Stranger Things is one that I think would be bigger if they released it on a weekly basis. And the fact that they're spending $270 million to produce season four of that show, I just looked up the Stranger Things budget and the Rings of Power budget, which is $500 million

over at Amazon, absolutely insane. But the fact that you would spend all of that money and not think creatively about ways to squeeze out more buzz and excitement among your audience. Does seem a little bit mystifying. And I guess it just goes back to them being sort of doctrinaire about some of this stuff. Well, things can change, though. There's going to be ads on Netflix. That's right. That's right.

I want to get to the ads. But before we do, more double downs from them, what do you think about what they're doing in games and movies? because to me it looks like those could still be lost leaders going forward. Yeah, I have a stronger opinion on games than movies. I don't really get the game thing. Well, I do get the game thing. I think an angle Netflix has is, look, business model dictates games to a large extent, which means that a lot of the games on Mole in particular are all about this trying to just sort of ring in that purchase from people.

And it's, you know, it's kind of, yes, it's very addictive, but a lot of people find it annoying. and distasteful. And if we bring our subscription business model, we can create new kinds of games that customers feel better about and enjoy and can do new kinds of creation possibilities, blah, blah, blah, blah. And I think, like, that's something that does make sense,

that there's definitely a theory to it. I just question whether this is really the best use of resources for Netflix. Yes, the business model angle is a compelling one, but you're a recorded content company. You're not a gaming company. It's just too far outside their lane. That's the concern.

And we've seen so many companies fail at gamemaking that are good at IP. I mean, like Disney is probably the most famous example. They've tried to do their own gaming in fits and starts for years. And they sort of spin it up and then it fails and they spin it out and they start licensing content and XYZ. And I just think this is an area where the licensing, like, yeah, if you can create like content that, lends itself to games, sure, but license that to other people who are better at it. It's kind of like the, it's kind of like the same argument about these content companies trying to become streaming services.

It's like, you're good at making content. Why don't you let the people who are good at streaming services take care of that part and you monetize your IP sort of by selling directly? And I feel this kind of the same way about Netflix and gaming. And I mean, I don't know, maybe they'll prove me wrong and I end up being this sort of big business. I think there definitely is a bit where games can, if you're into a game, like it's maybe good for preventing churn because, yeah, your favorite game comes from Netflix and why would you want to cancel? And so I can see the angle in that regard. And maybe there's more of a,

you know, evergreen aspect to, to the games. But I'm, I'm just pretty skeptical. Like, they're touting the ability to be a focused entity that's just doing streaming. It's like, well, no, you're you're also doing gaming. It's like we're a focus on it. But we're also going to try this. Yeah. I mean, more power to them.

But I think you're right to point out that number one, this is outside their area of expertise. And number two, they're sort of starting from scratch with a market there. And that's another like real challenge. And we've seen more failures than successes in that scenario in gaming specifically. Yeah, particularly from content companies.

As for movies, I don't know the data. Like obviously Netflix sees the data and they see what aspect there is. And maybe there is a real market for the, you know, the old traditional Blockbuster Red Box. Is it called Red Box? Redbox is a thing. Yeah.

I think that's the successor to Blockbuster. Yeah. And, you know, where Friday night, I just want to watch a movie and Netflix is going to have something original and interesting to watch. And there have been a couple that have broken through and have generated some sort of buzz. I do worry it's in that sort of content middle zone. that discovery is trying to avoid,

which is it costs a fair bit of money, but does it actually drive new subscribers? And if it's only a couple hours, is it actually, you know, really helping with retention and avoiding churn as opposed to like a 10-hour series or 12-hour series, which then you can have multiple series

sort of going forward. But, I mean, this is one where my critique is a little more, I just, it's hard to know the data. Maybe they see the data and they see the movie bit is super important. It's super aligned to strong retention or like these movies that do break through actually do drive new subscribers. So I, that's a very weakly held opinion on my first. Interesting.

Yeah, because I read their rationale and think to myself, like, what is actually the downside of taking knives out to and releasing it in theaters for three weeks or so? And I guess their argument would be we want everyone watching Knives Out to on Netflix. But I just feel like it's more of an event in theaters. And it doesn't preclude people from going and watching it on Netflix after the fact. Like there's still that long-term value that they're discussing in the investor letter of owning your own IP, owning all the copyrights and the sequel rights and everything else. Like they're still getting all of that. But they're also potentially creating more buzz. And I also, I prefer watching good movies on the big screen. And I think a lot of people do.

but maybe that's changing too. I could be more of a dinosaur in that regard. Yeah, well, the Nizzo release is pretty interesting because I think they're putting in theaters for a week. Right. Which is, and again, I think that makes sense. You don't have to be doctrinaire about this sort of stuff. Like, like, and you've seen this come up on several earnings calls.

This is one of the things that Discovery is doubling down on. And Disney has always been very adamant about is that there's a real marketing payoff to being in theaters. And, uh, you, like, especially if you want to make IP, that pays off in the long run. And, you know, Netflix's argument is like, look, you know, our subscribers, the promise we made to them is our content's available on the streaming service and we want to fulfill that promise. It's like, it's, it's classic Netflix speak. It's like they, they, they have a set of beliefs and they're going to stick to them,

uh, until they absolutely have to change, like in the case of advertising. and just the language they use about, hey, you know, we just, you know, we want to deliver great content to our subscribers and ask for permission to increase the prices and all this sort of BS. It's hilarious. It's like you're running a business here. It's okay to run a business. I mean, and they're also doing that in other areas.

You know what else Netflix promised? They said sign up, get an account. You can watch from anywhere, share your password with other family members. And there was a lot of value that. They did it. But that was a lot of the value that people. people were getting. And now that's going away because Netflix is a business. And so I don't begrudge them that, but also like let's be very clear, it's almost like raising prices by doing

that. And so the idea that they owe this to their subscribers is just complete nonsense to me. But, you know, whatever they have to tell themselves is they double down over and over again. And look, the numbers are great in Q3. So. Well, they're okay. I mean, it's not a huge amount of growth. I mean, what's funny about this is Netflix is so funny as an analyst because it's like nothing about the business actually matters other than like that top line subscriber number. And then the stock veers wildly. Like this is a 20 year old company. Like it should the stock price should not be increasing or decreasing by double digits every single quarter. Like it's kind of funny. But it's funny in that the executives feel like they're just like the stock market. Like it's like this.

It's like, oh, we're going down. It's going down. Throw it ads. Let's do ads. We'll do your box. and now the stock's up, they're like, yeah, middle finger to all of you. We know what we're doing. It's quite entertaining. I mean, what are they like from an analyst perspective who doesn't watch a lot of TV, the greatest entertainment is just Netflix itself. It's not just Netflix. Netflix is then treated as a bellwether for like the entire streaming space.

So really it's like Wall Street is shifting its outlook on the entire streaming space based on Netflix subscriber count. One of the funny things about the earnings release schedule is that the two companies that are always early in tech are Netflix and Snap. and they are both used as bellwether's Netflix for the whole streaming industry and snap for the whole advertising industry. And the problem is both these companies are fairly whack. And so they're like, it's super funny that they have to come out first.

And everyone overreacts to them. It's just a total roller coaster for the next two weeks until everyone else gets their earnings out. It's terrific and so irrational. And it's my favorite irrational Wall Street behavior. But the final question I have on Netflix, do you think it's a mistake to offer only one tier for their new ad-supported product? They're going to offer basic subscriptions with ads for $7 a month, which is significantly cheaper than their premium offerings, but they're only offering ads on the basic subscription, which allows you to watch on one TV. and I'm curious what your read is on that decision.

I think it's a mistake, but I think it's probably a temporary situation, to be honest. So I wouldn't want to make too big of a deal of it. So there's a couple things. Number one, you mentioned the passport sharing bits. They're going to start sort of shoving people off of their parents' plans or making them pay more or whatever it might be. And it's important, and this is one of the cases when I wrote that Netflix needs to have advertising,

this was one of the points I made. they need a landing spot for these people, right, who still want Netflix and they've been used to getting it for free. And an ad-supported service, it's like, well, okay, seven bucks a month, fine. I've been, you know, I've been, you know, skating along on a shared password for a very long time. And that's, you know, you have somewhere to land. So I think that makes sense for the place to start. In the long run, though, I mean, this is almost a double down again.

Like, they always doubled it on movies or on binging, all these sorts of pieces. They're, like, doubling down on like, we're going to get a whole bunch of growth for this. because you need people on this plan for your advertising business to work, right? You need an actual audience. And they're pretty adamant, oh, people aren't going to downgrade X, Y, Z. We don't see that very often. We'll see. I would tend to think that's the case.

I mean, are people going to actually, you know, downgrade to save three bucks a month or $8 a month, but down to only one screen and lower quality, et cetera, et cetera. Time will tell. But I think the real, a real growth opportunity here is, would want this advertising business to get really big because the advertising business, it's kind of orthogonal to the streaming business where instead of, you know, people paying based on content, if you can like there's a, there's a exponential growth potential with advertising if you get super big and at scale where you can make much more money with ads

than you potentially can with subscription. We see this like Hulu, like Hulu makes more money off their ad supported plans and they do their subscription direct direct plans. And that seems like one of the biggest profitability potentials for Netflix. Because that growth in revenue per customer is all very high margin. Yeah. Because you're putting in that infrastructure for the advertising. You're selling the ads.

But then as that goes up, you sort of all profit. And so I would really want to push that. And I think what makes the most sense, it definitely, I mean, they have made the promised customers we're going to be ad free. So I'd like the fact that they're not necessarily like you're not going to suddenly get ads if you weren't expecting it previously. But it would make sense to me to have all the plans, all the different quality levels should have an ad option. That's what I couldn't understand. This is a new market for them.

And it's actually hard to predict what the consumer behavior is going to look like. And so in that case, I'm not really sure what the downside is to making your offering as diverse as possible. And do you think it's just like logistically, it's they, they want to take more time before they try to achieve that sort of scale? Yeah, I mean, this is where Netflix deserves credit. It's only been six months since they said they're going to have this product. And it was clear when they announced the product. They had no idea what they're going to build. It was clear that happened 20 minutes before the call.

Yeah, I mean, maybe not 20 minutes, but it sure felt like it. And they've, they've come around. They built this deal with Microsoft where, you know, Microsoft is basically, you know, I assume they're getting a phenomenal deal. in Microsoft's building the exact product that Netflix wants. Like they've out like they have this like Microsoft is like working for them in some respects. And I, I, I, this is my supposition. But Microsoft by building this product, then they'll have a really attractive product is offered to other streaming services for, for example, in the long run.

But they're, they built this product. It's as it should be to start a brand advertising focused product. They're building a sales team. Like they, you know, like and they said we're overwhelmed. Like between us on Microsoft, we don't actually have enough. salespeople to sort of like, like take care of this. And it makes sense.

Like, like, it's a, it's a great product from an advertising perspective. And so I think it's honestly just a, look, it's only six months in. If we come back in a year and it's not expanded,

I would be very disappointed, but I'm definitely ready to give them the benefit of the doubt, given how quickly they've moved to date. And honestly, it's kind of a credit to, to Netflix and makes me a little more bullish on the company that they've move so quickly on this. Once they did change their mind,

they didn't like half acid, right? And I think that's pretty impressive. Well, it is one thing to keep in mind with Netflix. As a tech company, they've always been really good. Like the experience of using Netflix is superior to the experience of using any of these other streaming services. And it's always just been cleaner and easier,

even than over the air TV. And I think that's been one of their advantages. And you talk about the ads. I actually think from a consumer standpoint, Netflix's basic with ads tier will include an average of four to five minutes of commercials each hour and won't give users the ability to download movies and TV series. I think that's a pretty solid deal. And I frankly was expecting more ads than that per hour. And at $6.99 a month, that is pretty enticing. So.

Well, the other thing to think about, too, is you may. mentioned Netflix's technical acumen. I think one of the challenges in this space, I was talking to Matthew Ball and I was a checkery interview a few months ago. And he's like, look, technical acumen was great when everyone had access to the same content. But the problem with this industry is content is king. And it doesn't matter how good your tech is if you don't have the good content, right? And I think one of the advantages of getting into advertising is it's a place where you can have a sustainable advantage by having better tech because you can, your ad delivery can be better, can be smoother. And in the long run, you can really get into targeting and increase the

value of your ads by showing it to the right people when they want to see it. And again, this is where scale matters. Netflix has the most subscribers already. Now, all those subscribers are locked into plans that Netflix has said won't have ads. So I think it actually is two Netflix's. I would personally, if they really want to be aggressive, not only would I have an ad tier at every level, I would make it even cheaper, like 50% of the price. Because I would want people getting on these

ad tiers so that I can get a scale plate going, so I can get my target average. Maybe they don't have, they said they don't have any target advertising capabilities right now. They said they're going to build it, as they should. They know exactly who the customer is. They know exactly what they want.

They can get a lot of... A lot of first party data, yeah. A lot of first party data, which is what matters. and thanks to Apple, they're going to say, we're going to be very privacy focused. We're not going to, you know, because Apple's definition of privacy is,

hey, as long as you're not getting the data from somewhere else, it's private. So that was like, we're going to be totally private and we're going to, you know, implied is we're going to get every single little, into detail we can from what you do on Netflix, which is a lot. And so maybe part of it is they don't have that tarding capability yet.

It's just brand advertising right now. So what I would like to see as an analyst is they really develop, this high level of tarding capability. And then they get super aggressive on the ad stuff where they really try to get a substantial bit of their base on there. Again, just the upside potential there, particularly from a profit perspective, is so much higher than subscriptions. And the fact they're finally going this direction and the fact they seem to be moving

pretty fast, that's definitely a bullish indication. Yeah. No, I think everything you said there makes sense. And that was going to be my final question is, when are they going to move toward targeting and it sounds like they are when they can they just don't have the capability totally totally and as we said a couple weeks ago ad supported businesses are so profitable you forget how to make a profit anywhere else so maybe that's where Netflix should head down the line for now to shift gears to part two here on friday morning we published an episode that included a question about whether to

banned TikTok for national security reasons. And within about three hours of that pod going live, there was a story from Emily Baker White in Forbes that was headlined, TikTok parent bite dance plan to use TikTok to monitor the physical location of specific American citizens. And I'll read a bit from the story here. Quote, material reviewed by Forbes indicates that BightDance's internal audit team was planning to use this location information to surveil individual American citizens, not to target ads or any of these other purposes. Forbes is not disclosing the nature and purpose of the planned surveillance referenced in the materials in order to protect sources. Tick-Tock and BightDance did not answer questions about

whether internal audit, the team that's in charge of all this, has specifically targeted any members of the U.S. government activists, public figures, or journalists. And then on Friday night, TikTok responded on Twitter, where they criticized the Forbes story for, quote, a lack of both rigor and journalistic integrity. And then they added, specifically, Forbes chose not to include the portion of our statement that disproved the feasibility of its core allegations. TikTok does not collect precise GPS location information from U.S. users, meaning TikTok could not monitor U.S. users in the way the article suggested. TikTok has never been used to target any members of the U.S. government, activists, public figures,

or journalists, nor do we serve them a different content experience than other users. And Forbes stands by all of its reporting, and Baker White said that her story never claimed they were collecting precise GPS location data. what I was going to make. It's one of those things that my, you know, my shirt answers questions that are raised by my shirt sort of situation here. So I definitely wanted to mention this because I'm like, I can't see any issue where data, you know, is really that from TikTok as the national security is concerned.

Of course, I should have thought of and mentioned the location data angle. That's a, that's an obvious one. It's something that's come up before. Like there was a bit, I think it was Strala, like the run tracking app. And they're like, could determine, like, or like the area 51. Like there's been like revelations that have come from apps that that are just sharing data in that case,

not maliciously like Strava, the whole idea is you can sort of share your data publicly of your, your workouts and things on those lines. And so that's definitely a real angle and a real issue of concern. And it was a mistake by, by me to not think of that, not mention it on the last one. I think just the broader point though is it's just ridiculous that this.

this, we're allowing this situation to, to persist. I mean, to your point, TikTok's like, we don't collect, you know, super precise GPS data. Well, no, no one said that. You can get IP address data and, you know, you can get in broad strokes where someone is, where they're moving around. That's definitely, that's definitely a real thing. Yeah. I think there's definitely an aspect from the U.S. government perspective, like they're, or the military perspective, there needs to be real, real controls around and awareness of the risk of using,

like the Strava thing is a good example, right? If you're in the military and working at a secret base, you shouldn't be recording your runs on Strava. And it kind of ties into the misinformation thing broadly. Like the only solution of this, given the Internet, is an increased level of individual awareness and individual sort of control. It's very hard to sustainably do this sort of at scale,

That said, the whole challenge with TikTok is, like, we're not even trying, right? Right. This whole Oracle deal, I mean, you see this in, there's been stories, you know, the TikTok CEO in the U.S. doesn't fully know what bite dance is collecting and doing. And this idea that there's going to be this sort of useful firewall between the two sides is absurd to imagine it will work from a technical perspective. much less why would they actually want to let that happen, you know, if you're sort of from the Chinese perspective. And it's not exactly like relations in the tech sector are cooling.

And, you know, we can come to sort of some fun agreement here. I mean, you can debate and go back and forth on the chip ban that we talked about last week. Yeah. But if you're sort of declaring war, it seems like you should probably cover all your fronts. Well, and I want to know a little bit more. about the data in particular. Like, why wasn't the personal data that concerning to you and why is location data more

concerning? Those may be stupid questions, but explain it for the audience. No, it's a good question. Actually, this is one of my general questions, my general take on privacy in general is I just think there's a real challenge when it comes to digital stuff. Like, like the idea of like an IP address, like at the end of the day, you need to know where to send the data. You kind of need to know what the IP.

It's like email, right? It's like, I need to know what your email address is if I'm going to send you a daily update. Like there's there's a bit where, I mean, that's a very, you know, simplified sort of example, but data exchange is how the internet works. And given that, I'm skeptical of the extent to which any of this stuff works in general, where I do think, but I'm cognizant of, and I think there's real concerns about data being used poorly. So where I personally draw the line

is I think the line should be where data, there's a crossover between the digital world and the real world. And so I think location data is something that I think is very valid to have a big crackdown on. And I applaud how

Apple's got much more aggressive in iOS, for example, in letting apps know that they're using the location data. And yes, it's sometimes annoying. You get those pop-ups, this app, you know, like if you have a weather app, that's a widget or whatever on your home screen. And it comes up, you know, hey, this app's been checking your location data without you opening it.

Is that okay? On one hand, unfair, because Apple's weather app doesn't ask you that. On the other hand, it's like, I think that's a legitimate concern and something to be worried about. I have a big issue with like all the cameras that are sort of going up all over the world. And this collection of data and who knows where it's stored and how long it's kept for, if you're going to draw a line, to me, that's a understandable place to draw a line that is a real legitimate worry where we're, you know, we're losing freedoms that we had before computers to be able to move around freely, to be able to transact freely. Like, like, I think the shift, I think it's justifiable to be concerned about the digitization of money. And like, you know, on one hand, the conveniences are massive.

On the other hand, there is something you're sort of losing along the way. Computers, on the other hand, they've been digital from day one. Like, it just kind of feels like it's a different paradigm, a different arena. And I would like it if we could have the digital world with the knowledge that there's not going to be much privacy because of nature of computers, but we could still preserve some aspect of privacy in our actual real life world. And maybe this is all sort of a fantastical wish on my part. That's not really, you know, realistic in the real world. but that's where I personally draw a lot. Yeah, that makes sense.

In law, there's the concept of assumption of risk, and when you're using a computer data is part of the currency that everyone is using on there, whereas I can see the erosion of other freedoms that used to exist in the physical world would be more concerning. And computers have countervailing measures like encryption, right, which work against this, right? There's no encryption for the real. world, right? And so, like, analog gives and analog taketh away. Digital gives and digital taketh away, right? Right? If you're, you know, this gets into questions of, like, encrypted messaging, for example, where I've always been more okay with messaging by default being unencrypted,

knowing that you can't encrypt it if you want, you know, did like, if you have countermeasures, then it's a little more tolerable in some respects. It's, it's when decisions. is sort of made on your behalf. And that decision on the digital side can be, look, we've decided our definition of privacy is the right one. And no matter it favors us, we're going to dictate that to you. I have a little bit of a problem with that. On the flip side, in the analog world, like, no, you can't be private.

You're going to be tracked. You have to use X, Y, Z. I have a problem with that. Like, like, I want user choice and control to be preserved in both arenas. Yeah, that makes sense to me. And as far as the TikTok situation specifically, and, I'm a lot of the TikTok situation specifically, and what we were talking about on the last episode, when we were downplaying the data concerns,

I was thinking back to like stories about companies in the valley instructing their employees to delete TikTok because they were concerned about the Chinese government harvesting, like individual employee data. And I just think, yeah, I mean, there's stuff you can get.

Apple's in Google are walking down more like list of apps and like IP addresses, like which does show location. Like there is, there is, That's the nature of digital. You can definitely do it. But if you're the Chinese government, you're not going to be weaponizing it that way. I think they're far more likely to try to use influence and try to use the algorithm to sway the American public on certain issues.

And I don't think they've done that yet. But I think long term, who knows. Yeah, who knows? I know, I absolutely think they have. Like I said, I documented examples with the NBA thing in the Houston Rockets and the Hong Kong protests. Now, I was documenting them from Taiwan, although I did use a U.S. VPN to see if it was different there. So, and I don't think that was necessarily the Chinese government. The brilliance, quote unquote, brilliance of a hardcore censorship regime is not the censorship itself.

It's the companies knowing what they ought to do. And they will always sort of, and then as the censorship imposer, you say, well, no, we didn't say that. You don't have to do that. But everyone's going to always overcorrect and sort of go too far. And further on individuals themselves kind of know, look, I don't want to be banned. I don't want to get X, Y, Z. So I'm not going to even approach the line. Yeah.

And so you have everyone as sort of plausible deniability and say, no, we're trying to be very reasonable here, knowing that the incentives are such that everyone's going to sort of tend more towards the censorship angle than not, or more towards the, you know, not criticizing or whatever it might be. And, yeah, you know, just to take, you know, go back to your point, my issue is I, it's relative speaking. Of course, data is an issue, but I am relatively speaking way more concerned about the That's where the focus should be if you're making the case that something needs to be done.

Right. And it bugs me that all the conversation about TikTok on the national level is all about data. Because to me, yeah, sure, an issue. And I was wrong to overly minimize it. But relatively speaking, I think it's minimal compared to this influence. Yeah. Well, and you know what? I regret giving TikTok the benefit of the doubt because I'm looking here. at another story from Emily Baker-White. TikTok owner BiteDanced used a news app on millions of phones to push pro-China messages, ex-employees say this was on BuzzFeed.

Emily Baker-White has done a lot of good work on TikTok over the last year or so. And one of the other stories this year was about that Oracle project, and I believe it's called Project Texas. Can you talk a little bit more about what that is and why you're skeptical that it actually moves the needle? Yeah, well, it's just basically this idea that Oracle is going to be in charge of

and store all the data, but all the algorithms are still coming from ByteDance, number one. And number two, like, ByteDance is still running the show. I mean, like, there's this aspect. And, you know, you see this, if you've ever dealt with, if you've ever dealt with Chinese companies and their PR operations, I mean, I just think I've definitely experienced, I don't want to say exactly what it was, but I've experienced this for real where you have a PR person who's often a foreigner, who's, they are sincere and they're being very honest with you in saying that does not happen.

But they don't actually know what's happening. And that's by design, because then they can lie sincerely because they're not lying. They're telling their truth. Yeah. And maybe this happens to US companies too. I don't know. I've definitely experienced with China. companies. It's something that people who have dealt with China are aware of and have dealt with as well.

And like at the end of the day, how is Oracle going to actually know what control and data access, whatever, bite dance has or does not have? And why would bite dance slash China by extension want to give that up? You know, it's a, again, if we're in a economic war, particularly in tech, I don't think anyone is sort of laying down their weapons. Right, right. And the fact is, if the entire infrastructure has been designed by people who are in China, I wonder whether even if you break off TikTok, there won't still be access. And so that leads to our final question here from Morgan.

He emailed in and said, I would love to hear your thoughts on how the U.S. trying to force a sale would actually work. Would you think it's more likely that if the U.S. tried to fly force of sale, ByteDance would pull TikTok from the States, or would they actually spin it off in a US IPO or maybe sell it to a U.S. company? I could also see them trying to IPO or sell to a non-U.S. market just despite the United States. Do you have thoughts here? Because that's the logistics question. I'm not sure if TikTok is really viewed as a national security threat. that if they were to sell to like Microsoft,

I would worry that people in China who want to abuse it would still have access and be able to weaponize it for their own means. Yeah, I mean, I think the, I think spite as a motivation is probably a little overrated in this regard when you're talking hundreds of billions of dollars. Yep. So, you know, Bight Dance has investors they, who want to return. And it's an extremely valuable property.

I don't want it to go. Again, I enjoy the fact that Biden is kicking Facebook's rear end, right? Like, that's what we want. We want good sort of, you know, competition in the market. And it's probably a commentary on, you know, where the U.S. market is and the startup system is that this had to come from China to sort of win. And, you know, so I definitely don't want to sort of hand Facebook a home run. Like they kind of got handed in India.

And so where they did ban TikTok. So on one hand, I definitely want that to happen. Secondly, so, and I think there's motivation to make that happen because it's worth a lot of money. I don't think TikTok or their investors or anyone wants to like just, just sacrifice all of that. If another company did acquire the asset, and this was part of the hang up with Microsoft was BightDance is like, we don't want to give up the algorithms. Like, like, yeah, Microsoft can do all the data, but that's R, that's RIP. And that's obviously going to be the price of your acquisition. I mean, once, say, a Microsoft has full control, then they can actually go through and audit it and work through.

And yeah, sure, there might be back doors there. But you're like, it's something that can be solved over time if you have the whole sort of kit and caboodle. If it's actually still tied to, you know, bite dance and servers there. And that's where the actual, you know, magic sauce is. There's no way you can ever verify it. So your concern about verification is actually what should apply right now with this Oracle. It just doesn't make any sense that this is actually going to be sort of a viable thing. Now, the mechanics are, this is the challenge, is you have the reason to, you have to have a legitimate threat.

Like, if you don't sell, it's going to get banned. Yeah. And one thing that's really interesting for better or worse, in general, I think it's for worse, but hey, we have the capability, is China had to build up this whole, this whole, great firewall, right, to be able to block U.S. services. And it's actually a tremendous technical feat, aided and abetted by U.S. companies like Cisco. But it definitely was a lot of work and took a lot of time. The thing with mobile is that there are actually two choke points,

which is Apple and Google. And they can unilaterally kill Ine. And given that, they're actually like we've basically backward or fell backwards, into great firewall type of capabilities. Now, they can't like, like the great firewall, like parse individual data packets and decide what goes through and what doesn't.

But as a blunt instrument, it's actually, it's phenomenally effective. Yeah, I'm smiling on this side of the line because it's so bad in so many ways that they have the power to gatekeep that way, but in this particular respect, it is a strategic advantage on the U.S. part. Well, yeah, just an observation

that the capability does. exist. Yeah. You know, as we've seen over the last week, if the U.S. asserts a national security prerogative, they can make private companies do what they do, do what must be done. And, and so, you know, all this makes me horribly uncomfortable. Like, I don't like the fact Apple and Google have this capability. I don't like the idea of forcing a sale.

I don't like the idea of blocking a product that lots of people enjoy. And, you know, 99.99% of its uses are legitimate. And maybe all of the uses are legitimate today. Again, I'm a little skeptical, but maybe it is. And people have built careers on there. Like all these are great things. And it's great to have this competition in the space. I guess it's hard to square the approach to TikTok with the approach to chips.

Like influence and narrative really matters. And does it matter as much as AI? in the long-term outcomes. I mean, maybe, maybe not, but it seems weird to focus on one and not the other. Right. And maybe I've watched too many 90s, like hacker movies, and I'm imagining people going through, like,

the backdoor of a sold TikTok, spun off to a U.S. company. Like, I have no idea what exactly is possible there. I'll just say, Oh, it's definitely possible. And there would probably be a whole bunch of them in there and it'd take a long time to close off. But it's like, it's kind of like it's hard to ban chips, right?

they're all the same. How do you actually stop them going to the market? Well, you can make it definitely a lot more difficult than it is, uh, than it is. Okay. Yeah. Well, and look, I was joking on the last show what I was talking about banning it and not giving it a second thought because it makes me feel old. I will say the two cases for banning it are number one, the security concerns I've just described. And number two, I hate to say this, but like it's similar to the argument with Facebook where if you really want to criticize Facebook, the best way to do it is to step back and say, has this had a net positive impact on society or a net negative impact on society and interpersonal relations? And I think there's a pretty good argument that the impact has been

net negative. And I think there's also a good argument that the impact of TikTok long term is net negative. And so aside from the qualms you have about, seizing private enterprise and just banning it, I think we should go for it. Well, the calls I have are moralists like you trying to dictate to the kids on with their lives. So thank you for making my point. There you go. Well, I've nothing, if not a dinosaur. Somehow I'm the old guy on this show.

I'm still pissed off about the Red Bull victory. Yeah, that your old guy didn't win. It's going to sting for the rest of the week. Man, oh, man, it was nice. that 10-lap stretch where Lewis Hamilton was leading the American Grand Prix. For now, though, Ben, I look forward to coming back later in the week. And listeners, you can send questions or comments to email at sharptech.fm. We'll continue to answer all of those over the next few weeks.

And we've loved hearing from everybody so far. It's been a lot of fun. So, yeah, by the way, this is coming out a day early. I think we're going to try experimenting with a Monday, Thursday release. schedule and we may actually move around which which episode is the mailbag which isn't but all emails to email at sharp tech.fm are read and put in the if you put in the potential they crack me up on a daily basis so thank you to everybody who's written in and until then ben let's come back Thursday sounds good talk to you later