The a16z Show - a16z Podcast: Tech and Entertainment in the 'Era of Mass Customization'

Episode Date: February 26, 2017

Imagine, for a moment, an alternative universe: One where Netflix got disrupted by some other streaming-content company that made its DVD rental business irrelevant. But that's just a counterfactual. What happened instead is that Netflix cannibalized (or rather, "hybridized") its own core business to make room for a more strategic one given where the tech was going. Given how rare it is for companies to successfully disrupt themselves like this, Reed Hastings, CEO and co-founder of Netflix, shares how they did it in this episode of the a16z Podcast (based on a conversation with Marc Andreessen that took place at our inaugural summit event). But please don't say "only the paranoid survive" -- Hastings believes business leaders need more sophisticated metaphors "to anticipate the paths, and all the judgment it takes, of deciding which competitive path to most explore". It also turns out that sourcing, managing, and supporting creative ideas and creators is not unlike the questions VCs ask themselves -- like figuring out just how much experience first-time entrepreneurs (or directors) need when creating something (like, say, "Stranger Things"). Finally, is there a "Netflix brand" or genre of content -- and if so, just how far can you stretch it so the same brand can produce something like "Orange Is the New Black" one day and then "Fuller House" the next day? Or are we entering an "era of mass customization" where we only see content suited to our interests -- dark and dystopian if that's your thing, sunny and funny if not? How is the industry ecosystem evolving; where do telcos, Silicon Valley, Hollywood fit in? All this and more in this episode. Stay Updated:Find a16z on YouTube: YouTubeFind a16z on XFind a16z on LinkedInListen to the a16z Show on SpotifyListen to the a16z Show on Apple PodcastsFollow our host: https://twitter.com/eriktorenberg Please note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Hi, everyone, welcome to the A6 and Z podcast. Today's episode is based on a conversation between Reed Hastings, CEO and co-founder of Netflix, and Mark Andresen that took place at our inaugural summit event. Given how rare it is for companies to successfully disrupt themselves, the way Netflix did when arguably cannibalizing its own DVD business for internet streaming and then going into original content, how do they do it? Mark and Reid take us on a journey through the origin story of Netflix to how the entertainment and tech industry has evolved in this episode. And perhaps, Reid argues, we need more sophisticated metaphors than only the paranoid survive for business leaders to anticipate the paths and judgments behind which of the competitive

paths they should put the most effort into when they're thinking about what comes next. Good, good. Welcome everybody. We'll just thrilled to be here today with Reed, who makes about 90% of my favorite TV shows. So we're going to spend the entire time talking about spoilers for the third season at Daredevil. Hopefully you all have watched season one and two. Actually, let's start with a show of hands. How many people here subscribe to Netflix? That's

pretty good. There's still a little room for growth. So, Reed's very interesting, guys. So, the quick historical story on my part, how I first ran into Reed. So back when my partner, Eric Beena and I at University of Illinois in 1992, were first developing what became Mosaic, which was the 400 Netscape.

92. 92. 1999. Back in the good old days. The big challenge, for programmers, if you were a programmer back then, and some people in this audience probably were, you dealt with a very specific technical challenge. It was called memory leaks. And so it's very sort of, it's not so relevant of challenge anymore because things have changed. But at the time, as a programmer, you had to keep track of how you used computer memory and computers didn't have very much memory. And so if you screwed this up, it was like having, you know,

termites at your construction site for your new house or something. You had memory leaks. Your program at some point was just going to collapse. And you were going to sit there and stare at horror because you weren't going to understand why it was collapsing. And in fact, if you was, you is users of technology have ever had a phone or a PC that just like, you know, slows down, it slows down, it slows down. It's probably memory leaks. And so this was just kind of a torture thing that programmers lived with. And then in 92, was it 92?

In 1992, a product came out called Purify. Software product came out called Purify. And it was like penicillin for software programmers. It solved memory leaks. And it was this program, very clever technical mechanisms to basically surface all the memory leaks and make them easy to fix. And it really was like a step function upgrade in coding. And, of course, interesting, relevant part of that story is Reed was the founder, co-founder, of Pure Software, which was the developer of PureFi.

I believe you were also the developer of the product or one of the developers, as well as the CEO of the company. And for context, this would be a little bit like, you know, a modern movie mogul in Hollywood having started his career by like polishing 35 millimeter film lenses. Like, this is an unusual background for somebody who's now doing what you're doing. And so I thought maybe you could start, basically tell us that, at least the short form of the story of Pure and Purify and how it informed kind of how you're your career developed from there. Because you were a young man at the time, young man of... The lucky break of my life was, I was a high school math teacher, I wanted to get into computers, and I got a job serving coffee in a teaching lab for computers. And that company turned out to be the first.com of all time, which was Symbolics.com, now out of business.

And they made LISP machines in hardware. And this was an architecture that was a 36-bit data word. So it's 32 for the data and four bits of real-time data-type tagging. And I didn't think that much about it, except I learned a lot about LISP in that area. And then three years later, at Stanford doing lots of C programming, and I'm so frustrated, where's my data type tagging? And I realized that it would be possible to implement that all in software with the techniques that Purify used. And if I hadn't gotten that first job serving coffee and been so exposed to this very alternative style computer architecture, it would have never occurred. to me. And then from that, invented that first product, Purify. And that changed my life,

because then I was able to start a company. It doubled every year, went public one week before Netscape, actually. And so for one week, we were the big topic. Okay. So, I mean, everybody now knows you from Netflix. How did the peer experience kind of shape your thinking as you went to build a new company in the form of Netflix later on? And what would appear to be, at least at the start, a completely unrelated space. Yeah, it is substantially non-related. You know, at Pure, I, I was a product guy, and I didn't think much about management, and it didn't turn out very well. So as the company grew, it got more bureaucratic. We were obsessed with putting processes in place because every time there was a mistake, we wanted to make sure that mistake didn't

happen again. So we treated it like managing semiconductor yield when, in fact, in a creative process, that doesn't work very well. And so it got less and less innovative. And that was the great scar, which is it got less fun to work at. And so that's when I vowed that, in starting another company, that at least we wouldn't make that mistake, that as we grew, we would try to have less rules, not more rules. So that was the big impact for me. Right. That's interesting. And so does that suggest that if someday you were to start a third company, you will learn from Netflix that you don't have enough rules and you need to then revert back? Like, do you think this is a cycle or do you think you've figured out the right

formula? I think I'm in love with Netflix for a long time. So that company, Pure was a software tools company. They always get acquired. Media companies can grow to be quite large. in independence, not for sure. So it's got good odds, though. Right, got it. Okay, good. Well, so I think everybody knows, you know, the original story of Netflix and kind of how it became a big success with DVD rentals and then ultimately switch to streaming. And so the thing I really want to drill into tonight is that transition to streaming,

because it's sort of this classic, you know, there's a counterfactual universe in which Netflix got disrupted, right, by somebody, some other new company that created streaming and made DVD rentals, you know, irrelevant. And so maybe take us through, like, when did you start thinking about streaming? How early? because Netflix started in, what, the mid-90s? 97. So when did you first start?

And for those of you who maybe are too young, remember this, internet video in 1997 or even 2000, or even, I would argue, probably 2003, 2004, was very bad. It was tiny little postage stamp-sized videos. You needed special plug-ins. It almost never actually worked. And so it was quite a conceptual leap to kind of envision the kind of thing that you have now

when you sit down in front of Netflix. And you started streaming. I remember actually Reed invited me in probably, I think you were talking a bunch of people in it around 2000. 2003, 2004. That's right. And I think if Reid remembers this, he invited me in and said, what do you think of this streaming thing? And I said, that'll never work. So, you know, great foresight. But it was based on all this, well, actually, I said someday it might work. But it seems awfully hard

because there are all these technical impediments. It seems like a very challenging thing. And so maybe take us through when you started thinking about that. So if you look at median residential bandwidth from 1980 forward, it's completely smooth. And so we've gone through multiple technologies, these first different types of dial-up and then the beginnings of DSL and cable and fiber. And so interestingly, the speeds at which streaming was going to become practical, sort of one megabit, two megabits, was completely knowable. Now, we weren't that smart. You know, we knew it was sometime in the future.

But right from the beginning in 1997, we envisioned it. When I was at Stanford, you'd take the classic tenon-bound computer networking class. And, you know, it makes you think about networks differently, and you have to compute the bandwidth of a station wagon filled with backup tapes driving across the country. And so you start thinking about networks in a different way. And then in 97, when a friend told me about DVD, I was like, oh, my God, that's the station wagon. That's this five-gigabyte packet that you could mail for $0.32.

Very high bandwidth. Very low latency. Yeah, that's right. No, high latency. Yeah, 24-hour latency, but good throughput. Right. Slightly better than carrier pigeon. Yeah.

So, you know, it was, again, it's... that cross-fertilization, a metaphor. So we always viewed the DVD by mail as a digital distribution network. And then we knew eventually, and that's why we called the company Netflix and not DVD by mail or, you know, that kind of thing. So we had the slight advantage that the thing that we, our first business, we didn't totally fall in love with because we knew it was temporary. It was the path to something else. And I think that helps in comparison to other people like the founders of Blockbuster who get so associated with store that it's hard to think outside of that because it became such a big thing.

Right, right. And so how did you make the decision on the when, when to pull the trigger and when to start streaming? Sure. We knew that it was an issue. We went public in 2002 and we said, eventually streaming will come and we called it internet delivery because we knew it would be some mix of downloading and streaming. But we really didn't do that much on it until 2005, which was YouTube.

So when we saw YouTube, it was like amazing because even though the video quality wasn't great, you could click and watch. watch immediately. It was like television. But it was click and watch. And that's when we realized, wow, it's starting, it's beginning. And so we started that effort then, which was a mix of content licensing and technology development, and then launched that in 2007. And then as Clay probably described, the key thing is not getting into the new business. Lots of companies do that. They just don't get in and make money. They don't create it as a profit driver. They get in and and dabble with it and lose money in it, essentially.

And so we knew that the key was really focusing on it is how is this going to grow into its own business. But it was too young, too, so we hybridized it with DVD. And by too young, literally, didn't have enough content. So we couldn't have sold a streaming content service on its own. It was part of the DVD subscription. And then as the usage grew and grew and grew, we knew eventually we'd be able to split those apart.

So that took us up to 2010. Then we did our first test in Canada, our first test of streaming only. So we picked a new country that it wasn't used to our DVD service to see, with the content that we can get, can you build a service that there's word of mouth and grows in another country? And the Canada experiment was a rocket chip. In the first three days, we got as many subscribers as we thought would take three months. And so it was clear that you could position Netflix as streaming only if you didn't have heritage. And from then on, we focused on, you know, how do we get streaming only, obviously,

on a global basis. So the other thing, of course, Clay talks about why companies tend not to be able to make this shift is because the management team, the guys, the people with P&L responsibility for the old business, consider the new thing to be a threat, right, a cannibalization threat. Did that happen, like, were there people inside Netflix running the DVD business that were like, wait a minute, what are we doing? Yeah, probably one of the most painful moments along that journey was the DVD was all the revenue, all the profit. We were hybridizing it with streaming and we were getting more streaming attention and executives, but the discussion was still a lot around DVDs. And then we realized that we had to kick out the DVD executives

of the main management meeting. And that was hard because we loved them and had grown up with them and they're running everything that's important. But they weren't adding value in terms of the streaming discussion. And we realized we always compared ourselves to, compared to a streaming pure play, what would we do? And so it was very personal. We gave them their own meeting. But, you know, that part was hard.

Yeah. You know, it's funny. It's almost the reverse of what Apple did with the Macintosh, where he had the same issue. The Apple II dominated the business. The Macintosh's a threat. In that case, he took the Macintosh team offsite. In this case, you kicked the DVD team offsite, so to speak.

Yeah, the difference is the selling proposition. and you didn't, and so maybe that was a good. Again, if the Mac had been an add-in to the Apple to be a board in it or something, you know, but our commercial proposition, the two services had to be highly integrated in the beginning. Right. Because we just didn't have enough content, a combination of money to license that content and studio comfort. Yeah, got it. And then, you know, at least my experience usually with these things is you kind of, you start doing these things and you put on a very brave face in public, right? And sort of every cocktail party in Silicon Valley, the answer to every.

question of, oh, how's your new thing doing? It's doing great. And then at 4 in the morning, you're like, ah. So did you have the 4 in the morning moments? What was your level of confidence along the way? And specifically, when did you know that it was going to work? I think we still wonder, because, you know, clearly we're the beginnings of success. But, you know, will we be one of the leading internet television firms of 10 or 20 years is very much open to debate?

So we knew technologically it was going to work. We didn't understand and weren't confident enough about the competitive dynamics. And, you know, that was frankly as true in the DVD business. So as we were growing the DVD business, we developed new competitors of Walmart doing a DVD rental service, Amazon doing one in the UK, and Blockbuster doing a big one. And so suddenly we were up against three much larger companies in that battle. And we got through it by focusing on, you know, not getting psyched out, by focusing on how do we, improve service delivery. How do we win this war of attrition against these services? And so we've

always imagined that as new services come in for streaming, that what we have to do is not get distracted by them. So we spend a very small amount of time thinking about competition. And we spend almost all of the time trying to improve the service. And that's because, again, there's nothing we can do about the competition. If you all think of some night you didn't watch Netflix, God forbid, then what did you do that night? You know, some of you watch sports, some of you played a board game, some of you read a book,

some of you drank too much, some of you went to bed early, and so we compete against all of that. And so it's not just competing against Amazon or HBO. It's really this open competition for time. Right, right. Okay. So then, yeah, so then let's talk about the original content,

kind of phenomenon that's happened. So when you started both Netflix itself, DVD business, and the streaming business, you were licensing content from Hollywood, studios and other kinds of content owners, and then you decided along the way at some point to start funding and making original content. This, of course, was an interesting move because if there's one universal rule of business, it's if you're not in the entertainment business today, do not go into it because you cannot succeed, because you will get fleeced, like they will take all your

money, and you can name generation after generation of kind of outside investor or outside company, including maybe most notably all the big Japanese companies in 1980s who came to Hollywood, put a huge amount of money in, and I think generally now people feel like they got the short end of that stick. Hollywood did very well. The Japanese companies didn't. So there's been just like lots of fear and trepidation in the business community, and certainly in the technology industry, nobody thought they could go make original content in Hollywood or

in the Hollywood system. And you, of course, it went directly against that prevailing belief and decided to go straight into it. So maybe take me through kind of the thought process of how you decided both of that was a good idea and also that it could actually work. Sure. Think of it as we were moving in licensing content. It's second or third window.

The content's been out, so it's got a track record. And so you can do the moneyball type analysis on the content to try to figure out before you buy it, how much it's going to get viewed because it's already built. So it's suitable for heavy analytics in the moneyball sense. And then when you move into taking creative risk, you're buying properties that haven't yet been made or maybe they've been made, but no one has seen them, so you don't know a general reaction. It's very different. And we tried the first round, actually, in the DVD business,

in the middle of the Blockbuster Wars, we started buying films on DVD out of Sundance, and we couldn't make the economics work. We bought a whole bunch of films, and it turned out we just spent a lot more money than we generated a consumer value. So we were aware of the risks. But by 2011, 2012, we were realizing that many of the firms that we were buying from

were eventually going to want to run their own streaming service, and that we did not have a reliable supply. And so there's a bit of the Burn Your Boats-Cortez model, which is we had no choice but to make it work. We had to go vertical because we were dependent on these firms that it was not going to be in their interest to sell to us over time. And so my partner, Ted Sarandos, led that charge first with House of Cards, or first with Lillehammer, for anyone who's really counting,

and then House of Cards. And then we've steadily grown that muscle year after, year. Now, for this calendar year, we're spending about $5 billion on content and $1 billion on tech. So now, you know, the ratios have been reversed. And, you know, it's not without stress, but people in the company are so proud of the content that we're delivering and we're now very associated and all of us identify with some of the original series. Right. So let's talk about actually Ted for a second. So talk about talent development, because this obviously is a, this was like if you, if the DVD business was one big

bat and streaming was another big bet, and then original content production was the third big bet. You went outside the company to get the leader of that third effort. And I'm bringing it up. Ted now has become legendary, right, in Hollywood and in the valley. Today, at the time he first went to work for Netflix, I think he was not that well known and maybe had a little bit of a non-traditional background to do what he should say. Yeah, Ted Sarandos, which is our chief content officer, has turned out to be a fantastic creative executive, both on the talent relations and then picking what's going to win. And he was always a very curious person, but he came out of warehousing. So he ran warehouses for Blockbuster. Not like metaphorically warehousing, like

actually, literally, literally, hourly workers. And then he had moved himself up to be doing DVD revenue sharing for a small video chain that was competing with Blockbuster. When we heard him, in his first two years at Netflix, he had to work out of the home because he couldn't afford an office. And he used to drive down with his crew to Costco and, you know, buy 5,000 copies. And, you know, we would load them up and mail them out. So, you know, he has grounded out from the beginning. And it's been fantastic how he's evolved to have such a fresh take on how to motivate the creative audience. And it's certainly inspired by some of the stuff that we've been all learning in Silicon Valley about supporting creative work. Right. So was it like did you

spot like, I think a lot of people Hollywood are like they're so impressed by Ted. And then he doesn't have the classic background where the great studio executives come from. And so did you like how, when did you know that he was going to be the guy who could really do what he has ended up doing? You know, Hollywood is also filled with the stories of the mailroom people, start in the mailroom, become the... Usually at one of the big agencies. Yeah, that's right. And because they have a sense of general humanity and they don't grow up in the elites. And I think Ted's always had that connection to, you know, super broad range of people.

And so it's not that unusual that story of the common man who has an incredible taste. But it's very few people do it. And I would say Ted's grown in confidence as... he's done more and more of it. He would probably the first say in 2010, say, before we started that, of, you know, let's see how it goes. Okay, great. So let me ask you the same question, the when did you

know it was going to work, question. Like, when did you, and maybe it's the same answer, which is you still don't know, but when did you know, like, was it House of Card specifically? Was it, like, Premier Night of House of Card? Was it the first week of House of Cards? Yeah, the first weekend, well, it was all the press leading up to House of Cards, and then the first weekend, and then there was

the White House Correspondent center that year, spoofed it. We had clearly hit a that we thought, wow, if we can do more of this, and then when we did Orange is the New Black, about three months later, then it wasn't a one-shot lucky thing. It was the pair of those, the proof that they would be more. And then whether it's Narcos or The Crown last week, there's a whole series of these major shows,

or Daredevil, Jessica Jones, Luke Cage, finding these incredible franchises that we could co-develop with Marvel. Right. So I remember, let's talk about the sheer amount. He's had $5 billion this year of content acquisition. So let's talk about the sheer amount of content. So five years ago, Jeff Bucas, the CEO of Time Warner, said that competing with Netflix was like going to battle with the Armenian army.

No. Was it even the Armenian army? No, it was the Albanian army. Armenian army actually would have been scary, the Albanian army. Which was not intended, I believe, as a compliment from him. Variety or Hollywood reporter earlier this year, five years later ran the opposite story saying Netflix is obviously going to have a monopoly on all content production in Hollywood forever. And so you've gone from the Albanian army to the global, you know, to get the Godzilla of the

industry quite quickly in the view of the industry. An example that I remember sitting next to Jeff Kastenberg at a dinner a couple years ago. And he was just in Jeff Kastenberg, ran Disney production for a long time in DreamWorks and has lots of experience. And he was just, he was literally like mind boggled at how much content you guys were buying even then, two years ago. And I think he told me the story of you guys greenlit 200 hours of children's programming in one shot 400 and half-hour episodes. You guys who needed the Marvel shows, you greenlit five miniseries at the same time. And so at least I think in Hollywood, they're all looking at Netflix now saying, oh my God, ambitions appear to be limited. So the question is like, now that you have cracked

the code for Netflix on creating original content and shown the companies from the valley, maybe, you know, certainly Netflix, maybe others can do this. How much content can Netflix make? Like how far can you push this? You know, we'll have to find out year by year. about $8 billion in revenue this year, and we think of it as the customers, all of you, are giving us your money, and our job is to turn that into joy. What we have to do is create amazing content,

stream it perfectly all over the world to you, and if we do that, you'll give us more of your money, and then we have to turn that into joy. And so for every incremental billion dollars that you all give us, then it's our responsibility to do the best shows that we can that convert that into the most joy, and we measure that with viewing and a few other metrics as possible. If you look at the total global ecosystem, we're still sub-5% of all content being made around the world.

So, you know, pretty tiny. We're 87 million members, which compared to Facebook's, you know, 1.76 billion is pretty tiny or to YouTube's billion. So there's a, you know, we're well behind Internet-scale companies, so a long way to grow on that front. And what's happening is as smart TVs are selling, and most people watch most content on TVs, then that's opening up tremendous new markets. So that's a next 10-year story, is more and more smart TVs playing not only Netflix, but playing YouTube and BBC and many other networks. So it is shifting to where the risks of us getting squashed or less,

and the risks of our competitors, partners, and suppliers getting scared as increasing. And it's up to us to play that maturely where, you know, we're not filled with our own sense of success. And instead, we're, you know, just out trying to do the best shows we can. But we're pretty convinced if we can stay focused on just the greatest shows, the greatest movies over the next couple of years, then, you know, we'll have great progress. And we'll see how it shakes out. Right. So another kind of surprise that people had, I think, at least when they watched Netflix as a consumer from the industry,

the surprise I had is just like, okay, Lily Hammer, like, I'm not sure people knew, probably an experiment. And then House of Cards and Orange is a New Black, as you say, came out back to back. And that kind of branded Netflix out of the gate is kind of edgy, kind of transgressive content, right, or different kinds, this very dark view of the political future, this very, you know, dark view of a women's prison or whatever. And so I think the view was, okay, now Netflix is going to be like, you know, dark, edgy, you know, millennial, you know, kind of, kind of stuff, like Premiere Premium Content. And then you guys started to do,

You did Fuller House, which is the sequel to Full House, which does not fit in the genre I just described. I would watch it if it did, but it doesn't. I want the dark, dystopian version of Full House if you're taking requests. You did a big movie deal with Adam Sandler, which is a very completely different genre, and it appears, and you probably saw it from the real, like, it appears now that you've hopscashed across many genres. And so I was curious, like, is there a Netflix brand of content? Is there a Netflix targeted viewer, or is it truly, is it unlimited diversity or something in the middle? Like, how far can you stretch the genres? You know, it's often called the era of mass customization.

And when you use the service, hopefully Fuller House does not get promoted to you. And it's all the dark dystopian things that you love. And so you think Netflix gets me, and that's the emotion we're looking for. But yeah, the content's incredibly broad. And when you look on a global basis, it's wildly broad. We're getting all those Japanese films and British shows. So, you know, what we want to really do is connect people and not treat them as, you know, that's someone who's by these demographics or that location,

but treat them based upon their viewing. What's the kind of content that you want to relax with and make you happy? And so it's very much focused on, you know, using personalizations so that you can have that breadth. So if you think of the old world linear TV, there's all these different channels in the grid. And then if you're going to differentiate from broadcast cable, which is pretty generic, then you have to have an attitude like Hallmark, and there's a certain type of show, Lifetime, FX, you know, HBO, but you had to carve out an identity. But on the Internet, because of personalization, we don't need to be associated with just one type of content.

And so that's the great enabler. A great example of a super smart guy that all of you would like is Jeff Bucas, who runs Time Warner, who's, you know, Stanford MBA, he's been in the business, ran HBO for 20 years, you know, a very thoughtful guy, and yet he missed the Netflix thing. And what happens to people is they associate you as you are, not as what you can become if the technology matures. Okay? And so he looked at Netflix in 2002 and would say things like, the internet can't do video at scale.

And it was like, okay, now really that's true, but broadly that's not true because that's going to change. And so, and he was frustrated that investors, which are pretty good at seeing these long-term trends, kept hitting on him of, what are you going to do about Netflix? What are you going to do about Netflix? And he would say, come on, it barely runs. And that's what in frustration made him be incredibly dismissive.

So that comment that he made will define one part of his career, like Steve Bomber's iPhone, you know, commercial or hit, which, you know, now that I know him well as a person, you know, he's actually a great and super thoughtful guy. But sometimes, and this can happen to any of you, you get trapped into a certain paradigm, you're frustrated about investors always asking you about threat acts, and then you say something dumb, the counterpositions. This is, the original one was 45 years ago, which was Ken Olson who ran digital equipment, said Unix's snake oil. And once he said that, that was. was the end of the company.

Okay, because he also said there's no reason for anybody to have a PC in their home. Yeah. So, you know, he, and in his time, he was an amazing and thoughtful leader. So they built one of the best digital equipment was one of the best companies of the 60s and 70s. Well, Thomas Watson, the founder of IBM, Thomas Watson Sr. said in the late 40s, there's only a world market for a total of five computers. Yeah. So the lack of imagination amongst us leaders can be very high.

And it's easy to look at those guys and say, what idiots? But in fact, they are us, you know. And so it's very hard to, people say things like only the paranoid survive. That was Andy Groves' quote. And the problem with that is it encodes a truth in a way, but it oversimplifies because the paranoid are delusional. They see crazy things all the time. Okay.

And business isn't that easy. You don't get to just imagine everything is going to crush you or you could totally distract it on the wrong threats. And really, to be great at business, it's like being great at chess, and you have to anticipate which series of things, seven, eight moves down are likely to happen. And by the time in chess you go seven or eight moves,

the tree of possibilities, you know, is at the limits of human understanding. And so you have to prune the branches. That's probably not going to happen. So I'm not going to explore that. And if you prune wrong, then you get check-mated. Okay? And that's the same thing in business.

And so we need more sophisticated metaphors than only the paranoid survive to anticipate okay, what are the paths and all the judgment that it takes of which competitive past do you explore most? Right, right, right. Okay, so let's talk about industry structure for a little bit, and we'll get to a couple other fun topics. So other than the rise of Netflix in the last five years, probably the most important structural change in the entertainment, internet, telco world that we all live in, was the combination of Comcast and NBC Universal, which is kind of a, you know, once upon a time the movie studios owned all the theater chains.

then they got disaggregated in the 50s due to antitrust, and then that kind of separated content distribution from ownership for things like film and TV for a long time. And then it seems like Comcast NBCU is kind of putting that back together again. You own the pipes, you create the content, and you have kind of a closed ecosystem. AT&T, of course, now famously has bought Direct TV, which puts them in the content business directly,

makes them a huge customer and increasingly direct producer of content. AT&T now trying to buy Time Warner. Is this a trend? When you play your chess game in your head, do you look out 10 years and say each of the big telcos is going to partner up with a big media company like this? And if so, does that mean that Netflix needs to buy a telco? So I think you're misunderstanding what NBCU and Comcast is about. So Comcast serves about 20% of U.S. households, about 20 million households.

And then NBCU is a global content producer. Okay. And so the amount of interlock, they can't take the NBC content exclusive to boost there. So it's not really much of a vertical integration. So you might say, well, why are you? are they even bothering? So it's a tax law thing. So if Comcast is very profitable, if you return all that money to your shareholders, it gets taxed. So the shareholders would like you to invest it smartly if you can, if you're trusted to invest it, rather than return it to them and keep it tax-shielded.

And so by buying a good related business and running it well, but very independently, then they create a lot of shareholder value in that. But they haven't taken the NBCU networks or content and tried to make it exclusive, you know, to that. So, again, it's not much of a vertical integration the way you all might think about it. And it's very similar with Verizon. Verizon has a ton of cash flow. They don't want to, because of the tax leakage, return it. So the question is, can they buy high-quality assets at a reasonable price?

And Time Warner makes a lot of money. It'll continue to make a lot of money for a long time. Same reason they bought DirecTV. And so they're not trying to corner that market. So let me challenge that last part, which is 1840. TNT has now said publicly that a big reason why they're buying both DirecTV and Time Warner is because they want to launch a Netflix a Netflix competitor, a full Internet streaming service that won't be attached just to the DirecTV satellites or to the AT&T telecom system, but will be generally available like Netflix. So you don't think that they want...

AT&T is only in the U.S. for consumers. Sure. Okay. So it's in 20% of the global market. And so what's the service they're going to do? I mean, how does that work? And Time Warner is a global service. So you might be seeing a little bit of window dressing for investors as opposed to like the fundamental.

rationale. So you know, to the extent that you were able to work with Time Warner or NBCU before those mergers, you think you'd be able to continue to do the same things after those mergers? I think so. I mean, evidence of that is, you know, we had a big battle with Comcast about them buying Time Warner and we were afraid of them cornering the residential broadband market in the U.S. and wanted certain conditions, which they were unwilling to provide. So it was this big battle. And during the intensity of that battle, they never brought in the NBCU. So we were buying content from NBCU, and they treated us completely neutrally and appropriately. And you get big enough for these different divisions, and you end up having to do that, or you get a lot of government

problems. And they ran it very thoughtfully and maturely. And AT&T is the same thing, which is you spend all that money for Time Warner, which monetizes the content globally, then, you know, you want to monetize that globally. And yes, they own a lot of mobile pipes in the U.S. and kind of 10% on residential, but all in the U.S. So it's, I don't think, other than we want to be treated the same as HBO's bits, in terms of zero rating and net neutrality, which is a relatively minor condition. I don't see a big problem with that. Okay, got it.

And then, so as I said. So do we need to buy a telco? No, because we're not trying to, you know, we work with over 500 ISPs around the world. Right. Okay. So just like Facebook or Google or anyone or an internet company, The last thing, I mean, you know, how well is Google Fiber worked out for Google? You know, it's like not so well.

It's hard stuff, and it's much better to just add incredible value as an application layer. Right, right, got it. Now that, with respect to Silicon Valley, so now that Netflix has proven, Netflix's instance of one, previously there were zero, now there's instance of one, of there can be a scaled Silicon Valley technology, first-class technology company run by a first-class technology team that can actually go buy and create content at scale. So now that the, you know, what now looks like a myth of the past that that was, you know, not possible. So Pixar, EA.

Well, okay. So it's a broader universe than you're thinking. Okay. So, you know, obviously Pixar, you all know. But EA in the gaming market has been tremendously successful, you know, based in Silicon Valley. And yeah, there's some tech in it. It's fundamentally a creative enterprise. So I think of it as when you need to develop a new muscle as a corporation, if it's essential that you do it.

and you kind of allocate, say, a third of your resources to it. You can master a new skill. It's not impossible. What's impossible is to dabble in it, okay? For a non-tech company do a little bit of tech on the side, that will never work out. But if they must get good at that area and their good management team, and they put, say, a third of the company to it, they can figure it out, including on the creative barrier. And so that's why I think it's more permeable and it's less magic, you know, in some, you know, in some, in some other way. But, you know, definitely the stresses, and EA faces as Pixar did, between

the tech people and the content people, is our material. But again, if you think about Apple, what they really did with the iPod is combined fashion and technology. And because they successfully sold it as fashion, they made, you know, they made us all get them. And none of the fashion houses could do the tech, and none of the other tech companies could do the fashion. And so for many, many years, they owned that space. And you know, What we're trying to do is combine personalization, on-demand content, smart TVs, all these very geeky things with this incredible content. And if we can combine the two of them better, that protects us against HBO, which is very good of content, but not so good a tech company that's trying to move into content. Right.

So then let me ask directly then. So in the case of an Apple, which I think is just now really starting to put his foot in the water on this stuff, Google, which seems like it's exploring increasingly original content. And then obviously Amazon has gone in. I think it's dove into the water and is now making quite a bit of actually and quite very good programming, man on the high castle and other shows like that. How do you handicap the other major Silicon Valley companies? Like we're sitting here in five or ten years, will it be an increasingly routine thing for scale tech companies to be doing this? Or do you think it will still be a relatively idiosyncratic thing that only a few companies, you know, a small handful of companies will be good at? You know, I think if for the Silicon Valley companies, so Google Apple, if they want to spend a third of their management research,

resources in this area, then they could probably get in and be big at it. But that's a big chunk, and they're oriented around other things. In Amazon's case, I would say they've exceeded the amount of investment that I would have thought they'd put in. They spent a tremendous amount of money in the area on some of the shows, as you said, are working out. But I would imagine that from a focus standpoint, it's just not at the core of what they do. The core of Amazon retail and AWS are operational excellence and margin efficiency. And entertainment is a very different thing. But I say that, and then I look at Jeff Bezos,

and I think not only is he running one of the most amazing companies in the world, but then he's also doing Blue Origin and also doing the Washington Post. Right, right. And so I feel like we're competing with, you know, an unusual person. And so the normal limits of, you know, normally you could not combine all the competencies that they're trying to do in Amazon and have that work with entertainment, but because Jeff's there, it's kind of scary. So, you know, we'll see.

But again, even if they succeed wildly, you're going to watch some of their shows and some of our shows. So, you know, each show has its own constituency. And so it's not, you know, we compete, again, as much against video gaming and the NFL as we do against Amazon shows. Yeah.

So the most among the young folks at our firm, the number one question everybody had was they want me to ask you about Stranger Things, which is the cult hit of the last year. For those people who haven't heard of it, It's a genre piece. It's sort of a loving homage to, like, the Steven Spielberg movies of the 80s. So it's kind of coming of age in the early 80s, but with, like, sci-fi kind of, you know, horror kind of elements to it.

Supernatural. Stephen King Crossing. Stephen King Crosses E.T. kind of thing. Very, very fun. Very, very great, just fantastic show. Amazing child actors. You know, great cast. And I think a very big success for Netflix.

And so I read an interview, Rolling Stone interviewed the Duffer Brothers, who are the Artur's who created the show. And they, of course, told the classic story that a lot of the entrepreneurs here will, I think, probably sympathize with, which is, you know, they came up with this idea. They had done a few things in the industry, but not a lot. And then they shopped their idea to, you know, the studios and the networks. And they said they got passed on 15 times, 15 knows. And then Netflix said yes. And so take us through, like, if you want, like, with that as a specific example, like, how do you think about that process? What makes you bet on that property at that time with people like that?

Well, I think one of the things that makes Silicon Valley so healthy is that, that there are so many venture firms to go to, and that they're constantly competing for the entrepreneur's attention. And I think it's a similar thing about television networks, that there's lots of places to go to for successful creatives. And, you know, our main reaction was, why did you go to 15 before coming here? That's awesome.

When we saw it, to be fair, and when many other people saw, is a little different than it is today. But what we saw is the potential, just as you would back an idea. You know, the initial idea that the entrepreneur had is different, than how it actually ended up. There's a lot of that in the creative process.

So it's a pretty similar process, except that the kind of minimum going in, you know, there's no CA funds and all that. You know, you're in for the whole thing at, you know, $30 million to $100 million. So the size bets that you have to make on these are larger. But otherwise, it's a pretty similar structure in many ways with the entrepreneurs coming. And what's great is that our guys had a fresh take on, you know,

we didn't, the lore was you couldn't combine kids and scary stuff and this wasn't going to work. And what we saw is the potential we turned out to be right. But there'll be, you know, other things that we probably will back in the future that don't work. And so that's okay, obviously, just as it is, you know, for you guys. Yeah. And then a constant kind of question of value, of course, is like how much experienced entrepreneurs need, you know, working other places getting trained before they can start their own companies. And there's, you know, some stories that, you know, kids who just start immediately and launch a company,

other stories of people who work in industry for 20 years. start a company. So Stranger Things is an interesting case where the guys, the young guys, two true brothers. And my understanding, they had done a few, like they did a few episodes of one of the Fox shows, Wayward Pines. Like, they were like directors, but they had not actually done their own project at any level of scale. Like, this is the first big thing they did on their own. And what, like, what made you think that they, or what made your folks or maybe Ted think that they, these guys would be able to do it and the other, you know, 100 presumably that you turned down in the same month, you know, weren't. You know, I, I, I,

think it's largely like your venture capital vetting process where it's a set of subtle factors of who does it appeal can they evolve are they going to listen you know to the feedback do they have the creative vision and then it's a gut call and the duffer brothers were very compelling in the pitch and so i i think if you set in on those pitch meetings you would be like oh my god is it just like us so with probably the big difference is you know in the best case these franchises go on four five six seven seasons, you're not building as long a franchise. So if all of your companies got acquired, it would be kind of like that. That is, we're building something that that's going to get plugged in somewhere else. Right, got it. And then let's talk about, so creative control. So one of the

things they said in the interview is they said one of the pieces of feedback they got from the other studios that they pitched before they were smart enough to come in and pitch Netflix was, basically they would get, in Hollywood, in the valley, we have this concept of board meetings where we come in and tell the founders what to do, even though we don't know. In Hollywood, they call this notes. And so it's famously written up as notes. And it's literally, you know, it's like the Hollywood executive sending, you know, the 30 ideas on how to change. And in the case of the creator's view, you know, ruin the idea. And so the Duffer brothers have this classic story of they got all these notes back during the pitch process from other studios. And the quote I

have is, you either got to make it into a kids show, right, which it very much is not. It sort of is, but it's really not. Or make it about the detective character investigating paranormal activity around town, right? Make it into like a monster of the weak, ex-liles kind of And, of course, both of those were wildly off vision from what these guys wanted to do. So the question is, like, at least Netflix, the reputation is you guys give it on the usual level of creative control to the creators relative to the studios? Do you think that's true? Well, look, imagine Silicon Valley if the original six venture firms from the 1950s, 60s were the only venture firms around because of some other constraint. And so that's what it's like in Hollywood.

There's the original six, and they've got their networks, and if that's who you pitch. And so it gets, there's a lot of dysfunction that comes out of that, which is there's not enough competition. They all move between each other. It doesn't really change very much. No one's trying to innovate much. And so if you can try to imagine Seller-Cablan value with just the old venture firms, and that was the only places to go, that's how Hollywood is.

And so if you think about you guys and the modern venture firms differentiating from the prior generation in terms of being founder-friendly. was the same thing for us with creative freedom. Right. You're looking for a differentiator because the existing system has misunderstood something, and you get to encode and hopefully be branded around some truth that then really helps you differentiate. But again, it's much, you would find it a much softer target there than in the venture capital side. Because if you didn't own cable networks, you couldn't, you didn't matter, you couldn't break into the business. And so there was a significant constraint, which gave them huge margins.

So cable networks have been running at 50% gross margins. And, you know, like it is unheard of in U.S. business, right? You have to be up at, you know, Windows monopoly levels to get to there. Right, right, got it. Okay, good. So I want to ask you the question of the question I'm sure you always get asked, which is sort of the future of TV in 10 years. But given that we just had an election,

I want to ask you the sort of the broader question on kind of intersections of politics and media. And this is not a political question. This is a media question. Donald Trump, one of the things he said was basically television commercials, television commercials for political campaigns don't matter anymore. They're not relevant. That's not how the message gets across. And he's an absolutist on this. He says the message, it's entirely social media,

so he takes sort of one extreme view. Obviously, the counter argument would be that television is the time-honored way of candidates putting messages out, and that's still where most of the money goes. How would you advise him to think about media and about how they should get a message out? This is a coded question, because Mark's going to run, and he wants my advice. And I would say, go back on Twitter, be your icon. monoclastic selves. And people are looking for mavericks, Mark.

And I will vote for you, baby. Mayor Palo Alto, governor, whatever it is. We need people like you in office. Well, it worked for Mr. Trams. Yeah, we stopped commercially. We spent a couple hundred million on advertising on the Netflix service, and we stopped advertising on linear TV a couple of years ago,

and all of our advertising is online because we want to target the show to the person. and so that's been very effective for us. So I think that definitely you're going to see a lot of shrinkage in linear TV advertising around the world. And in general, linear TV has been amazing. We've had it for 50 years. But it's like the landline phone. That was an amazing invention too.

And now it's been replaced with mobile phones over 30 years. And linear TV, 10, 20 years from now will disappear. It will be once in a while you'll see it in a hotel where you see a fixed-line phone. But other than that, you know, you're not going to see it. everyone around the world will be doing internet video as well as internet everything else good good thank you reid hastings everybody thank you reid