Invest Like the Best with Patrick O'Shaughnessy
· Reed Hastings
[00:00:00] S1: I fall in love with ideas easily. Like, I'll see some combination or insight. The original one was that DVD, which was just coming out when Netflix started, was very lightweight. And this was coming out of the AOL mailing CDs to everyone to install AOL on CD-ROM. So I was kind of, like, pretty familiar with mailing because I've gotten tons of these discs through the mail. DVD for movies was just replacing VHS, or just starting. So I kind of like, clicked on that. And then the classic computer networking thought experiment you do is, what's the bandwidth of a FedEx, of a tape through the mail? And it turns out you calculate it and it's like terabits per second at low cost to send a backup tape by FedEx. So you start thinking about networks a little bit differently. So all those combinations made me think of DVD by mail as an extremely efficient digital distribution network that someday the internet would be faster than, and cheaper than, and lower latency than. So I never thought I loved the mail business. I thought I loved a network business to deliver entertainment. So that was an example. And then the contrarian part of it was when we were fundraising in 1997, '98, '99, everyone was excited by internet delivery. And I'm like, but it's not even close. But it didn't matter, they were excited about it and so we were contrarian. And, we had a contrarian thesis that we could build a business with DVD and then transition it to streaming. And it's precisely because of that contrarian thesis that we didn't have much competition in that. Because it worked, we created great value.
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: When did streaming first enter your mind as, like, clearly, this is the place that we're going to have to ultimately go? [00:00:00] S1: Oh, that was from the beginning. That's why we named the company Netflix is "Internet Movies." [00:00:00] S0: And so it was really just about managing the transition, even from day one. Designing the efficient system for DVDs was just a notch on the timeline getting to streaming. [00:00:00] S1: Correct. It was one digital distribution network, and then eventually we would replace it with another. And we knew that would be a challenge, but we knew the best way to be successful at it was to get big on DVD. And so that became, for the first decade, that's all we worked on. [00:00:00] S0: One of the other really cool things about your background is that for a long time you were on the boards of, I think, Facebook and Microsoft. I think you're on the Anthropic board and the Bloomberg board. You've had this sort of, of course, Netflix itself is at the center of technology. You've had this very cool 360-view of probably the most interesting era of technology development ever. I'm curious, from those seats, what the technology landscape looks like to you today? Like, what are the key considerations, things that you have your attention on that seem the most important to you from those vantage points? [00:00:00] S1: First of all, because of exponential phenomena, it's always the coolest time ever to be in computer science. In the 1980s, I thought, oh my God, so much better than the 1960s. [00:00:00] S0: It'll always be true.
· Reed Hastings
[00:00:00] S1: It'll always be true. I would say, as a CEO at Netflix, I learned so much being on the boards of Microsoft and Facebook. They're quite different businesses, but they made very interesting trade-offs, the way they thought about things. I mean, both of them were very long-term oriented in what they thought; they were willing to lose money in certain new areas for a decade. What I loved about looking at Facebook's business was, ad-supported and everything they did that was on the core, like Instagram, worked incredibly well. And when they tried to do crypto, or when they tried to do other things that were not big ad-supported businesses, it didn't work well. And so that's an example of, companies get good at something, and then if you can add to the core mechanism, that's great, rather than go off to new fields all the time, that helps a lot. So we've always wanted to add content to the Netflix subscription to make it more and more useful, more and more enjoyable. But kind of keep it like one big model, as opposed to also do theatrical movies, or, you know, also do something else as a way to expand revenue. Trying to find simple, large models that, if they work, you can continue to expand and expand on the kind of core monetization engine that you've already got. Or, if you look at Microsoft's case, you know, it's building high-scale software. And, then I'm on the board of Bloomberg, which is owned by Mike Bloomberg. It's the trading stations of Wall Street and media around that. And he's been incredible at kind of this long-term orientation too. Having this intimate relationship with the customers, like becoming a trusted utility for the industry. That's been very powerful. Big moats for that business, that are really customer loyalty, that he's been serving multiple dimensions for a long time. And then Anthropic, I've only been on the board for a year, and it's a wild story because, you know, it's growing so fast.
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: What did you learn from Mark? You mentioned a little bit about what you learned from Facebook, but what did you learn from him specifically? [00:00:00] S1: Super committed. Like, when you look at the metaverse and being convinced that there's going to be something beyond the phones, maybe that'll be a glasses format, and not wanting to be dependent on it, wanting to be really the invention of that layer, which is, you know, extraordinarily ambitious. I probably would have just been like the ad giant if I was doing that business and try to go after TikTok. But he wants to do bigger and broader things. For society, it's great because he does amazing amounts of innovation, funded with what would otherwise be the profits of the company. [00:00:00] S0: You've been on these great boards. You had a board yourself, of course. What advice would you give to people to either be a great board member or run a great board process themselves?
· Reed Hastings
[00:00:00] S1: So typically, board members want to add value because they're getting paid. It's a human nature thing. And the problem is, by the conflict rules, they don't really know the business. If you run an airline, you can't be on another airline's board. But you're doing that board one day a quarter, for the most part. And on one day a quarter, it is super hard to add value. And so what you see is a lot of directors who struggle to add value. And then management has to be super polite to them. Management can't tell them, you don't know what you're talking about, because they run the thing. So you see this dysfunctional thing where board members ask hard questions and management ducks and weaves, and it's not very functional. So I would say, first part is board members to realize, okay, I'm not here to add value. They can hire consultants who know the industry and are not conflicted, and that they pay for the advice. So, I shouldn't spend my time trying to give advice. So then what am I doing? I'm here as a board member as an insurance layer. If the company falls apart, I will step in and be part of replacing the CEO. And that's basically the entire job, which is replacing the CEO well. And to do that, and to have the confidence to do that, you have to learn the business. So you can't be asleep. You've got to really ask a lot of questions and learn what drives the profit streams. How does the business work? What are the issues with it? But again, you're not trying to solve those problems. You're trying to get a grasp of the business so that you can determine, you know, who might be the best person to run the firm. And if you get that right, as say Microsoft's shareholders or board did with Satya Nadella, then the business takes off. And all the advice in the world doesn't matter compared to that. If you're on a board, don't measure yourself by "did you give a suggestion". Measure yourself by did you get more and more prepared for the small chance that you will have to take big action. And, so it's a lot like a firefighter who drills and drills and drills and hopes that there's never a fire.
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: When selecting for people that would be that insurance layer for your own business, what did you select for? Because a lot of these boards are full of very fancy people like you that are great names to have on a website as a board of directors. That seems to be a selection criteria, versus like, this person is actually going to be good at this insurance layer thing. How did you select board members? [00:00:00] S1: Yeah, people who I believe will be wise in a crisis. We call it extreme duty of care. So duty of care is one of the responsibilities of a director. And we amp it up that they really have to know what's going on. We ask directors to come to management meetings so they can watch what's going on, watch the sausage being made. Again, not so they're adding value, but so they're highly informed. And so we look for people who are wise in crisis. And so a board interview process would be those kinds of things, tell me about different business crises that have happened. And in case that happens, that they would be wise. [00:00:00] S0: How much of your time when you were running the business full-time was systems structuring and thinking around the business, versus like, the marginal, you know, strategic initiative or something?