Invest Like the Best with Patrick O'Shaughnessy
· 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?
· Reed Hastings
[00:00:00] S1: I never booked hours on my calendar to think about the culture. You end up just trying to make things better and then watching what's going well and what's not, and making observations. Here's an example. So from maybe 2004 on, we had open compensation. So basically, the top 100 or 500 people in the company could see all the comp throughout the company. And the rationale was then they could keep like similar people, in a similar vein, and there would be more trust around gender, around other dimensions that could be discriminatory, because the data was all out for everyone to see. That was all true, but it also created a lot of petty rivalries. "I make a huge amount of money, this other person makes a huge amount, plus $10,000 more." And so it got pretty distracting. And ultimately, we put it to a question of the VPs about 10 years later, 2016, '17, and they decided to take it away from themselves and from everybody else and do the traditional, you know, your direct reports' and their team's, but not the whole company. So I would say that was an experiment in human nature, which got resolved pretty decisively to be less mavericky, but it ended up working a little better. So, again, we would take an experimental view on things. And that's a good example, because then you can see like, we're not geniuses. We're just willing to question things and try them. So we did open comp for a number of years and then decided that its net costs were negative.
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: Another strategic question that always fascinated me about Netflix was how you determined how much to spend on originals and original content? [00:00:00] S1: As much as we possibly could. [00:00:00] S0: Say more about just the core calculus or thinking there. I'm sure there would be some directors that would accept an unlimited amount of your money to make something. [00:00:00] S1: There's how much on any one show. That's a different question. But in terms of the total budget, we would always try to shovel money into that on the hopes of creating the great next K-Pop Demon Hunters. In terms of any one show, then the question is, what's the likelihood, based on what we've seen, that this is going to be big? And it's also a competitive market. And the very first original series that we had that helped make our reputation was House of Cards. And we had to bid that away from HBO. So as Media Rights Capital was making it, they had bids both from HBO and us. And we were a DVD company, okay. So we had to overpay relative to HBO. And then they went with us. And we had to overpay by a bunch because, you know, it's a lot of risk. And then they came through and made a fantastic show. And then we were off to the races in original content.
· Reed Hastings, Patrick O'Shaughnessy
[00:00:00] S1: There's how much on any one show. That's a different question. But in terms of the total budget, we would always try to shovel money into that on the hopes of creating the great next K-Pop Demon Hunters. In terms of any one show, then the question is, what's the likelihood, based on what we've seen, that this is going to be big? And it's also a competitive market. And the very first original series that we had that helped make our reputation was House of Cards. And we had to bid that away from HBO. So as Media Rights Capital was making it, they had bids both from HBO and us. And we were a DVD company, okay. So we had to overpay relative to HBO. And then they went with us. And we had to overpay by a bunch because, you know, it's a lot of risk. And then they came through and made a fantastic show. And then we were off to the races in original content. [00:00:00] S0: And is the simple way to think about it, almost like one would think about a venture capital portfolio or something, that you want to make lots of bets. And you don't know exactly which one's going to be K-Pop Demon Hunters, but that there being a K-Pop Demon Hunters is the thing that matters, that you have some dominant, massive franchise. [00:00:00] S1: Very much so. But it's similar to venture capital if every A round were $100 million and there was just an A round. So it tends to be pretty much a single round to fund the construction. You do get sequels and other things you have option rights to, but that would be the big difference from venture.