Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Reed Hastings, Patrick O'Shaughnessy
[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. [00:00:00] S0: If you think about the portfolio of content, what else would surprise people about the conversations happening inside the business, especially in the early days of developing that portfolio, the considerations that matter to you as you expanded it? I mean, now it's so many things, but in the early days, you know, you're obviously making choices. It's House of Cards, it's not something else, and there's trade-offs. What would surprise people about the conversations that led to the portfolio that you ultimately chose?
· Reed Hastings
[00:00:00] S1: I mean, everything for us was around reinforcing the brand, and trying to figure out what should the brand be. So the cable networks, by necessity, were narrow brands because they got one cable slot. And so FX and Hallmark were both interesting, doing different types of content, but the handle on the brand gave you the type of content, which was inherently pretty niche because it had one network slot. We were doing something that had all the network slots. And so then we spent a lot of time thinking about how much of the programming do we want to be Hallmark — soft, easy, romantic stories, feel good; versus FX, and be sort of cutting edge and violent and dark; versus Comedy Central. Our main issue relative to the industry was that we had this incredible breadth of content to choose from. And, on any new film or series, unless it's completely derivative, there's just so many variables compared to other things. So it ends up, you can do asset allocation, which is how much in comedy, how much in drama. But in terms of the stock picking, it ended up being intuition and people's judgment. And then we promoted those people with great judgment, who got this right again and again and had what we called a great taste. But they had more than taste, they had taste in judgment about, you know, would the people deliver? Would this come together in all kinds of ways? So it became just people picking. And so then it's trying to figure out how much money to put in each area. And then the people in those areas would figure out how to best spend it.
· Patrick O'Shaughnessy
[00:00:00] S0: The other side of the equation of course is, the beauty of the business model is fixed costs for a piece of content and then a growing subscriber base across which to spread those costs. But that requires that you grow the subscriber base. How did those two interrelate? Like, what did you learn about what sorts of fixed spend on content would create great and reliable and high subscriber growth?
· Reed Hastings, Patrick O'Shaughnessy
[00:00:00] S1: What I loved about Microsoft and Facebook's business is they at that point basically had one big product or, you know, maybe two highly related ones. And then it was grow those products to be, you know, $50 billion in revenue on a product. When I started Netflix, I was like, well, thankfully, we can do this as, you know, one really big product, because entertainment is an extremely large market. Basically, every human on the planet watches television to varying degrees, but it's a deeply human thing to watch stories. And, so then the question is, okay, what percent of that could we capture? Even today, Netflix is about 10% of U.S. television. So we've got a long way to go. And internationally, it's less than that, generally. So plenty of, in terms of how do we think about subscriber growth? We knew that if we could produce better television, make it lower cost and more enjoyable being on demand, that there would be a huge market for it. So it was kind of constrained on, essentially product quality, what kind of shows do we have. Now, the streaming is kind of flawless and not differentiated between competitors. But for a decade, we did it much better than our peers. [00:00:00] S0: That other 90%, is that defined as just traditional television, or does that include like, YouTube watched on…