Invest Like the Best with Patrick O'Shaughnessy
· 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…
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: That other 90%, is that defined as just traditional television, or does that include like, YouTube watched on… [00:00:00] S1: No, YouTube is about 12%. It includes everything; sports, video gaming, it's uses of the television screen. I mean, we compete for time on mobile phones too, but we're very small there. It's not a big use case. And television, we're a big use case, but still, really, it's under 10%. [00:00:00] S0: If you think about that percentage as an important thing for Netflix the business, what are the competitive frontiers or fields on which you feel like you're competing against something like YouTube? It's more easy to imagine versus cable or network shows or something like this, but versus something like YouTube, that's sort of a pure UGC platform. Do you think about it that way, like we're competing against them and therefore we want to do certain things to win?
· Reed Hastings, Patrick O'Shaughnessy
[00:00:00] S1: Well, they're growing and we're growing, and traditional linear is shrinking. So you're right that mostly we both compete with linear TV, but we do worry about YouTube because it's sort of a substitution threat. Does it get better and better with AI creators? And it just becomes more and more of people's time. And that's the user generated world. And it's not really user generated. It's on spec. That is, there are some very professional people who make content for YouTube, but they don't get paid on it in advance. They put it up and they see what kind of ad revenues they get. So in our case, you know, we pre-fund the programs, which gives them a bigger budget. They don't have to do it on spec. And that's really the biggest difference in the business model. But it's ultimately, do we produce content like "The Perfect Neighbors" documentary that just came out, won all these awards, and it's been the number one documentary this last month. You know, clever, fresh perspective content like that, or K-Pop Demon Hunters, which was our hit this summer. So, you know, it's ability to create those hits. [00:00:00] S0: What is that magic? Like, what is shared amongst the people like Ted and others, that have been able to reliably and consistently be a part of creating those big hits over time?
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: What is that magic? Like, what is shared amongst the people like Ted and others, that have been able to reliably and consistently be a part of creating those big hits over time? [00:00:00] S1: If only it were reliable and consistent. "K-Pop" was probably our 30th animated film. So it's not at all reliable and consistent. Now it is a lot more like that of art, and seeing the contrarian edge, and what's the story. I mean, imagine the pitch for K-Pop Demon Hunters, right? You know, so it doesn't fit a set of formulas. So in that way, it is a lot like venture. And also that a few of the companies will generate outsized returns. [00:00:00] S0: What do you think will be the most interesting impacts of AI on the Netflix business specifically? And this could mean, from the perspective of cost to create the content, it could mean for the service. Where does your mind go as you think about the raw capabilities of the technology?
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: What do you think will be the most interesting impacts of AI on the Netflix business specifically? And this could mean, from the perspective of cost to create the content, it could mean for the service. Where does your mind go as you think about the raw capabilities of the technology? [00:00:00] S1: Well, visual effects is one, where there's a lot of that workflow that can be automated. But in terms of like, recognizing a K-Pop Demon Hunters at a script stage or pitch stage — which is the biggest value creator, you know, which things do we back. That will be a far distant skill. So eventually, AI might eat up everything and be better than humans on everything. But, you know, in terms of the sequencing, so think of it — AI is not particularly incented, and the companies are not, to do long-form character development. But at some point, they may do that and focus on that. And then the AIs will be winning the Booker Prize and doing the best fiction of the world. And remember, we're only interested in, like, the top 0.0001% of the stories that get written. So simply writing a story, I mean, there's a million film students. We could just go to them. So the issue is trying to find one that's really unusual, extraordinary, and recognizing that one early. So I think AI will have had a lot of other effects before it hits us on that.
· Reed Hastings, Patrick O'Shaughnessy
[00:00:00] S1: Well, visual effects is one, where there's a lot of that workflow that can be automated. But in terms of like, recognizing a K-Pop Demon Hunters at a script stage or pitch stage — which is the biggest value creator, you know, which things do we back. That will be a far distant skill. So eventually, AI might eat up everything and be better than humans on everything. But, you know, in terms of the sequencing, so think of it — AI is not particularly incented, and the companies are not, to do long-form character development. But at some point, they may do that and focus on that. And then the AIs will be winning the Booker Prize and doing the best fiction of the world. And remember, we're only interested in, like, the top 0.0001% of the stories that get written. So simply writing a story, I mean, there's a million film students. We could just go to them. So the issue is trying to find one that's really unusual, extraordinary, and recognizing that one early. So I think AI will have had a lot of other effects before it hits us on that. [00:00:00] S0: Can you imagine kinds of innovation in the form factors or formats of shows? Like, it seems like we've got a couple, you know, there's the show, there's the documentary, there's the full-length feature movie. Can you imagine lots of different kinds of form factors starting to proliferate?