Invest Like the Best with Patrick O'Shaughnessy
· Reed Hastings, Patrick O'Shaughnessy
[00:00:00] S1: Well, it's always been a sort of medium barrier to entry, I would say, first with DVDs. And we had incredible sorting and shipping machines and postal integration. And I used to spend all this time on types of polycarbonate plastics that break and don't break. And we were impressing plants. And the biggest issue we had was that the DVD would get to you without cracking or shipping or being damaged, it was on time, the postal carriers didn't steal it. So there was like a huge amount of machinery to shipping a million red envelopes a day, consistently. FedEx style, right. And then certainly, streaming, the mechanics of getting the bits to people was challenging. We first launched in 2007. And for probably 15 years, the internet was underpowered and you had to do a lot of clever engineering things. But for the most part, there's 100 companies that stream now. Consumers can't particularly tell a difference between them. So I would say that's now just become part of the base systems, and commoditized. What's unique is still being able to do the AI recommendations, all the deep learning on — there's a thousand things on Netflix you would enjoy, which one would you enjoy most, at what time? That's still a big area of tech innovation. The gaming is — we're trying to push into different types of games and figure out gaming in addition to TV series and films. [00:00:00] S0: Why do gaming at all? Like, if you're so good at the core thing and there's room for scale, still — you're only 10%. Why bother with gaming?
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: Why do gaming at all? Like, if you're so good at the core thing and there's room for scale, still — you're only 10%. Why bother with gaming? [00:00:00] S1: We used to just be movies. And then we expanded to TV series, and we're really glad we did that. And then we expanded into unscripted content. You know, "Love is Blind." So we've always been expanding in new categories, and gaming is just another category of entertainment. And so we've got some cool stuff going on with TV where your phone is the remote control, which has higher latency, but it's easy for party-mode type games. And it's really fun on these kind of social interactions. [00:00:00] S0: How do you know when to keep betting on something and how long term to be behind something? Like, gaming is a great example. I'm sure there's examples of things you tried that didn't ultimately work that you stopped doing.
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: How do you know when to keep betting on something and how long term to be behind something? Like, gaming is a great example. I'm sure there's examples of things you tried that didn't ultimately work that you stopped doing. [00:00:00] S1: Sure. Well, let's do one of those. If you look at The New York Times, January 2006, there was the launch of Netflix Friends. So this was friend-to-friend sharing about films and what you were watching. Facebook was still just at Harvard. And then we worked for two or three years on that — could we get people sharing what DVDs were you picking? Could you give each other... we tried different permission schemes, then Facebook started doing that whole integration, you know, where they did photos and you could share via Facebook. So then we said, okay, that's the problem. You don't want to set up your own network. And so let's all share via Facebook. And then that didn't work any better. Then we tried one or two other variants, but it was probably eight solid years. And that's part of what got me on the Facebook board, which is trying to figure out more of this. How is social going to be? And ultimately, that probably got solved by TikTok. [00:00:00] S0: How do you think about TikTok? What are your impressions of it?
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: How do you think about TikTok? What are your impressions of it? [00:00:00] S1: It's like old cable used to be, and you'd change channels and you'd just be there, numb, changing channels, looking for something to watch. But really, it was the hit of the new thing constantly. So it's hitting that part of enjoyment. Very creative as a business and all of that, and very effective. But I would say, not a thing I want to spend a lot of time on. [00:00:00] S0: When you were CEO, I'm curious how you thought about generating and keeping business power, which leads to free cash flow and then allocation of free cash flow. Those seem to be, you know, especially once you've got product-market fit and you're growing and you're huge, those are really important things. How much would you sit down and think about, where does our power come from? Is it scale? Is it some other cornered resource or some set of different things and guide the decisions to get more power? How much was that like, specifically on your mind?
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: When you were CEO, I'm curious how you thought about generating and keeping business power, which leads to free cash flow and then allocation of free cash flow. Those seem to be, you know, especially once you've got product-market fit and you're growing and you're huge, those are really important things. How much would you sit down and think about, where does our power come from? Is it scale? Is it some other cornered resource or some set of different things and guide the decisions to get more power? How much was that like, specifically on your mind? [00:00:00] S1: Power is a way of saying above-market margins. So the theory is that we can all earn a marginal rate of maybe 6%. But to earn above that is because it's hard for competitors to do what you do. And then you can get an above-market margin. So we definitely spend time thinking about that. Which things should we license our content exclusively, non-exclusively? Our deals on televisions and those kinds of things. They would often want to tax us. So a typical television maker thinks, well Netflix, you're making a lot of money. So if I'm putting the app on the TV, I want 30% like Apple gets. So there would be battles over that. And then power is essentially, could they sell a TV without Netflix? Or could we, how many members would we lose if Sony televisions, for example, didn't have the Netflix app? So that's an example of how that worked out.
· Reed Hastings, Patrick O'Shaughnessy
[00:00:00] S1: Power is a way of saying above-market margins. So the theory is that we can all earn a marginal rate of maybe 6%. But to earn above that is because it's hard for competitors to do what you do. And then you can get an above-market margin. So we definitely spend time thinking about that. Which things should we license our content exclusively, non-exclusively? Our deals on televisions and those kinds of things. They would often want to tax us. So a typical television maker thinks, well Netflix, you're making a lot of money. So if I'm putting the app on the TV, I want 30% like Apple gets. So there would be battles over that. And then power is essentially, could they sell a TV without Netflix? Or could we, how many members would we lose if Sony televisions, for example, didn't have the Netflix app? So that's an example of how that worked out. [00:00:00] S0: Amazon and Bezos very famously were constantly reallocating capital back into the business to keep generating more customer benefit, which obviously, Netflix has done this well. How did you think, or would you think about the point in the company's lifecycle to do more harvesting, to pay dividends, to buy back shares, to do this sort of thing? And just I'm so curious how you thought through, like the capital allocator's toolkit of the things that you could do with the capital that you're generating.