Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Patrick O'Shaughnessy, Reed Hastings
[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. [00:00:00] S1: Well, in most businesses, that's highly material, you know, building a lot more warehouses or something. But honestly, for Netflix, there's very little capital allocation. There's the total budget and per show. But the biggest shows we have, like Stranger Things, were less than 1% of viewing in a year. So we have extreme non-concentration and lots of different budgets and spread. There was very little CapEx of any long-term nature. Margins were pretty close to free cash flow. And then we just have always done buybacks with it rather than build it up. Probably the related tension was how profitable, how soon. It wasn't a strictly cash one, it was essentially a P&L margin question. And what we decided is let's have low margins relative to cable, which ran at like 35%-40% margins, so that we can invest a higher percentage of revenue into the content to have better content for our revenue level than we would otherwise. And that became the fundamental lens that we ran the business, and they still run it today.
· Reed Hastings, Patrick O'Shaughnessy
[00:00:00] S1: Well, in most businesses, that's highly material, you know, building a lot more warehouses or something. But honestly, for Netflix, there's very little capital allocation. There's the total budget and per show. But the biggest shows we have, like Stranger Things, were less than 1% of viewing in a year. So we have extreme non-concentration and lots of different budgets and spread. There was very little CapEx of any long-term nature. Margins were pretty close to free cash flow. And then we just have always done buybacks with it rather than build it up. Probably the related tension was how profitable, how soon. It wasn't a strictly cash one, it was essentially a P&L margin question. And what we decided is let's have low margins relative to cable, which ran at like 35%-40% margins, so that we can invest a higher percentage of revenue into the content to have better content for our revenue level than we would otherwise. And that became the fundamental lens that we ran the business, and they still run it today. [00:00:00] S0: How did you know when it was time to leave being full-time CEO? [00:00:00] S1: Because Greg and Ted were ready. I've been developing them for at least a decade. And I felt like coming out of COVID, they were ready. And then, unless I was going to be around for another decade and train a different set of people to take over, this was the time. So it was really driven from them. And since they took over, they've tripled the stock and, you know, they've done incredibly well.
· Reed Hastings, Patrick O'Shaughnessy
[00:00:00] S1: Because Greg and Ted were ready. I've been developing them for at least a decade. And I felt like coming out of COVID, they were ready. And then, unless I was going to be around for another decade and train a different set of people to take over, this was the time. So it was really driven from them. And since they took over, they've tripled the stock and, you know, they've done incredibly well. [00:00:00] S0: How does something like the set of ideas we've talked about so far translate to a totally different domain like what you're doing with Powder Mountain? Like, it seems it's such a wildly different project in almost every way that I can imagine. It's very, very different. How much directly translates and how much needs to be left behind, given the different nature of the project?
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: How does something like the set of ideas we've talked about so far translate to a totally different domain like what you're doing with Powder Mountain? Like, it seems it's such a wildly different project in almost every way that I can imagine. It's very, very different. How much directly translates and how much needs to be left behind, given the different nature of the project? [00:00:00] S1: So Powder Mountain is a ski mountain and real estate development that fell on hard times in Utah. So the original people running it ran out of money, so they never finished a lot of the project. We happen to have a house there. I love the place, its natural beauty is insane. It's 10,000 acres. And so after retiring from Netflix, I decided to take control of it and invest in it and do a turnaround. And so then it's rebuilding the staff, rebuilding the vision. And I would say 90 plus percent of talent density, no rules rules, the whole model has worked extremely well. The ability to move fast, hire incredible people, have them do things. It's everyone being very creative. And I would say the talent density model has been worth the pain, i.e., the turnover, and has created an amazing set of leaders throughout the company. [00:00:00] S0: How did you approach it from the beginning, in terms of the original vision and plan? So it's a distressed asset that you go in and buy. How do you determine the initial vision? And then, what were the first couple steps to execute against it?