Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: Disagreed. [00:00:00] S1: So, yeah, they were still mailing me the discs. And, so they didn't like it. Lots of cancellations, stock dropped by 75%. So it was a tough time. And, ultimately, it's the right thing to have separated DVD and streaming, but we did it too fast. The big analysis of it afterwards was lots of the executives thought that it was very problematic. But they kind of said to themselves, geez, Reed's made 18 decisions right before. So, you know, I'm probably wrong, and Reed's probably right. So they kind of suppressed their own significant doubts. And what we realized is, if they all knew of each other's doubts, they would have been much more likely to weigh in, to probably just have us do it slower. We instituted a much more collective information process on decisions going forward where everybody weighed in 10 to negative 10 on decisions, and it's all in a big shared document, so everyone sees what everyone else thinks. So that way, if we had had that decision process in place, then I think I may well have thought, well, these are all fantastic people, and they're all horrified at this idea. So I may be right, but let's at least go a little bit more gently to figure out that, and we wouldn't have had as deep a hole.
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: If you think about all the value creation that you've been a part of, or the leader responsible for, was most of that the result of a fairly non-consensus idea? Because that seems like a consensus process, or at least, if not decision by consensus, at least being aware of what the consensus is. And I'm curious about that tension there. It seems like very often, non-consensus is where the value comes from. Is that generally true in your personal history of decisions that you made that created most of the value? [00:00:00] S1: Well, I think you want to be super careful here, because this is the source of much value. You want to be totally independent in your thinking and not consensus oriented at all. But you want to know what other people are thinking. Otherwise, you're, you know, flying blind. So I think there's a high value on information, gathering opinions, but then not averaging them. We would never do that. We were very clear that the concept was the informed captain. So we wanted to make it like the captain of a ship. Okay, the captain of the ship makes the decisions, but it's good for them to collect a lot of information. And, so we were very strong on no committees; individuals make decisions, but we want them to be informed about that decision, and then it's up to them to make it. [00:00:00] S0: I'm so interested in the bucket of "seems like a bad idea, but turns out to be a good idea" because there's just less competition if it seems bad. What has been your process of coming up with good ideas in the first place?
· Reed Hastings
[00:00:00] S1: I fall in love with ideas easily. Like, I'll see some combination or insight. The original one was that DVD, which was just coming out when Netflix started, was very lightweight. And this was coming out of the AOL mailing CDs to everyone to install AOL on CD-ROM. So I was kind of, like, pretty familiar with mailing because I've gotten tons of these discs through the mail. DVD for movies was just replacing VHS, or just starting. So I kind of like, clicked on that. And then the classic computer networking thought experiment you do is, what's the bandwidth of a FedEx, of a tape through the mail? And it turns out you calculate it and it's like terabits per second at low cost to send a backup tape by FedEx. So you start thinking about networks a little bit differently. So all those combinations made me think of DVD by mail as an extremely efficient digital distribution network that someday the internet would be faster than, and cheaper than, and lower latency than. So I never thought I loved the mail business. I thought I loved a network business to deliver entertainment. So that was an example. And then the contrarian part of it was when we were fundraising in 1997, '98, '99, everyone was excited by internet delivery. And I'm like, but it's not even close. But it didn't matter, they were excited about it and so we were contrarian. And, we had a contrarian thesis that we could build a business with DVD and then transition it to streaming. And it's precisely because of that contrarian thesis that we didn't have much competition in that. Because it worked, we created great value.
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: When did streaming first enter your mind as, like, clearly, this is the place that we're going to have to ultimately go? [00:00:00] S1: Oh, that was from the beginning. That's why we named the company Netflix is "Internet Movies." [00:00:00] S0: And so it was really just about managing the transition, even from day one. Designing the efficient system for DVDs was just a notch on the timeline getting to streaming. [00:00:00] S1: Correct. It was one digital distribution network, and then eventually we would replace it with another. And we knew that would be a challenge, but we knew the best way to be successful at it was to get big on DVD. And so that became, for the first decade, that's all we worked on. [00:00:00] S0: One of the other really cool things about your background is that for a long time you were on the boards of, I think, Facebook and Microsoft. I think you're on the Anthropic board and the Bloomberg board. You've had this sort of, of course, Netflix itself is at the center of technology. You've had this very cool 360-view of probably the most interesting era of technology development ever. I'm curious, from those seats, what the technology landscape looks like to you today? Like, what are the key considerations, things that you have your attention on that seem the most important to you from those vantage points? [00:00:00] S1: First of all, because of exponential phenomena, it's always the coolest time ever to be in computer science. In the 1980s, I thought, oh my God, so much better than the 1960s. [00:00:00] S0: It'll always be true.
· Reed Hastings
[00:00:00] S1: It'll always be true. I would say, as a CEO at Netflix, I learned so much being on the boards of Microsoft and Facebook. They're quite different businesses, but they made very interesting trade-offs, the way they thought about things. I mean, both of them were very long-term oriented in what they thought; they were willing to lose money in certain new areas for a decade. What I loved about looking at Facebook's business was, ad-supported and everything they did that was on the core, like Instagram, worked incredibly well. And when they tried to do crypto, or when they tried to do other things that were not big ad-supported businesses, it didn't work well. And so that's an example of, companies get good at something, and then if you can add to the core mechanism, that's great, rather than go off to new fields all the time, that helps a lot. So we've always wanted to add content to the Netflix subscription to make it more and more useful, more and more enjoyable. But kind of keep it like one big model, as opposed to also do theatrical movies, or, you know, also do something else as a way to expand revenue. Trying to find simple, large models that, if they work, you can continue to expand and expand on the kind of core monetization engine that you've already got. Or, if you look at Microsoft's case, you know, it's building high-scale software. And, then I'm on the board of Bloomberg, which is owned by Mike Bloomberg. It's the trading stations of Wall Street and media around that. And he's been incredible at kind of this long-term orientation too. Having this intimate relationship with the customers, like becoming a trusted utility for the industry. That's been very powerful. Big moats for that business, that are really customer loyalty, that he's been serving multiple dimensions for a long time. And then Anthropic, I've only been on the board for a year, and it's a wild story because, you know, it's growing so fast.
· 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?