Netflix: Reed Hastings. “We’re Not a Family.” The Provocative Idea That Helped Build a Streaming Giant

30:52Yeah. Because they had to go through and remaster them one by one. And the best titles they wanted to save for when 50 million homes had a DVD player and then more people would buy it or rent it. Did anybody in 1997 or 1998 think this was a viable business that you knew? Very few, you know, but that was more tied to we weren't streaming. So the threat there was when are you going to deliver over the Internet? You know, Cosmo and other people were doing amazing things, overnight delivery or same day delivery. But that was food, right? Cosmo was doing food and snacks and stuff. That's right. But in their plans and in their conversations, they talked about being Blockbuster also, right?

31:41Uh-huh. So that was perceived to be an internet-based threat. And then the other is just downloading the movie was going to take over. Right. Okay. But that, I mean, we're still, you know, real audio and real video just starting. and streaming was still, I mean, people didn't have, some people had fast connections. Very few people did in 1999. I think - Streaming, that's true, but the model back then was downloading. Downloading it and then you watch it. People downloaded music. But it would still take forever. Like, you know, bit by bit would be going, floating through, you know. Sure, we were asking about, we're talking about barriers to people investing.

32:18So the biggest barrier for them was, you know, it seems like a temporary business. Right. and I wasn't sure that it was going to work. But I think it had the advantage of I wanted to use it, and so you hope there's other people like me because I was living an e-commerce life, buying a lot of things on Amazon. Now I could do movie rental online. So it was kind of a natural extension. I was pretty confident the business would exist, renting movies online, but I wasn't sure that we were going to win. When we come back in just a moment, a brief flirtation with Blockbuster and a merger that thankfully does not happen.

33:04Stay with us. I'm Guy Raz and you're listening to How I Built This.

33:27Hey, welcome back to How I Built This. I'm Guy Raz. So it's 1999 and Netflix has been in business for about two years. And since launch, Mark Randolph has been CEO. But that's about to change because Reid is starting to think he could do a better job. You decide to take over and run the company. Mark has talked about this, that you had approached him with a pitch deck to explain why. It's very matter of fact, and he described it in a very generous way, not like he was mad about it, but just very matter of fact way. A pitch deck explaining why he wasn't the right person to run the company, which I think is that radical candor.

34:14Tell me about that approach you took. You know, I don't remember how we talked about it. So whether it was a pitch deck or a memo or something, I would have done it in person, not just send them an email or text. But I may have written it out, you know, on some slides or on a memo or something. So for you, it's not personal. It's just a very – because a lot of people – and I've had some of the best-known founders in the world on this show. They still have a hard time demoting people or firing people or letting them go. It seems like you see it in a very different way, that it's not about feelings or emotions.

34:59It's just – it's really about facts and data, and that's it. Well, definitely that's true now. but I would say at pure software, I was very bad at letting people go. And I introduced a lot of my own emotions. It's natural for the manager to feel guilty or you like the people generally. And then letting them go, they're upset. You don't like hurting people. So I had gotten better, I think by the time of early Netflix, but I would say I'm much better now than I am then. So, you know, it's an evolution of something you get from practice. And in 1998, right, or 1999, when you really start, you know, running operation, how many employees are working in Netflix?

35:5330. 30, okay. And it was based in Santa Cruz or was it already in? It was in Scotts Valley where Mark lives, which is partway between Santa Cruz and Silicon Valley. I guess I'm trying to figure out, given your background and everything you had done up until that point, which had nothing to do with consumers or consumer products, this was going to be a brand, a consumer products business. What was attractive about that to you? What do you remember about thinking, this is the company, I'm going to drop everything and I'm going to run this thing? So I think you're phrasing the question like an MBA would, which is sort of what are the properties of the business that made you think you had a differential advantage and how did this come about?

36:39More like what's interesting about it to you. Well, I think fill in the picture, which is I realized in myself, oh, I'm a crossword puzzle solver. So I like an interesting challenge with a bunch of challenge and constraint, and then seeing if I can figure out the crossword puzzle. And Netflix was a big crossword puzzle in many ways for 25 years. So I think that's the underlying theme. It almost doesn't matter what the domain is. It's mostly, is it a puzzle to figure out? A hard problem to solve. Yeah. But that implies that it's like 20 little problems. It's not a hard problem like fusion. That's a hard problem.

37:32Yeah. But it's a hard problem with many different aspects of the puzzle. Okay. Right. And so the business model was going to be based on a monthly subscription, right? Like a fixed monthly fee. No. In the early days when Mark was running it, you pay four bucks for a rental and that was for five days. And then if you kept it longer, you paid another essentially a late fee. So you could return it by mail to make it convenient to avoid the late fee because you didn't have to go to the store. But you still had late fees. And just getting on this late fees, I mean, Blockbuster at this time, I read something like 15 or 20 percent of their revenue came from late fees.

38:24Like this was a huge part of their business model. Yeah, just think of it as an extended rental. I mean, you know, in other words, if you rent a car and then you extend it for three more days, you know, you can call that a late fee. But – and their marketing was poor, so it got named as a late fee like you're supposed to – that's, you know, like it's a moral issue. Yeah. And it should have been – if they had just gotten to be called a double rental or an extended rental. Instead of being punitive, right. Right. Yeah. Yeah. So in any case, so the initial Netflix model was a single rental. It was a$4 rental.

39:03And what we found is that there was less and less repeat business. So people did it for a little while, three, four, five rentals, and then didn't really come back. And then when I came in, I wanted to convert us to subscription and to this idea that when you returned a DVD, we automatically sent you the next one from your list. And so in September 23rd of 99, we launched the subscription service, 20 bucks a month for unlimited DVDs. Got it. And we had no idea what would the retention be. In other words, once you started it, how long would you stay with it? You know, we waited day by day to see who would cancel and you have to proactively cancel.

39:54Yeah. And then it was unbelievable, the elation, because the first two days came in, it was like 85 % retention. And we were like, oh my God, this is going to work. Did you have trouble raising money? Well, yes, but the internet bubble was expanding and expanding. In early 2000, we closed around with LVMH. With LVMH, the consumer luxury brand. Correct. So we closed that round of them investing$50 million. I don't remember the valuation, but it was a good valuation. And that was February of 2000. And then March of 2000 is when the bubble broke. And it was a shitstorm of everybody retrenching, no more investment for anybody.

40:49So by pure luck, we got that deal done. By pure luck for you and LVMH. So right before the dot-com bubble bursts, you get this funding. And you're not a public company, so you're not going through the same challenges. But it means that you know at that point you're not going to be able to raise more money for a while. Yeah. Mark and I had to think through, okay, how do we give ourselves the best chance of success? You know, how can we grow, get enough customers in that we become cash flow positive? And so that was the crucial thing is getting to cash flow positive. Do you remember what you, how much revenue you were doing in 2000 or 99?

41:38Like a few million? A few million. So when we went public two years later, we were at 50 million. Right. So I'm going to guess it was sort of$10 million of revenue and$10 or$20 million of losses, of cash losses. And were the losses in those early years mainly because of marketing costs or was it literally just the cost of – All of the above. So we had to pay to acquire customers and marketing. We had to pay to acquire DVDs. And then we had our fixed cost, which was all the people. And then we had the mailing cost. How much did it cost to package something? So, you know, we lost money on every shipment because we were inefficient at packaging.

42:27We knew we could fix that, but we had to, you know, do a lot of scale to fix that. But there's a story that I've heard and might be apocryphal. Maybe your memory is different, but something to the effect of in 2000, you guys tried to sell the business or to try to merge with Blockbuster to become Blockbuster's digital art. I don't exactly know, but tell me what is the story? Oh, we had been wanting to talk to them for a while. And roughly the idea was, did they want to bet on us to do the online? I see. Because if we could have become blockbuster.com, we'd grow a lot faster. So we talked to them and they were pretty gracious, but we were kind of naive about, you know, we wanted the blockbuster.com brand, right?

43:21Because if we had that brand, we wouldn't have to build our brand. And I think they looked at us as – We're a flyspeck. Curious, yeah. And I don't remember them actually making an offer. But I think we probably would have taken any offer. But it didn't result in any deal transaction. Probably all we did is make them watch us more. I mean, it's amazing to imagine that that could have happened. Like you were prepared for Netflix to become Blockbuster's digital arm in 2000. Like you would have been happy with that outcome. Yeah, no, exactly. We had not much confidence that we could grow, period, and then particularly grow against them.

44:11I mean, it sounds like it was a Hail Mary in a way. Like, OK, it's a dot-com bubble's burst. You're not going to get any new funding. you've got this 50 million in cash, but you're watching that run rate pretty closely. You can see where things are headed if you can't bring money in. And Blockbuster could be the savior. Yeah, we had a similar thing with Amazon, but I think it was earlier. I think that was like in 99. But in both cases, they, particularly Amazon, have 100 companies they could buy. And Blockbuster had like 14 ,000 stores in the U.S. I mean, I think that year alone, it made$800 million in just late fees.

44:52Right. We were the size of one store. Yeah. Also, they could have looked at you and said, we can do this ourselves. We don't need you. We can replicate your business and put you out of business. Yeah, I'm not sure their exact thought process, but I agree with you that it was naive of us to think that there was possibly a deal, but we were probably feeling pretty desperate. All right. So that doesn't happen. And you are surviving the dot-com crash because you're not a public company. And did you remember being really disciplined about conserving cash? I mean, you were losing money every month, but did it become top of mind?

45:29Well, we did a big layoff, you know, shortly after the crash. So, yes, we were conscious on that, you know, we had this amazing 50 million in from LVMH and then we were going to have to make that last. All right. So today when a startup goes public, they do a roadshow and people look for profitability and there are all kinds of things that happen. You took Netflix public in 2002. It was still an uncertain business. Did you take it public because that was the only way to raise money as far as you were concerned? I would say we took it public because that's what companies did. We didn't really question it that much.

46:16We took it public as soon as we possibly could. But in hindsight, I tell other entrepreneurs that don't be in a hurry to go public because it gives your competitors a lot of information. Yeah. And that was certainly the moment I think that Blockbuster said, oh, that's bigger and more profitable than we thought. And we should go start competing. That was 2002. And in 2004, they launched against us. So, you know, in perfect hindsight, I wish we had stayed private for another two or three years. Yeah. I mean, that year you went public based on my reading. Walmart also announced that they were going to do a subscription DVD service.

47:01In November of that year, your stock was down to like two and a half dollars,$2.50. sense. The big storyline is we went public. It was fine for a quarter. Walmart announced Walmart.com that they were going to do DVD rental, which made no real sense. And then Blockbuster had bought a tiny little DVD rental company. And so they were clearly interested. And so those two facts created a lot of fear about our revenue. But our revenue never dipped in that timeframe. It was only once Blockbuster did the big launch in 2004, 2005, that it was a real competitive battle. Okay. So now you've got the biggest brand in the rental business getting into this space.

47:50You have a leg up. You guys have been doing this for six years. Blockbuster was the main one we were worried about because for them, it was kill us or die. and we knew the biggest companies like Walmart were not going to focus on this tiny little business. They had a big competition with Amazon. So they never worried us and we in fact played up David versus Goliath relative to Walmart to get us more attention. And I remember New York Times articles in 2002 about what's with Netflix and it's got the biggest company in the world, Walmart, You know, the biggest rental, you know, Blockbuster coming after it.

48:32Amazon's lurking. But it was the little engine that could. And so that got us kind of more press. And with Amazon, we're always kind of worried because they have such high confidence. But it just was too niche a business for them. What's remarkable is that Blockbuster launches this service in 2005, right, to compete with Netflix. and in 10 years, Blockbuster is going to be dead, right? And did anybody know that? Oh, we knew it. But, you know, they were a very good store operator. They had rolled up the whole business. They'd beaten everybody else. They were highly skilled at running stores. And I think that selective intelligence, you know, can blind you to other models.

49:22Yeah. You know, you take away 20 % of the revenue from every store, and that takes away the profit, right? And our customer base was highly distributed, you know, across the US. So we knew that if we got to a certain size, that it was like, you know, a billion, it was very painful for the store-based model. And we always anticipated the store-based model would collapse if online got large enough. And then it was who's online, ours or blockbusters. But the inevitability of stores going away was pretty clear. So as Netflix hits profitability and is growing and is really dominating by 2005, is dominating the sort of the mail rental market, right?

50:08And everybody remembers those red envelopes. Not everybody. Everybody is a certain age. I certainly do binge watching The Wire. I remember those red envelopes and I just sent them back and get them more and send them back. Tell me about your sort of involvement in the branding, right? Like the red envelope and the sort of the just building the brand of Netflix, right? Because that was also part of its success. Yes. So Mark, bless his heart, put his ego aside when I came in. And then he was head of marketing and merchandising and up until the IPO. And just before then, we got in a head of marketing, Leslie Kilgore, who was out of Amazon, but before that was Procter & Gamble and, you know, central casting for marketing.

51:07Yeah. And she really drove the red envelope and the iconic branding that we had. And, you know, I, at that by then was articulating the freedom and responsibility model. And so it was very consistent for me that I was not involved in the branding, the iconography, all of that, and that she ran it and ran it incredibly well. And now, two years later, she's a board member at Netflix. OK, let's talk about the freedom and responsibility model here, because this is a reference to this, what's known as the Netflix culture deck. And I want to dive in here because you make this public in 2009, and this would eventually become the basis for a book that you wrote a few years later.

51:57But when it was released, it was released to mixed reviews. Some people were just blown away. And for people who don't know what this is, it's 127 slides. It explains Netflix culture and how the company motivates performance and evaluates employees. And some people saw it and were just, you know, sort of recoil at it because basically it demands high performance. And also it shows how you, when people aren't performing, you push them out. Tell me about developing this model because, you know, I asked you earlier about your previous companies. You said sometimes, you know, when you're chopping wood, you can't sharpen the axe.

52:40In this case, clearly you took the time to sharpen the axe. So how did this sort of approach to building culture and building an environment around excellence, some people would say, mercenary culture? How did you develop that? And the core of it was, if you had incredibly talented people, you didn't need a lot of process and rules. Netflix was anti-process and rules and pro-talent density. And then to get talent density, we modeled it on a championship sports team. And they had to swap out players. And that was a normal part of the ethos. And so that contrasted with the notion of company as family.

53:34You know, you're all like my family, that kind of CEO talk. But then you go and lay someone off, which, you know, if you were on hard times, you wouldn't say, we're going to lay off your sons. Your daughters get to eat. And, you know, our ethos in family is around undying loyalty. That's what we admire. And so I realized, oh, it's really that we want to organize as a professional sports team and not a family. And lots of people were operating their Silicon Valley business that way, but none of them admitted it, or not many. And so the shock was, it resonated because it was the truth of what we aspired in much of the competitive ecosystem of team, not family, but no one had said it so directly.

54:23And that not only did that run counter to the direction that that corporate America was heading in, it still does. Right. I think it's changing a little bit. But for the last 20 years, many companies, certainly tech companies were talking about their employees like family. And that model can work and it can work really well. But you think that that model is it sort of naturally results in inefficiency and in in in just waste and lack of productivity? Well, families are dysfunctional in many ways. And so, yes, I think it's an inferior model. And again, team is not cold. A good team really has highly functional people with good relationships between each other.

55:11They pass the ball well, sacrificing their own opportunity to score because the other person's got a slightly better shot. So you need incredible cooperation. And we said today many people want to be team players, but not everybody has the skills to do a blind pass. So a blind pass in soccer or basketball is throwing the ball without looking at the player because you've worked so well together. you have a high confidence where they're going to be. And so we would talk about that as the skill of teamwork, which is building trust, proactively letting each other know about things, all kinds of close cooperation that we're a joy to be part of.

55:58I think people did focus. We had a line in there that adequate performance gets a generous severance package. So that was sort of the acid line. The typical model is the job is a property right and you have to screw up and the company has to prove that to take away that property right. And what we were saying is no. In a sports team, it's very clear that adequate performance generates a cut and someone else gets a chance to try to be extraordinary in that position. What's so interesting about that model, It's like when you think about, let's say, a professional baseball player and they are on a team that wins a World Series.

56:40They're committed to the mission of the team winning the World Series and they're playing as hard as they can and they celebrate it. And then the offseason, they get traded. And the thing that you hear again and again from a player is, look, that's business. That's the business. You know, very rarely do players take it personally. Sometimes they do, but very rarely do they take it personally. They're traded to another team. They're not needed in that position anymore. And so how do you find a star who's also understands that, you know, business is business and that at some point they might be cut loose?

57:16I mean, broadly, there's two types of people, one for whom job security is very important and they're willing to tolerate uneven quality of colleagues. That's just an acceptable price to pay. Yeah. And then there's others who are willing to tolerate job insecurity. Nobody likes it. But they're willing to tolerate it because all of their colleagues are amazing at what they do. And it's so much fun to work in that high talent dense environment. So I would say the original deck was in hindsight, didn't balance enough the love and the care that we have for each other. So it came across as competitive, that we were internally competitive for the positions.

58:01Right. Which really was not the experience of employees inside. So we should have warmed up that deck with a lot of intense positive emotions about teamwork. In fact, the story behind publishing that deck was too many people were surprised when they came into the company the way we operate. And it wasn't fair to them. We wanted to be really clear about who we were. so that we differentially attracted the second type who was willing to tolerate job insecurity to get talent density. How would you make that assessment, though? Like it has to be sort of coldly rational, right? No, it's not rational when you let someone go.

58:44I mean, you want to think it through, but it's an instinct that you could get someone better for that role. So the test we use is called the keeper test. Would you fight to keep that employee if they were leaving on their own? Like if I worked for you and I said, hey, if I was going to leave, would you fight to keep me? And if your answer was no, then I would know I'm not probably, you know, the right fit. Then it's time for a generous severance package. That's right. The generous severance package helps in a couple of ways. If there's a generous severance package, it hurt less because the person had a backstop.

59:22And then second, then we didn't have to do like performance improvement plans and document that we had tried and all those things, which eats up a lot of time and energy and money anyway. Yes. So I don't think it actually cost us money because it got managers to act more quickly and it made it easier on the person who was let go because they got what they perceived as a generous severance package. So then we could be letting go of hundreds of people and have no lawsuits. Reed, how did you make sure that people were honest with you? Because you presumably are expecting people to also evaluate you based on this model.

1:00:01Now, you had a great record, you built Netflix, but so maybe you're, you know, you sort of are kind of, it doesn't apply to you, but I guess to be consistent, it has to. It had to. Yes. I mean, I would ask the board of if I were, you know, quitting or retiring, would you want to change their mind? You might need to stay. So yes, it applies to me also. But I have to imagine that if I'm, you know, an employer, manager of Netflix, and there's Reed Hastings, the guy who, you know, who went up against Blockbuster and believed in this thing when the stock price was a quarter. And, wow, look where we are now.

1:00:42Like, I would probably be intimidated to give you feedback. And that actually, I think, in part did happen, right? Like there was – you've described this kind of debacle that happened around 2011. Maybe it's time to talk about this. Yeah. Because I think part of – at least from your view, part of the reason why that happened is because nobody really pushed back on your idea. Let's set that one up because it's a good one. I became in 2010 with the rise of Hulu, which was a straight streaming play by the industry. I became obsessed if if we cling to DVD, despite the fact that it's growing and it's profitable, we may not succeed in streaming.

1:01:26And that we should wean ourselves from the DVD business. DVDs, oh, Rentals, was still growing in 2011. Yeah. Okay. And streaming was quite small, but it was clearly the future. You saw that that's what it was going to be. That's right. And one step in that was to separate the businesses into the old DVD business was going to get spun out as Quickster. And then Netflix was going to be the streaming business like Hulu. That this was going to be the dramatic, painful in the short term, but important in the long term thing to do. And there'd be two sites, Quickster.com and Netflix.com. Okay. That's right.

1:02:09And two pricings and two – yeah, you just separate the business. And it was more expensive if you wanted access to DVDs and streaming. Correct. Okay. Both were good deals, but it was more expensive. Yeah. So everyone knew it was scary, but as you said, everyone said, well, Reed's been right. Sony has before. Let's do this. We did it. We got a number of things wrong, in particular the pricing. We should have grandfathered in the existing base. But big picture, it was too early. So most of the customers didn't care that much about streaming. And they didn't want all this change and the split. So we were ahead of the customers by several years.

1:02:52So it was a blow up. Customers very upset. Stock drops by two thirds. We did a layoff. We had to reset our revenue expectations. It was a disaster. When we come back in just a moment, Quickster gets demolished and a house of cards gets built. Stay with us. I'm Guy Raz, and you're listening to How I Built This.

1:03:33Hey, welcome back to How I Built This. I'm Guy Raz. So when we left off, Netflix was in the middle of a crisis. Reed had launched a spinoff company strictly for DVD rentals, which raised prices and made everyone really, really mad. By the way, how long did this disastrous period last? It was more than a year, right? It was probably three years, really, the launch of House of Cards and Arrested Development that kind of got us out of it in 2013, so two years. Right. Because you had to eventually – I'm only smiling because I've seen the Saturday Night Live parody, but you had to apologize for it.

1:04:10I'm sorry. Which did only made it worse. So, you know, that didn't – that was a desperate technique that didn't work. You went on – you did a video sort of acknowledging that this was – Just to YouTube. Yeah, that's right. But – and then SNL parodied it. Jason Sudeikis. Yeah, exactly. Brutal. It's quite funny. It's quite funny. Exactly. A bit of history. Okay, so we dug our way out, and that's good. So a year later, roughly, we spent some real time analyzing, okay, what went wrong? How do we avoid it? And that's when I realized that many of the executives, top 50 people, thought this was very risky and unwise.

1:04:52But they all deferred to me because they thought, well, Reid's gotten so much right before. And they didn't know that the other people in the room were also scared. And if they had known that, they would have spoken up more forcefully. And we probably would have taken a slower, more cautious approach. So the thing we instituted on big decisions is everybody publicly weighing in, you know, on a 10 to negative 10, is this a wise decision? So that would affect like going into Europe, going into original content, pricing changes so that everyone knows where everyone else stands. Who got to vote on that?

1:05:35Like if you were to make a big decision or wanted to, who got to vote on whether that was the right decision? Roughly the top 50 people. Sometimes it was top 100, but something like that. And so negative 10 to positive 10, and you would sort of use their responses to guide your decision? Like let's say you were really convicted that this was right. We talked about it as the informed captain. The leadership model is to be the informed captain. So the captain of a ship is the absolute ruler of that ship and makes decisions. Yeah. We want our leaders to feel like they're the captain. And it's not a democracy.

1:06:13But they needed to know what everybody else thought. If you knew that there was discomfort or uncertainty about this quick stir idea, do you think it would have changed? I mean, you wanted to shift the business. Absolutely. It absolutely would have changed if everybody was like, well, we can figure this out in two steps. If we do it here, we'll say grandfathering the price. Okay. So, you know, there was no price hit. And then if it works well, then we can raise prices over time. So just as an example, there are many ways to do it less aggressively and still do it. And ultimately, we did it. The thing that was DVD became DVD.com.

1:06:55And so it happened. It just happened less dramatically. And then we eventually closed down the DVD business in roughly 24. Did you – I mean, given that Hulu was going to start streaming stuff – Oh, they started in 2007. Yeah, they started streaming. That also probably created a potential threat in that some of these content creators would not give you the rights to stream stuff, right? Like you could – DVDs was one thing. Nobody ever gave us rights. We bid for them. Right. So it was an open market in buying the rights. And if we paid enough more than Hulu, we would win the bid. But Hulu was a pure play.

1:07:42It was all about streaming. That's all it did. That was the risk was that they would become the symbolic center rather than Netflix, which had the DVD heritage. So how did the idea to make original content come about? Was that in response to where you saw this sort of whole industry headed, that if you didn't do that, and you were just a streaming rental service, then your business wouldn't survive? Well, every cable network, which is a subscription business, had started on other people's content, build some audience, and then start to add their own content. HBO was built on other people's content and then got good at original programming.

1:08:28So, again, it was a very well-trod path. And when Ted Sarandos came in, which he joined us in 2000, he was the one who sort of articulated, you know, eventually we're going to want to do original content. And then we actually started in 2005 doing original content on DVD. And we didn't have a big enough subscriber base. And so after two years, we closed that down. That was Red Envelope Entertainment. We closed that down in 2007, and then we reopened it essentially with House of Cards. I believe we commissioned that, Ted did, in 2010, and then it came out in 2013. And was a huge success, massive success.

1:09:15Which is all Ted's programming judgment. There was many scripts floating around, and then he swung for the fences. We had to bid against HBO. This was not kind of junior content. This was first, you know, league content. HBO was thinking of it. And we came in with a higher financial bid, even though we couldn't justify it at the time. And in the hopes that this would be our breakthrough. And indeed it was. And you, like you personally, would you say that you had a good eye or like a good sort of the ability to judge what was going to be good? Or did you kind of defer that to people who had a better instinct for it?

1:10:00I don't and I still don't. When I read a script, it's very hard for me to translate to why one won and one didn't. I would say that's a unique skill which Ted and his team were very strong in. And let's talk about Ted now for a moment because you would serve as co-CEOs. I mean, you have a very strong point of view. You also like feedback. You also give it. What was it about him? Because you were running the business for so long. What was it about him that you thought, this is somebody I could split this job with and actually, you know, totally work really closely with? you know by the time i did that which was i'm gonna guess 2020 um we'd been working together for 20 years so we grew up together um you know we were both uh quite young uh in doing netflix and at every place in the growth uh you know uh we learned more and relied on each other so It was a pretty easy, non-traumatic thing that only changed the business slightly.

1:11:13I mean, 2013, you've got this original content really starts to become a huge part of Netflix's business model. And by 2018, 2019, 2020, really, there's now just a ton of money coming into this, into content with the other big players competing in that space. Tell me a little bit about how that sort of impacted what you guys put bets on. Because, I mean, I think in 2018, spending on content was like$12 billion just that year alone. What we did in original content was very well executed, but it was conventional wisdom that that's what we needed to do. So it wasn't that radical. It was just you got to do it well.

1:12:07The thing that was radical is being direct to consumer around the world. So every other network, let's take HBO as an example, but FX the same. They built shows for the US market. They had their own distribution here. And then they sold the shows off to the BBC or Canal Plus or different networks in different countries. They were not direct to consumer outside of the US. and we were the first to say, hey, with the internet, we can be direct to consumer in India, in Japan, in South Africa, in Brazil, in France. And this was seen as ludicrous in the industry that, you know, we would never be able to break in, that we would never get successful.

1:12:50You know, So our first market was Canada in 2010. And that didn't have DVDs, right? So that was streaming only. And that's part of what gave us confidence that streaming only could work. Then we did Latin America and then country by country in Europe. And then in 2016, we did the whole world ex-China. And we gained increasing confidence year by year because the markets that we had gone into early continued to grow. And eventually became profitable. When do you remember thinking, OK, we're going to win or be near or at the top of this competitive environment? I mean, over time, you know, there's who you mentioned, Hulu, and then Disney gets into this and HBO and Paramount and Apple and Amazon.

1:13:42Were you always – do you always remember while you ran Netflix? Do you always remember being on like a war footing and always paranoid about you could actually be defeated or – or did you – were you confident that you guys were going to emerge victorious or whatever word you want to use? Well, if you look today at TV viewing in the United States as an example, Disney's ahead of us. YouTube is – this is combining linear and on demand. YouTube's ahead of us. They're the largest. Disney's ahead of us. Even Paramount's ahead of us because they all have big linear capabilities. So we still have a long way to go.

1:14:24We're less than 10 percent of U.S. television watching. But that includes terrestrial television. Yeah, it's all. In other words, it's the television viewing is television viewing. You know, you pick up your remote control and you choose where you're going. That's the moment of truth that we're battling for. And do you choose Netflix or do you choose YouTube? And I would say the big challenger is YouTube because they have doubled in the last four years their share of television viewing somewhat in the U.S., but dramatically around the world. You know, people call it user-generated, but it's not really users.

1:15:05It's kind of semi-pro. It's people putting all kinds of different content on. And there's a little bit of user gen too, but it's the incredibly broad selection, podcasts, everything that's on YouTube is very popular. So we're definitely a surprisingly small player in the US and around the world, again, being less than 10 % of television viewing and having YouTube be the past us and be the fastest growing. So we're, again, trying to win more share by having better and better programming. I know that you stepped away from the operational side. You're still the chairman of the board. And so you may have a, I don't know, sort of outsider insider perspective on it.

1:15:52But how does a brand like Netflix, you know, maintain, even maintain its position when you've got all this competitive pressure? And for years, people were saying people are not going to want multiple subscriptions. They're not going to want to pay for Apple and Disney and Paramount and Hulu and YouTube and Netflix. In fact, many people do. Yeah, I mean, you're right that it's a market structure of individual subscriptions that's very fluid. And so competing for it is having the best content. So this summer we had an amazing movie, K-pop Demon Hunters, that for eight-year-olds became the stunning thing.

1:16:31And, you know, adults could watch it two or three times, kind of like Shrek was when we were growing up. And so it's our first big animated hit. After, you know, maybe 40 different animated movies, we finally had a monster hit. So it's an artistic execution business. And, you know, if we can improve those ratios from 1 in 40 to 1 in 20 to 1 in 10 to 1 in 5, we'll be a monster. But it's hard. Aaron Powell Netflix has invested tons of money in content over the last 10 years, right? And there's all of this technology. I'm sure you've seen Sora, too, and all this technology. And, you know, just as you could see that the world is going to go streaming, can you look at do you look at AI?

1:17:15Because I look at it and I think I don't see how I can imagine a future where there aren't human actors, where it's all done, you know, using AI actors. Do you think that is a realistic scenario? Well, think about sports. Do you think if there's two teams of robots playing basketball, it's going to be interesting? I think some people would say yes. I think a lot of people would. I think that will be a very small market. So I'll take the under on that. And there's something about watching humans compete that makes it interesting. I think we humans care about what other humans do. And that kind of puts some limits.

1:17:55And that's why we have anti-steroid rules, because we don't want to, you know, change the competition too much. And I think in the same way, you know, films will have human actors, not because it can't be something else, but because other humans won't be that interested. So think of it as, you know, the Booker Prize is a big prize for the best novel of the year. You know, the year that AI wins the Booker Prize, then it's starting to really change the entertainment business. But up until then, it's kind of tactical about what's on screen. Reed, it would be irresponsible of me not to ask you this.

1:18:39I mean, when this airs, this whole thing may be an old story because this won't air. We're talking now in December of 2025. This will air in 2026. But obviously, there's a lot of news around Netflix and acquiring Warner's streaming service or their film division, I should say. And then Paramount coming in with another offer. There's a lot of – there's a whole sort of – I don't know if I should say mess, but there's a whole big story here. Tell me about just your kind of, and there may be things you can't talk about, but what's your overall impression of the acquisition offer and then now sort of the challenge from Paramount?

1:19:26Well, I'm super excited that my replacement CEOs, Greg and Ted, which have been running the business for two and a half years, they've tripled the stock since I left. So they've been fantastically successful. And I'm thrilled to be supporting them in this next chapter in acquiring Warner Brothers. But that's about all I can say about it as a board member. All right. As you mentioned, Ted Sarandos and Greg Peters now share the CEO job. And you've moved on to become the chairman of the board. And in 2023, the year you stepped down, I think that year you acquired a ski resort in Utah, which I have skied at before years ago.

1:20:09It's a beautiful place near Ogden in Utah called Powder Mountain. I think it's called Powder Haven now. Tell me about that. I mean, you had plenty of money to do it, obviously. I'm assuming you like skiing. So probably a lot of people just assume, oh, you know, this is a fun little side project for Reed. I mean, can you explain this? What was the motivation to manage a ski resort? We had a home there. So we were skiers there, but we were one acre customers. And I had noticed that the resort was not very successful. And so I started to get to know that spring, the owners to see where I might be able to help.

1:20:52And in April, one of the two owners sold to me. And in November, the other one did. And so for me, it's a passion play of creating a real estate place of beauty. Real estate's a different skill set. You build a neighborhood, you put in roads and sewers, and then you try to sell the lots. And that's the basic play. And this year we had a big success and we sold out. So think of it as a big resort like Heavenly in Tahoe for only 650 families and their guests. And then we're also running the public resort, which is a normal public ski mountain with season passes and et cetera. up. The public ski resort's good, but it's not an exciting business.

1:21:39It's a hard, you know, it's like running a restaurant or something. The private side is, you know, much higher revenue, much more exciting. And so I think of it like my friend Steve Ballmer who bought the Clippers. You know, it's kind of like buying a sports team. You know, it's a passion, but it's not fundamentally around the profits. It's around competing and winning and succeeding. And for me, this is totally different than running Netflix, but it has a lot of interesting puzzles. Yeah. When you think about the journey you took, right? And I mean, age 35 already, you were very successful financially.

1:22:22But then, of course, it would go on to build Netflix, which is not just a company. I mean, it's one of the, you know, one of the fangs, right? It's a huge technology stock. It's a huge brand. It's a cultural touchstone. How much of what happened to you do you attribute to the work that you put in and your skill and your approach? And how much do you think had to do with getting lucky? Well, I wouldn't put them opposed to each other. So, So we got lucky at a number of places. We talked about the LVMH 50 million investment. It could have easily been bankrupt. We got lucky that DVD came along and lots of people worked on that.

1:23:07And then it won. We got lucky that a lot of competitors did or didn't do certain things. But there was a lot of hard work for 25 years. I was always trying to be the first one up in the morning, the first one reading the metrics. And, you know, it was a very wonderful, intensive time. So I would say we made the best of what the luck offered. And it might not have worked out, like you said. And if it hadn't, I'd like to think we would feel like this. I would feel like the same person and that the success of Netflix hasn't changed me. That's probably a little bit naive. But I think it's fundamentally true that you can't underestimate the role the luck plays.

1:23:51That's Reed Hastings, co-founder of Netflix. By the way, and this will come as no surprise to many of you, the most watched original Netflix film of all time is K-pop Demon Hunters. As of last December, it had amassed more than 500 million views worldwide. Hey, thanks so much for listening to the show this week. Please make sure to click the follow button on your podcast app so you never miss a new episode of the show. And if you're interested in insights, ideas, and lessons from some of the world's greatest entrepreneurs, please sign up for my newsletter at GuyRoz.com or on Substack. This episode was produced and researched by Sam Paulson with music composed by Routine Arablui.

1:24:31It was edited by Neva Grant. Our engineers were Patrick Murray and Robert Rodriguez. Our production staff also includes Alex Chung, Elaine Coates, Nora Gill, Casey Herman, John Isabella, Catherine Seifer, Chris Messini, Carrie Thompson, and Rommel Wood. I'm Guy Raz, and you've been listening to How I Built This.