Ted Sarandos: Netflix and how tech changed storytelling

0:00You had mentioned The Innovator's Dilemma. Yeah. I think it's a great example of it, too, which is, again, it's been the whole thread of Netflix's existence. And I always said, that's the book that every Netflix employee read that I'm glad no Blockbuster employee knew about. Because they didn't see where this was going. We look at those lessons of companies who, you know, could win one space and fail to move to the next one. You know, how rare it is. Why didn't Greyhound become an airline? You know, it's very, very rare for companies to move from one technology to the next. And I think it's because Netflix, we always saw this as an internet digital business, not a DVD by mail business.

0:37That's why it's called Netflix, not DVD flicks. That's Ted Sarandos, co-CEO at Netflix. Over the past two decades, Ted has helped lead one of the most remarkable transformations in media, evolving Netflix with technology and business model innovation from a DVD by mail service into the world's leading entertainment platform. I sat down with Ted to talk about his journey from his early days as a video store clerk to his pivotal role, reshaping how stories are told and shared all around the world. We talked about navigating an industry defined by constant technology and business model change. We talked about the tension between trusting your instincts and following the data.

1:21And he shares why storytelling remains one of the most powerful forces for connection. My conversation with Ted Sarandos, up next on Tools and Weapons. Well, Ted, it's great to see you. Thank you for joining me on Tools and Weapons. Yeah, we've known each other for a decade, and I still remember the first time I met you in person. It was my first meeting as a Netflix board member. It was March 2015. you and others were telling the board that you wanted to go big on full length movies. I do. I remember that like yesterday, Brad. It was interesting to me because I think about it in the context of the rhythms of the growth of Netflix into new areas of business.

2:08And that was as a bigger one as you can imagine, because it was somewhat out of necessity, uh, somewhat out of desire and really all wrapped up in that, you know, the underlying one, which is how do we make Netflix a better value for consumers? When we first started streaming, the movies were tied up in these very, uh, long pay TV windows. So our, our streaming service featured movies. None of them were under 10 years old. Um, and most of them were more than 30 years old. So there wasn't really much to pick from. And then the, the underlying dynamics of the business as it existed back in 2015 was that that wasn't changing the studios had these long-term output deals and all the movies we were going to get were going to come from the studios after they played in theaters after they went to home video after they went to pay-per-view and my sense was the thing that what you were left with was the least passionate audience for a movie they they wanted to see it but they didn't want to see it enough to go see it in the theater or to buy a DVD or to go to the store and rent it or to watch it on an airplane by accident.

3:14So for me, that the value of having original movies that consumers would understand very, very quickly. Well, the thing that I love about that, Ted, is I so remember that meeting in part because there were several folks on the board who I'll just say were a little bit skeptical. Well, why would Netflix be good at producing movies? Why is this the right thing for Netflix? And you very calmly, but with conviction, explain to them what you just explained to everybody watching this now. And one of the things that I find so interesting about that is I think it sort of takes you back to your roots. Your first job in this industry was actually in a video store in Phoenix.

4:03And I've heard you can tell us whether it's true, that people love to talk to you because you always had great recommendations about what they should rent and watch back in those days. How did you get that start? You know, it's funny. I was the kind of that underserved consumer who loved movies and lived in a place where it was hard to see them. I grew up in Phoenix, Arizona. When I grew up, there was a very small town and a very second or third tier movie market. There were no movie theaters near me showing anything interesting. And I was very interested because I was a journalism student. I really thought I was going to be a journalist in my life.

4:40And because of that, I used to get out of town newspapers. So I would read about Spike Lee and John Sayles and all these great indie filmmakers, but those movies literally didn't exist in my world. And there was one theater in Tempe, Arizona, the Valley Art Theater. And I saw some of the most interesting things in my time there. But I kind of stumbled into being in a video store or certainly working at a video store. And the second video store in the state of Arizona opened up walking distance from my house. And I walked into the store and it was almost like a lightning strike moment. You had everything you can get on video, which is under a thousand movies at that time.

5:22And what was in there was these little indie movies that I had read about in out-of-town newspapers. And the beauty of working in a video store, Brad, is that they were empty all day. So there was nothing to do but watch movies. So I watched everything ever made. Martin Scorsese talked about it not too long ago about how all movies are in conversation with each other. And there's definitely a natural rhythm to it, but you have to have a lot of input. So you have to watch a lot, which I did. The entire neighborhood was in the store on Friday night in this little jam space. And everyone is talking about movies.

5:56It was so cool. I did have this weird kind of memory for people when they come in and say, and I always wanted to know if they liked it or not. So I'd say, did you like this? Yeah, I loved it. Oh, if you like that, try this. And then I started creating kind of games for myself. Like I want as many people as possible to see this little movie. But I only want to show people who are going to love it because they're going to tell people and kind of create word of mouth. And it turned into one of those things where even when the store was packed with people on Friday night, people would wait in my line to check out for me because I had a good suggestion for them.

6:28Well, in a way, one of the things that I think is fascinating, Ted, and I see this as somebody in Seattle, two of the great consumer-focused companies in Seattle are Costco and Starbucks. And they both have this philosophy which they can employ, which is, hey, even if you join as the CEO or at a senior level, you first go work in a store. Yeah. And you talk to the people who are your customers and you try to understand what they love. A hundred percent. And that's actually how you were, in a sense, it was your first training to go work at Netflix without even having a Netflix yet existing. A hundred percent.

7:10And I think I would ask people all the time, I noticed you took about 45 minutes to make that choice. What's going on? And this thing that came back to me over and over again was how important choosing was. What it reflected, the choice that they made for the family movie that night or the gathering of their friends was a reflection of who they are. They made a good choice and they felt like they wanted to feel good about the choice. And they wanted to show their friends or their kids that they knew they could pick good movies. because it says something about them and their choices. What I learned that really has helped me at Netflix is that intersection of not only do you love this movie, but how do I show it to you?

7:54Did you ever imagine when you had that job in that store in Phoenix that you would have the job that you have today? Oh, never, never. And remember when I joined Netflix in 2000, we were mailing DVDs around the US. Right. And it was one of the most profound business lessons I picked up from that was when I was in the position of running these video stores, I used to, you know, I had to figure out how many copies of each movie we needed. And there was no spreadsheets and algorithms back then. It was all intuition, really. and the one thing that always confounded me was um some of these really interesting beautiful art film or like why those movies are like this movie is great why can't i get enough people to rent it to pay the hundred dollars it used to cost to buy the movie for the store and and i realized what it was was the um while the state of arizona was big and the city of phoenix was big the trade radius for that video store was quite small so what i realized with Netflix early days was I couldn't support one copy of this movie in this store, but I could have a thousand copies of the store if I could serve the whole country with it.

9:05But one copy in a thousand stores, none of them would work. So what Netflix was achieving in the home video days was a national footprint, a national trade radius for a video store where you could support increasingly interesting small things at scale. And what I find fascinating about Netflix, including the decade now I've had the opportunity to spend on the board, is just the quarter of a century now of sustained success as a disruptor. Basically, you're taking the book Innovator's Dilemma and putting it into practice. But the step from distribution to producing content, that was not just a step.

9:53That was a leap. Can you walk us through not just why, but what gave you the conviction? You and Reed and others, the self-confidence that you could pull it off. I met Reed in 1999, and when he talked about Netflix, he talked about Netflix like it would become, not like what it is. And I explicitly asked him about original programming, because I said, in this world where we're going to be a digital channel, and I don't know of any network that exists that doesn't have some form of original differentiating program from each other. A few years into streaming, I realized that if everybody had the same programming, this was just going to be a gigantic race to the bottom.

10:37And how do you differentiate yourself? Now, in some ways, you do it by having great choosing mechanisms. You have great UI, you have great delivery so that when people push play, it works. All those things were true, but they appeal to consumers at a more visceral level. But I think when you get into people saying, well, why do I choose service A over service B? It's my favorite show, my favorite movie. This thing I've got to, I'm in the middle of this season. I'm not going anywhere. And the idea that we could come in and just license everything we wanted, that was kind of naive back in the day, which was eventually the networks would see us not as a customer, but as a competitor.

11:16Even if we were just licensing their programming, because we were competing for, you know, limited amounts of time and people's attention span. So even in our very earliest days of licensing programming, it was very hard to get upstream and get content closer to the time that it was coming out. And ultimately, what I said is if we want more control of our destiny, we have to have control of our programming. And the way to do that is to produce, even if it's just a hedge, even if it's just to let our suppliers know that we might be able to do this on our own. but we may have to learn how to do this because what you don't want to do is get deep into the business and then get cut off.

11:56So it felt like a vulnerability in the business not to be in the original programming. So in a sense, it was driven by a necessity. Yeah. But I would say back to you, you had mentioned The Innovator's Dilemma. Yes. I think that's a great example of it too, which is again, it's been the whole thread of Netflix existence. And I always said, that's the book that every Netflix employee read that I'm glad no Blockbuster employee knew about. Because they didn't see where this was going. And now we look at those lessons of companies who could win one space and fail to move to the next one. You know, how rare it is.

12:31Why didn't Greyhound become an airline? You know, it's very, very rare for companies to move from one technology to the next. And I think it's because Netflix, we always saw this as, you know, an internet digital business, not a DVD by mail business. That's why it's called Netflix, not DVD flicks or mail flicks or whatever.

12:58One of the things I find fascinating, you know, fundamentally about every quarterly Netflix board meeting is you all, first of all, do an amazing job with data. and you have the technical capabilities to analyze data and learn from it and fundamentally ask the question that you said you were asking people when they came in, what do you think people want to watch? How do you help people find that data? But I will say, Ted, the other part of it is big decisions also require, I'll just say not just courage, but sometimes intuition, gut. You know, there's a little bit of a tug of war at times between a sort of right brain and data analysis and left brain and instinct.

13:47How do you think about that over the course of Netflix's success? Yeah, you know, it's funny because I came into this, you know, relatively small business that was very data centric. And I learned everything I learned in business in an environment that was all intuition. and so it had no tools to make any kind of predictive algorithm for what people wanted where what i realized very the early earliest days of netflix is that even even when we were mailing dvds we had a queue so i knew how much demand there was for the movie because everybody said i want it and they recorded it everything i learned about demand and consumer demand and consumer interest and uh zeitgeist you know driven moments none of that was rooted in data So for me, it's like I came into this environment where everything was data-driven, and I figured out that I think that crunching numbers and looking at data is a great way to look at what happened six weeks ago, six months ago, six years ago, but not a very good indicator of what is likely to happen six weeks from now.

14:48So this idea that something is going to change. Prior to Squid Game, we had seen none of our original programming from outside of the United States become a global phenomenon. We had seen some things travel, played in more places than one, but where literally everybody in the middle of America loved Squid Game as much as people who lived in Seoul. There was no data to predict that was going to come. So the first thing I think we have to do is understand that all the answers are not in the data. It's a great competitive advantage that we do respect the data, that there is data that is helping steer the decisions, but they require good intuition.

15:29One of the things that I think is so interesting about that is I'll just say all of the unusual steps that Netflix has taken and how successful it has been doing unusual things. And in a world where almost every corporation has one CEO, Netflix has two, you and Greg Peters, co-CEOs. And I'll admit as a board member, I was, let's just say, I had a lot of questions. How do you make this work? And yet the two of you really have. I think that's clear to all of us on the board. It's clear to the outside world. I do think Greg came from the data and technology side. You came from more the creative side.

16:15You had maybe more experience with intuition. He had more experience perhaps with data. How do the two of you make it work so well? Because you clearly do. Yeah, thanks, Brett. And I do think we might be the embodiment of the left and right brain. First, I think the model works for Netflix so well because I think it was designed well by Reed as a founding CEO who came to the conclusion that the unique demands of this business were pretty well suited for co-CEOs. So in the early days, Reed and I kind of divided Concord tech and entertainment. um a we always wanted to be a company that would be uh you know basically if you worked at netflix and you were an engineer that you thought you were working at the greatest tech company on the planet and if you were in the worked for netflix and you were a comedy network executive who is developing in the next great comedy show you thought you worked at the greatest entertainment you know company in the world and both would be true we kind of organically started running the business that way.

17:15And I think when Reid thought of this idea of how to do this together, and he kind of formally made me a co-CEO, which is also an incredibly unusual move for a founder CEO. And I think that Greg and I had been working together for more than a decade as well, tackling these problems in the same dimensions, the left brain, right brain approach. And what I think we're finding Greg is something I also found in Reid was somebody who understood the the technology, understood the integrity of the data, and was deeply curious about the entertainment side. And for me, it was like I was a complete inverse.

17:55Really understood all these other things and deeply curious about the technology to help make it all work. But I think we look at every decision from our own personal areas of strength. If we ever run into something where we disagree. We have an informal agreement that whichever area of expertise it is in, and whoever has the highest level of passion about it, will win the coin tosses. And it has served us really well. We both want to run a great business. And I think that this model helps both of us run a great business. The thing I just find so interesting is I think oftentimes human nature leads people to push away others who think differently from them.

18:39Yeah. And, you know, they'll even sort of criticize somebody perhaps like, oh, that, I don't think like that. And I think the answer is, yeah, and isn't that great? If you can find a way to bring together two people who develop the trust, as obviously you and Reed did, as you and Greg have, that's where this ability to break through in unexpected ways suddenly, I think, emerges. And I think being open to a different set of ideas, a different set of facts, and a different worldview sometimes. You have to be open to enough of these. You have to have enough of those inputs. None of this works unless you have all these inputs.

19:28another aspect of i think the netflix success experience is you know with each change netflix has changed and with each change uh you know as you produced original series original movies uh you know netflix has had an impact on others in the industry the industry has changed And that continues. I want to ask you, though, about one thing that I think even sort of extends that impact. Let's just take Formula One for a moment. You've made Netflix part of the conversation in fans of Formula One, but you've so expanded the audience and changed the way people think about what it means to be engaged in that.

20:13You've always seen this role of cultural conversations. What are you taking away from these recent experiences? You know, Brad, it's funny. I was always kind of confounded by why a sport can be almost like a movie or a TV show. Like, why can it be so popular in one place and not everywhere? And Formula One was this great, enormous popularity outside of the U.S. And in the U.S., it was viewed as a very niche sport, very high-end, high-income sport. And mostly because it's very complex. It was a very complicated sport to understand. So if you're a football fan, if you're a baseball fan, you're a soccer fan, you just figured out all those rules.

20:56Boy, Formula One is super complicated. And so when you look at it, you look at the ratings in Germany, in Italy, in France of these Formula One races are enormous. In the U.S., there are tiny things. Now, part of it was time zone. So most of the races didn't take place in the U.S. time zone. But most of it was people just didn't understand the sport. So we did this for the show called Drive to Survive that was basically the storytelling underneath the sport. So first first and foremost, do you care about these people? And I felt like for me, like, well, why wouldn't this work in the U.S.? This is beautiful people doing dangerous things in beautiful places.

21:35That's a recipe for success if I ever heard one. And most people just didn't understand the sport. So therefore, they didn't know the players. The storytelling behind the drama of this race was much more interesting than the race. It's not a great TV sport when you watch a race on television. But if you really are invested in who's going to win and lose and what does the win and loss mean, not just on the track but at home, all those kind of things, I think once you can get people invested in it, you can build a real bit. And then we were able to do that with with with full swing, with golf. You know, we were able to do it with multiple sports.

22:09And it's kind of a good formula that why this kind of shoulders shoulder programming around sports can be just as valuable as the sport itself. And we could be very valuable to the sports league to bring an expanded audience, both geography and demographic mix of who loves these these these sports. So if we can come in and actually add value to the sport, that leaves some profit for us too. And I think we have done that by expanding the audience, even for something as big as the NFL, by bringing a younger audience, a more international audience to a game that, you know, it dominates television viewing in the U.S.

22:48But the rest of the world is not very well served by NFL football. And so we're because through this combination of storytelling and ease of access and on demand controls, we can make the NFL even bigger. And in that way, I think it's a better business for us than just trying to take the rights away from CBS. And in a way that also, I think, encapsulates Netflix and its broadest. And Reed Hastings has always talked about it as fundamentally, we're all competing for people's time. And the only way you succeed is you offer people something different, something better, something that brings them joy.

23:29That's the type of thing that Netflix actually measures. Yeah, you know, it's funny. We talk about it in terms of the sports one because I think it's tangible. Everyone remembers when people didn't care about Formula One. But there's also things like when we did the TV show Bridgerton, those books have been around forever. And Shonda Rhimes had read all those books one summer and it was her dream to make it into a TV show. but when we released the TV show, the book sales jumped more than 500%. When we do a show like Emily in Paris, tourism to France grew by 38%. That's attributable to Emily in Paris.

24:05So this idea where you can actually influence an enormous behavior in the culture with the love of the story. In Korea, we have a show called Culinary Class Wars. They credit that with kind of a revival of the restaurant industry in Korea. And remember there, and there really were not, not a big unscripted, uh, there were no big cooking shows in Korea prior to this. So it's a really incredible. And I think like being able to take a show or a film, get under the skin of the viewers so much so that they make their, their once a year travel plan to go to that place that they saw on television or on movies, on Netflix.

24:43Uh, it's really a very cool thing to be part of. Well, let me just close with one last question, Ted, what comes next? I mean, you are the disruptor and the incumbent at the same time. How do you and Greg think about, say, the next five years for Netflix? You got to crack out that innovator's dilemma every once in a while again. There's an interesting thing with the way the business has evolved is the incredible resilience of professional storytelling. Through every technical invention that has changed entertainment, the internet, laptops and tablets, smartphones, TikTok, all these different iterations that have come along and compete with people's time and attention.

25:28It's remarkable how steady the consumption of professional film and television is on all kinds of screens. And so I think that the next iteration of things like that the internet was a massive disruption uh of distribution and i feel like the next massive you know uh disruptions likely to come on the creation side uh where because i think it'll be pretty hard for something to come along and be a more disruptive or a bigger or even close to meaningful as the internet was to to distribution but i think in creation and We've been seeing these things come along as tools evolve, like virtual production, which enables, you know, I think there's some practical applications of virtual production that are exciting.

26:16But people forget about some of the things that are not quite as sexy, like safety. You know, it's much safer to film that scene at the top of the Alps on a soundstage in California. So a lot of these tools that actually make it a better storytelling, safer storytelling, more scalable, be able to bring things to screen that used to only reside in your imagination is incredibly exciting. And I think we're on the cusp of a lot of those changes. And the tools that we use in this business are going to get better and able to fulfill the fantasies of creators, which will feed the fantasies of the audience.

26:53Well, I think in a way, and it's, I think, a thread that runs throughout the conversation we've had, you know, a big part of what makes people human is the ability to tell and listen to and watch and enjoy and retell stories. Yeah. I think that's sort of where humanity began with that use of language. But fundamentally, it is art and science. It's left brain and right brain. It's being focused on where you want to go and not just what you are today. I just want to say thank you, Ted. I think you shed a lot of light on a lot of things in a short amount of time. Thanks. Look, I think to deepen that relationship with people who are looking for those stories and looking for that bond that comes from stories, there's unlimited upside in that.

27:41That's why we continue to stay very, very focused on being that destination where we can dependably deliver that for people who desperately need it and want it. Well, thank you. Look forward to seeing you soon. And for everybody who watches Netflix and follows Netflix, clearly more to come. Thanks. Thank you. You've been listening to Tools and Weapons with me, Brad Smith. If you enjoyed today's show, please follow us wherever you like to listen. Our executive producers are Carol Ann Brown and Brent Christofferson. This episode of Tools and Weapons was produced by Mike Morrisrow and Lexi Swanson.

28:19This podcast is edited and mixed by TriFilm with production support by Sam Kirkpatrick at Run Studios. Original music by Angular Wave Research. Tools and Weapons is a production of Microsoft.