Reed Hastings on Netflix, Talent Density, and AI's Future

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The most interesting thing about studying Netflix and talking to read is that it is as a business probably the single most relatable examples since we all watch Netflix of two really simple ideas that everyone talks about, but are very hard to do in practice.

The first is this notion of finding a simple idea and taking it extraordinarily seriously.

Netflix has effectively been scaling up its core original model since its inception, retox in our conversation about how even the DVDs were nothing but a stepstone towards the streaming future that they envisioned at the very outset of the company's founding in 1997, and simply letting that idea play out over decades without getting distracted and how powerful that can be.

In the second is this notion of talent density.

This is a term that now gets thrown around every major company, and really it was read and Netflix that pioneered this concept of what can happen if you set and keep a talent bar exceptionally high.

We get into why that's difficult, what Netflix did to make that talent density bar work and sustain itself over decades.

This conversation really is an ode to those two simple concepts, and of course in this case it's fun to learn about because it's something that we all watch every day.

I want to go back to your first business and this sort of origin story of this notion of talent density that you become very famous for.

We'll talk about talent density for sure.

It's one of these ideas that's now ubiquitous in most technology companies.

I think you are sort of the originator of the concept, but I want to hear how you came to learn that lesson in the first place, presuming that your very first team was in just incredibly talent dense and perfect.

What was the early origin story of that concept?

So I founded pure software in 1990 and grew kind of typical great software company doubling.

I wasn't careful about it and I would say talent density declined.

That company, we went public in 95, got acquired in 97.

And when I analyzed looking back what happened, one of the major things was declining talent density and then with declining talent density, you need a bunch of rules to protect against the mistakes and that only further drives out the high caliber people.

And so it was through that experience that I realized, okay, I've tried to run software like a manufacturing plant and reducing error and putting in process and then that doesn't get high productivity or high talent and we should manage software much more just suddenly with inspiration rather than management.

So typically we humans, we value being nice and we value loyalty.

Yet in the workplace that's attention because being nice is in contrast to our intention with being honest, I generally like people that are nice and yet I want to in the workplace to be honest with each other so that we're more productive.

So we have to find a way to give each other permission to not be conventionally nice and instead to be focused on the team's success which is being very direct.

Similarly with loyalty, we kind of see loyalty which is something in your family, like you would never fire your brother if you were tight on money, okay, you would share and and that's what we admire.

And yet in a company what we do is we lay people off.

And so this whole idea that a company is a family, it's unintentional but it just derives from all the structures of society we're family.

All companies used to be family companies and then corporations have grown more recently.

All countries used to be family countries and kingdoms.

And so basically family was the deep organizing unit so it's natural that that spills in to how we think about an organization.

But the contrast is a professional sports team.

And that's an admired model.

It's really focused on achievement and everyone understands that you change players as you need to try to win the championship.

And we all got to fight every year to keep our position because if we can upgrade we must to achieve the winning of the championship which is producing a great company.

How do you protect against the natural way that companies seem to bleed down towards lower talent density over time?

Like there's seem to be very few organizations that get it high and then keep it at that same level, especially with scale.

What are the ways that you learn to keep talent density as high as possible as the company grew so big?

Well as a company's grow you may be able to pay people more.

So that will help if you think of the sports team and the biggest markets they can afford the highest compensation and like the Yankees or the LA Dodgers they often have the best players.

It's not a direct one to one on how much you spend and quality but there is a strong correlation.

I think the second thing you can do is continue to really evangelize the benefits of talent density over like total quantity.

So that more and more of your leaders get adept at managing for density.

I would love to talk about each stage of the funnel to creating talent as in a business starting with how you found people in the first place with the most reliable ways where are finding people and then also how you evaluated them and then I want to talk about further down the funnel but starting just with like top of funnel what were the most effective ways of finding people that had the potential to be extremely talented inside of one of your businesses.

I've come to look at it like keeping a pretty broad funnel and hiring a lot of people and then over the first year you really get to know them and you can figure out what you want to do you want to keep them or not.

Other people have a view like very hard to get in but then you can stay no matter what and I think that's been more of the Google orientation as an example and it comes from their graduate school background right it's really hard to get in to stand for a graduate school and then it's hard to get pushed out too and so it's just natural that they mapped themselves onto that model and there's some benefits of that but that's a different model and mine is more have relatively open doors will interview broadly and try to select what we think's the best person.

The stance reason that maybe your one year at Trishen rate was higher than say Google's or somebody else is quite a bit yeah what was it's like would you do remember?

It's probably 20% in the first year that's pretty high what would you tell people on the way in or tell the organization about that rate itself to make sure it didn't spook people that lots of people would leave.

Well it did spook people and so it's only fair to let them know what they're getting into.

We would say we're not going to guarantee you a lot but we'll guarantee that it will always surround you with great people and have you work on hard problems.

That was our core that you may not be happy the hours may be long you know the food may be okay but like the essence of what we can do at work is hard problems with great people.

Think of it if your primary orientation is around job security and you're willing to put up with working with the uneven levels of talent then there are other companies that are a better fit and there's some benefits of that you know which is you you have stability in your life.

If you're more of a performance junkie and the thing that makes you vibe the most is working around incredibly talented people and running fast and loose with great teammates then you're willing to put up with the job and security nobody likes it but you're willing to put up with it to get the performance density.

You said fast and loose can you seem to have a loose if you overmanage for example a tight process or specific hours that you have to be in the office or of wide variety of things you filter out performance and creativity and the looser that you can run the more creative that the organization will be.

So we talk about it as managing on the edge of chaos you don't actually want to fall in the chaos okay in chaos the product barely gets released it's full of bugs people are upset payrolls are made lots of bad things happen but it's getting us close to that edge of chaos where there's last minute saves and a lot of dynamism as you can possibly tolerate as opposed to say a semiconductor factory which is trying to reduce variation and reduce error to get rid of variants.

If you're going to be a creative organization you want to be high variance, high creativity and again managing on the edge of chaos.

I'm curious with the 20% attrition rate what you learned about letting people go well and the right way how did you get really good at that specific part of the life cycle?

Well I think there's two parts to it to create the confidence throughout the company.

One is to release the moral thing most managers their people managers they like people they don't want to hurt people so it's very difficult for them and so one of the best things is to do large severance packages like four to nine months of salary and so it feels expensive at first but one is it makes the person who's let go feel a little bit better because they've got a bunch of money in their pocket.

Two it helps the manager do their job because then they don't feel as bad in letting the person go and then it just sets up a much better mutual feeling.

Third on the termination is setting a context where it's not a moral issue you didn't fail.

It's just like a professional sports player we think we can get someone better here okay so it's a pity for the person but it's seen as natural as opposed to like a failure so typically I would say something like hey I see Patrick you're working really hard you're trying I'm so sorry to tell you that honestly if you quit I wouldn't try to change your mind to stay the reason I wouldn't change your mind as day as I think I could get someone in your role they could do what you're doing plus even more and here's why.

The way the company has set up is if I wouldn't work to keep you I'm supposed to let you go.

In that way we're sort of executing on an agreed upon framework that will keep our test framework.

How did the keepers test literally work like how was it rolled out across the company?

Well it was always there that you know in the original slide deck adequate performance gets a generous heavens package so it's really just starting of front the test that we encourage people to use is if someone were quitting would you try to get them to stay to keep them because that turns out to be a good test relative to you know all the relief we sometimes feel when someone not great moves on.

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Was there an episode in Netflix's history that you can remember where you were on the edge of chaos and it either date or very nearly cost you, very dearly?

During the Netflix 25 years, there's a couple small things that we did wrong and one big one being the quickster separation of DVD and streaming.

Maybe taking the quickster example, what is it like to see high talent density operate against something like that?

Like I'm just curious what it felt like to watch that happen.

So quickster for your listeners was a sad episode at a 2011 where I became convinced we really had to go well all in on streaming and drop DVD and put DVD in its own company that would drift long and free ourselves from that.

Unfortunately, most of the customers were mostly using DVD.

So yeah, they were sell mail me the discs and so they didn't like it, lots of cancellations, stock drop 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, reads made 18 decisions right before.

So, you know, I'm probably wrong and reads probably right.

So they kind of suppressed their own significant doubts.

And what we really to see if they all knew of each other's doubts, they would have been much more likely to weigh in.

Do you 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 or 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 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 no 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?

Well I think you want to be super careful here because this is the source of much value.

You want to be totally independent of 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 they're 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 a 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.

I'm so interested in the bucket of seems like a bad idea but turns up 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?

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 a well on CD raw.

So I was kind of like pretty familiar with mailings.

I've gotten tons of these just through the mail, DVD for movies, which just replacing VHS or just starting.

So I kind of 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?

Then it turns out you calculate it and it's like carabits 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 them and cheaper that in lower latency then.

So I never thought I love the mail business.

I thought I love network business to deliver entertainment.

So that was an example and then the Contrarian part of it was when we were fundraising in 1997, 1998, 1999.

Everyone was excited by internet delivery and I'm like post-diamond close but didn't matter.

They were excited about it and so it was very we were a 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 a great value.

When you're streaming first enter your mind it's like clearly this is the place that we're going to have to ultimately go.

Oh that was from the beginning.

That's why we need the company Netflix is internet movies.

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.

Correct.

It was one digital distribution network and then eventually we would replace it with another.

Yeah 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.

One of the other really cool things about your background is that for a long time you're on the boards if I think Facebook and Microsoft, I think you're on the anthropic board and the Bloomberg boards.

You've had this sort of of course Netflix itself 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.

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 gosh so I better than in 1960s.

Will always be true.

It will always be true.

I would say as CEO and Netflix I learned so much being on the boards of Microsoft and Facebook.

They had 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 and 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 as a board of businesses it didn't work well.

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 my Bloomberg it's had 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 a becoming a trusted utility for the industry that's been very powerful big modes for that business that are really customer loyalty that he's been serving multi-dimensions for a long time and then anthropic I've only been on the board for a year it's a wild story because you know it's growing so fast what did you learn from Mark you mentioned a little bit about what you learned from Facebook what did you learn from him specifically super committed like when you look at the metaverse and the convince that there's going to be something beyond the phones maybe that'll be a classes 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 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 so typically board members want to add value because they're getting paid it's a human nature thing and the problem is by the conflict rules they don't really know the business if you run an airline you can't be on another airline's board but you're doing that board one day a quarter for the most part and on one day a quarter it is super hard to add value and so what you see is a lot of directors who struggle to add value and then management has to be super polite to them management can tell of you don't know what you're talking about because they run the thing so you see this dysfunctional thing where board members ask hard questions and management ducks and weeds and it's not very functional so I would say first part is board members to realize okay I'm not here to add value they can hire consultants who know the industry and are not conflicted and did they pay for the advice so I shouldn't spend my time trying to give advice so they're one of my doing I'm here as a board member as an insurance layer if the company falls apart I will step in and be part of replacing the CEO and that's basically the entire job which is replacing the CEO well and to do that and to have a confidence to do that you have to learn the business so you can't be asleep you've got to really ask a lot of questions and learn what drives the profit streams how does the business work what are the issues with it but again you're not trying to solve those problems you're trying to get a grasp of the business so that you can determine you know who might be the best person to run the firm and if you get that right as a Microsoft shareholders or board did with such in the Della then the business takes off and all the advice in the world doesn't matter compared to that if you're on a board don't measure yourself I did you give a suggestion measure yourself I did you get more and more prepared for the small chance that you will have to take big action and so it's a lot like a firefighter who drills and drills and drills and drills and hopes that there's never a fire when selecting for people that would be that insurance layer for your own business what did you select for because a lot of these boards of full of very fancy people like you that are great names to have on a you know website as a board of directors and that seems to be a selection criteria versus like this person's actually going to be good at this insurance layer thing how did you select board members yeah people who I believe will be wise in a crisis we call it extreme duty of care so duty cares one of the responsibilities of a director and we amp it up that they really have to know what's going on we asked directors to come to management meeting so they can watch what's going on watch the sausage being made again not so they're adding value but so they're highly informed and so we look for people who are wise in crisis and so a board interview process would be those kinds of things tell me about different business crises that have happened and in case that happens that they would be wise how much of your time when you were running the business full time was systems structuring and thinking around the business versus like the marginal you know strategic initiative or something I never like booked hours on my calendar to think about the culture you end up just trying to make things better and then watching what's going well and what's not at making observations here's an example so from maybe 2004 on we had open compensation so basically the top hundred or 500 people the company could see all the comp throughout the company and the rationale was then they could keep like a similar people in a similar vein and they would be more trust around gender around the other dimensions that could be discriminatory because the data was all out for everyone to see that was all true but it also created a lot of petty rivalries I make a huge amount of money this other person makes a huge amount plus $10,000 more and and so it got pretty distracting and ultimately we put it to a question of the VPs about 10 years later 2016-17 and they decided to take it away from themselves and from everybody else and do the traditional you know your direct reports and their themes but not the whole company so I would say that was an experiment in human nature which cup resolved pretty decisively to be less mavericky but it ended up working a little better so again we would take on an experimental view on things and that's a good example because then you could see like we're not geniuses we're just willing to question things and try them so we did open comp for a number of years and then decided that it's net costs were negative and other strategic questions that always fascinated me about Netflix was how you determined how much to spend on original and original content as much as we possibly could say more about just the core calculus are thinking there I'm sure there would be some directors that would accept that I'm limited money to make something so there's how much on any one shell that's a different question but in terms of the total budget we would always try to shovel money into that on the hopes of creating the great next kpop demon honors and in terms of any one shell then the question is what's the likelihood based on what we've seen that this is going to be big and it's also a competitive market in the very first original series that we had that helped make our reputation was house a cards and we had to bid that away from HBO so as media rights capital is making it they had bids both from HBO and us and we were not we were a DVD company okay so we had to overpay relative to HBO and then they went with us and we had to overpay by a bunch because you know it's a but also a lot of risk and then they came through it made a fantastic show and then we were off to the races and original content and it's a simple way to think about it almost like one would think about a venture capital portfolio or something that you want to make lots of bets and you don't know exactly which one's going to be kpop demon hunters but that they're being a kpop demon hunters is the thing that matters that you have some dominant massive franchise very much so but it's similar to venture capital if every a round or a hundred million and there was just an a round so it tends to be pretty much a single round to fund the construction you do get sequels and other things you have option rights to but that would be the big difference from venture your finance team isn't losing money on big mistakes it's leaking through a thousand tiny decisions nobody's watching ramp puts guardrails unspending before it happens real time limits automatic rules zero firefighting try it at ramp.com slash invest as your business grows vantus skills with you automating compliance and giving you a single source of truth for security and risk learn more at vantus.com slash invest every investment firm is unique and generic AI doesn't understand your process rogo does it's an AI platform built specifically for Wall Street connected to your data understanding your process and producing real outputs check them out at rogo.ai slash invest if you think about the portfolio of content what else would surprise people about the conversations happening inside the business especially in the early days of developing that portfolio the considerations that matter to you as you expand it it i mean it's now it's so many things but in the early days you know you're obviously making choices it's house of cards it's not something else and there's trade-offs what would surprise people about the conversation that led to the portfolio that you ultimately chose i mean everything for us was around reinforcing the brand trying to figure out what should the brand be so the cable networks by necessity were narrow brands because they got one cable slot and so FX and hallmark were both interesting doing different types of content but the handle on the brand gave you the type of content which was inherently pretty niche because it had one network slot we were doing something that had all the network slots and so then we spent a lot of time thinking about how much of the programming do we want to be hallmark soft easy romantic stories feel good versus FX and be sort of cutting edge and violent and dark versus comedy central our main issue relative to the industry was that we had this incredible breadth of content to choose from and on any new film or series unless it's completely derivative there's just so many variables compared to other things so it ends up you can do asset allocation which is how much in comedy how much in drama but in terms of the stock picking it ended up being intuition and people's judgment and then we promoted those people with great judgment who got this right again and again and had we called a great taste but they had more than taste they had taste in judgment about you know with the people deliver with this come together and all kinds of ways so it became just people picking and so then it's trying to figure out how much money to put in each area and then the people in those areas would figure out how to best spend it the other side of the equation of course is the beauty of the business model is fixed cost for a piece of content and then it growing subscriber base across which to spread those costs but that requires that you grow the subscriber base how did those two interrelate like what did you learn about what sorts of fixed spend on content would create great and reliable and high subscriber growth what I loved about Microsoft and Facebook's business is they at that point basically had one big product or you know maybe two highly related ones and then it was grow those products to be you know 50 billion and revenue on a product when I started Netflix I was like well thankfully we can do this as you know one really big product because entertainment was an extremely large market basically every human on the plan at watches television to varying degrees but it's a deeply human thing to watch stories and so then the question is okay what percentage that could we capture even today Netflix is about 10% of US television so we've got a long way to go and internationally it's less than not generally so plenty of in terms of how do we think about subscriber growth we knew that if we could produce better television make a lower cost and more enjoyable being on demand that they would be a huge market for it so it was kind of constrained on essentially product quality what kind of shows do we have and now the streaming is kind of flawless and not differentiated between competitors but for a decade we did it much better than our peers that other 90% is that defined as just traditional television is that include like YouTube YouTube is about 12% good to everything sports video gaming it's uses of the television screen I mean we compete for time on mobile phones too but we're very small there it's not a big use case and television we're a big use case but still really it's under 10% if you think about that percentage as an important thing for Netflix the business what are the competitive frontiers or fields on which you feel like you're competing and something like YouTube it's more easy to imagine versus cable or network shows or something like this but versus something like YouTube that's sort of a pure UGC platform do you think about it that way like you're competing against them and therefore we want to do certain things to win well they're growing and we're growing and traditional linear is shrinking so you're right that mostly we both compete with linear TV but we do worry about YouTube because it's sort of a substitution threat does it get better and better with AI creators and it just becomes more and more of people's time and that's the user generated world and it's not really user generated it's on spec that is there are some very professional people who may content for YouTube but they don't get paid on in advance then they put it up and they see what kind of ad revenues they get so in our case you know we pre-fund the programs which gives them a bigger budget they don't have to do it on spec and that's really the biggest difference in the business model but it's ultimately do we produce content like the perfect neighbors uh documentary that just came out one of these awards and it's been the number one documentary this last month you know clever fresh perspective content like that or kpop demon hunters which was our hit this summer so you know it's ability to create those hits but is that magic like what is shared amongst the people like Ted and others that have been able to reliably and consistently be a part of creating those big hits over time if only it were reliable and consistent kpop was probably our 30th animated film so it's not at all reliable and consistent no it is a lot more like that of art and seeing the contrarian edge and what's the story I mean imagine the pitch for kpop demon hunters right you know so it doesn't fit a set of formulas so in that way it is a lot like venture and also that a few of the companies will generate outsized returns what do you think will be the most interesting impacts of AI on the Netflix business specifically and this could mean from the perspective of cost to create the content it could mean for the service where does your mind go as you think about the raw capabilities of the technology will visual effects is one where there's a lot of that workflow that can be automated but in terms of like recognizing a kpop demon hunters at a script stage or pitch stage which is the biggest value creator you know which things do we back that will be a far distant skill so eventually AI might eat up everything and we better than humans on everything but you know in terms of the sequencing so think of it AI is not particularly insented and the companies are not to do long-form character development but at some point they may do that and focus on that and then the AI's will be winning the book or prize and doing the best fiction of the world and remember we're only interested in like the top 0.001% of the stories they get written so simply writing a story I mean there's a million film students we could just go to that so the issue is trying to find one that's really unusual extraordinary and recognizing that one early so I think AI will have had a lot of other effects before it hits us on that can you imagine kinds of innovation in the form factors or formats of shows like it seems like we've got a couple you know there's the show there's the documentary there's the following feature movie can you imagine lots of different kinds of form factors starting to proliferate well let's step back a second and think about contrarian thinking generally so you love contrarian thinking right but you probably need to remember that contrarian thinking most of the time is wrong and once in a while it's right and that's when you get the big reward but if it's a most of the time contrarian thinking is wrong and the conventional thinking is right so for example on formats people are trying to think about multi-ending design your own story short form quickly there's all kinds of things right and the enduring aspect of a film at one and a half to three hours as a story has stayed strong like the enduring formula novel or the short story or the TV series so these things are tapping into something human that other things so you got video gaming as a different modality and that's quite a bit different but like most of the hybrids between TV series that you kind of interact with have been very small markets it doesn't mean we won't eventually come up with a new art form that's quite different but I don't think it says easy as choose your own adventure we're in leanback mode with TV and we're mostly wanted to tell us a story and if you think of young kids two year olds half of the time they're like daddy read me a story and half of the time it's daddy play with me and these like are two different modalities that are different one is passive and I mean I get I think it's very biological and we're selected for it and one's very active one of those becomes TV and another becomes video gaming.

I'm also fascinated by the technology backbone and story behind Netflix this sort of invisible part of the business everyone just takes for granted they can hit a button and have this beautiful thing pop up but I know there's quite a lot of building that happened behind the scenes can you tell that part of the Netflix story of what it took infrastructure wise and technology wise to make what we all enjoy possible.

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 FedX 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 a hundred companies at 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 come out of test 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 in a different types of games and figure out gaming in addition to TV series and films.

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.

We used to just be movies and then we expanded TV series and we're really glad we did that and then we expanded the unscripted content you know love his blind so we've always been expanding in new categories in gaming just another category of entertainment and so we've got some cool stuff going on the 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 sort of social interactions.

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 a simple things you tried that didn't ultimately work that you stopped doing.

Sure we're going to let's do one of those if you look at the newer times January 2006 there was a launch of Netflix friends so this was friend of 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 permissions 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 how do you think about TikTok what are your impressions of it?

It's like old cable used to be and you changed channels and you'd just be there num changing channels looking for something to watch but really it was that head of the new thing constantly so it's hitting that part of enjoyment very creative is a business and all of that effective but I would say now the thing I want to spend a lot of time on 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 will those seem to be you know especially it once you've got product market fit and you're growing in your huge those are really important things how much would you sit down and think about where does our power come from as its scale as its some other cornered resources at some set of different things and guide the decisions to get more power how much was that like specifically on your mind?

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-exclusive our deals on televisions and those kinds of things they would often want to tax us so a typical television maker thanks well Netflix you're making a lot of money to have on putting the app on the TV I want 30% like Apple gets okay so they would the 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 of how that worked out Amazon and BASOS very famously for constantly reallocating capital back into the business to keep generating more customer benefit which obviously Netflix has done as well how did you think or would you think about the point in the company's life cycle to do more harvesting to pick dividends to buy back shares to do this sort of thing and just I'm so curious how you thought through like the capital allocators toolkit of the things that you could do with the capital that you're generating 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 freak ash 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 essentially a P&L margin question and what we decided is let's have a low margins relative to cable which ran it 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.

How did you know when it was time to leave being full-time CEO?

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 I was really driven from them and since they took over they've tripled the stock and you know they've done incredibly well.

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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 pattern mountain.

Like it seems just 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.

So pattern mountain is a ski mountain and real estate development that fell on hard times in Utah so the original people running at ran out of money so they never finished a lot of the project.

We happen to have a house there.

I love the place.

It's you know natural beauty is insane.

It's 10,000 acres.

And so after retiring from Netflix, I decided to take control of it and best 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.

And 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 eat the turnover and has created an amazing set of leaders throughout the company.

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 over the first couple steps to execute against it?

It was a series of transactions to gain control.

So it took six months to buy out a majority of the company of the shareholders to have control.

Everyone wants to be in air to pay a lot and being clear with them that this thing could collapse.

If I don't come in, that was stage one.

Then stage two was figuring out, okay, this is a great mountain.

But if half of it were private, like Yellowstone Club and half-state public as it was, then it could be a real win-win where they share operating costs and are more efficient.

And we can then have a very uncrowded resort on the public side, which gets to something that's gone on in the ski industry, which is high crowds.

So it gets to compete with that.

And then on the private side, it's building a 650-home community of ski lovers where they get there.

Basically, they're own enormous ski resort, the size of heavenly or veil, just for the $600.

So it's pretty spectacular.

In terms of what drives the ski business, what aside from the real estate stuff, what are the most important variables or considerations that you've figured out in your studying of its history?

Yeah, skiing is about one eighth or one tenth as big as golf.

And in terms of number of people and playing, so I'd love to close some of that gap, you know, it's cold, but it's very family-oriented to get outdoors as social with your friends on the lift.

It's got some of those same properties.

Interesting, and there are 25,000 golf courses in the U.S., and about 20 percent, 4,000 are private golf courses.

And private golf courses, you get better T times, the nice club house atmosphere, social, yet to know people.

And that's really what it is for private skiing, also.

There's about 500 ski areas instead of 25,000, but only three are private, Yellowstone club, Wassagebeaks Ranch, and Powder.

So it's very underserved market relative to golf.

What's most fun about it, too?

The whole project.

That it's very right-brain.

Everything at Netflix was very strategic, logical.

A lot of big competitors in skiing, the competitors are very cooperative.

And I think because you have 20 or 30 miles between you, and so it's a lot more collegial.

And it's aesthetic.

The big wins we've done have been building up the arts at Powder Mountain.

So there's got a lot of outdoor land art that's incredibly beautiful to ski through.

So if you've had the good fortune to go to Storm King, North of Manhattan, hopefully.

Okay.

So think of Storm King on a ski meltdown.

skiing through it.

Tell me about that part of it.

So how did you conceive of that?

And how did you execute it?

How do you work out?

How does one acquire Storm King like art?

It's the conceptual parts, the key, which is we want to have a ski resort and to differentiate.

So what are we going to do in summer?

Well, you could do zip lines in mountain biking, but it's like it's all been done over and over.

And frankly, it's high adrenaline.

And it's like, okay, but it's not that great a match for real estate sales.

But most importantly, it's conventional.

It's been done.

So what's like interesting and scalable and fantastic, but hasn't been done.

And that's the art part.

And you know, I'd been to Storm King, but Storm King has the level 600 acres.

So it's not like in a mountain, but it is outdoor sculpture and incredibly stunning.

So again, it was that synthesis to then trying to do that on a mountain.

Then it was building in the curators and getting the work going.

And now we've got dozens of pieces already in and a lot more coming.

That side's really coming together as the heart of our summer fall experience.

How did you decide to focus so much on education as one of the buckets of your time we talked about pattern mountain, but education charter schools, et cetera.

It's a huge chunk of your time and philanthropy as well.

What was it about that sector that drew?

And I'm just curious for you to riff on the problems that you see in the space.

Yeah, and it's interesting.

I has been probably a third of my time on Powder Mountain because it's a joy.

And then on the education side, I was a high school math teacher as my first job at a college.

And so I've always cared about K-12.

And I've done a lot of philanthropy and that sector over the last 25 years.

And then the new big thing is AI.

So it's easy to then put those together and how are we going to apply AI?

The core vision and it's super well articulated by your prior guest around Alpha School is kids should be taught individually as opposed to having a teacher stand in front of a class and lecture to them.

And that that industrial model of the teacher, the sage on a stage we call it, needs to be replaced with individualized tutoring.

And prior to AI, individualized tutoring would cost you $100,000 a year per kit.

So out of reach of everyone.

And so now with software, we can have individualized instruction and the teachers become more like social workers where they are helping on discussion, social emotional learning, a lot of the more human and emotional factors.

But the content transfer, what were the roots of the Civil War, how to do fractions, that's all becoming software and hopefully as quickly as possible because then it's very global and because kids will learn more.

What do you think we can do to speed that up the most?

It could take decades because of the regulatory nature of schools, things move slowly.

What could we do that could speed that up?

It's focused on apps that really help kids learn more.

It's helping parents see that they all wonder, hey, with AI coming when my kids 6 or 16, what's going to happen to them in the workplace and they need more and better skills than ever.

And you know, every 16 year old is learning things on AI anyway.

So it's having them be more focused on that and less on traditional classrooms.

When you think about classrooms, we use it in K-12.

We use it in college and then like in the workplace, we never use it again.

You did all this classroom learning and it has like no bearing in your working life.

And so again, it's really driving the percentage of kids time that's not in classroom.

And as Joe says, it's helping kids really love school because then they'll continue to love learning.

And the classroom in the board of in frustration of that is at the heart of it.

I'm curious, as you think about the future, just broadly across all your interests, you've got a cool purview on the world.

What most worries you and what most excites you about the future?

I'm part of the anthropic camp where it's good to talk about the negatives, not because we think they're going to happen, but because we'll lower the chance of them happening if we're honest and talk about them.

So I don't think the AI boomer and doomer thing is that useful.

I think we all want to acknowledge there's some pretty significant risks, but they're not dispositive.

And we humans may be able to capture tremendous benefit by harnessing AI for higher quality of life on a global basis.

I'm on team human for making that happen.

But I would say that's the biggest, you know, swing factor of the next 50 years is how well we do that.

What do you think the biggest risks are?

Well, the near-term risks are unemployment causes societal chaos and strife.

So if you were to get a lot of unemployment, then you might get radical politicians promising to get rid of AI and that destabilizes society.

There's the long-term power competition between us and say China.

And then, you know, is war become how many robots do you produce?

And, you know, be unfortunate if we both end up having to spend a bunch of money on that because of distrust, kind of a new cold war would soak up a lot of GDP growth.

In the benefit side would be that we cure disease.

We get nuclear fusion with huge amounts of low cost energy.

Humans don't have to work as much, maybe not at all.

They get to do things like learn chests and learn how to play all kinds of games.

You learn biology for fun, like you learn chest today.

So there's tremendous upside to automating a lot of this and taking it to the next level.

It's just keeping humans on top as the beneficiary of them.

My traditional closing question for every interview is the same.

What is the kindest thing that anyone's ever done for you?

30 years ago, I worked at a startup.

I was a frontline engineer of 28.

So I do it all night there's all of time that I used to have coffee cups spread around my desk and over a couple of days and we get kind of ugly and messy and janitor every now and then would clean them all and I'd come in and be clean mugs and I didn't think about it that much.

One morning woke up early and in those days, you had to go in the office because of the computers where they couldn't take them home.

So I went into the office, said 435 in the morning, walked in, went into the bathroom and there was my CEO washing coffee cups and I looked at them and I was like, burial those my cups.

He said, and I said, have you been washing my cups all year?

And he said, yeah.

And I said, why?

And he said, you do so much for us and this is the one thing I could do for you.

And I was just very moved about his humility and his caring kindness in your question.

And so I felt like I'll follow this guy to the end of the earth.

And so simple gestures.

Holy cow, great story.

Amazing place to close.

Thank you so much for your time.

We'll pleasure Patrick.

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