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Oh my god, David, look at that podcast room you are in. That foam padding. Welcome to season three episode nine of Acquired, the show about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenfeld. And we are your hosts. Today we are back with the acquired version of Terminator 2, the second part of our Netflix episode. You know like that, David. It's just for you. Oh, man. That's great. That's great. I love it. Listeners, now if you remember the last episode we did covered the DVD saga of Netflix and where we left our heroes in 2009 shortly before the epic launch of Quixter. So today we're going to dive in on the era of streaming and later original content. So David, I wanted to have a fun fact to start us off on Netflix. So as you remember, they were once a plucky startup mailing DVDs to customers and a remnant of the pre.com bubble starting in 97. And they were doing this, even before most people had DVD players, they were waiting for the DVD wave to crest. This company now accounts for 15% of all internet traffic. I know. That's in my show notes. Well, sorry to blow your cover early. But you know, streaming movies and TV as a category actually now makes up 58% of downstream internet traffic. And no single service accounts for more of that bandwidth than that Netflix does. And at peak times, it can even account for 40% of the US's concurrent internet traffic. So you could imagine maybe like 8 PME Stern or something like that. Absolutely. Incredible. Yeah. And this is with some of the best compression and optimization technology that like humans as a species have figured out how to do. The last episode was about a company fighting to get its first 500,000 customers. And this episode is very much about sort of global domination. All right. Listeners, we announced on the last episode that we had formally launched the acquired limited partner program. And we've been just totally floored by how many of you have joined our LP community and our listening to the bonus show. And our sending us really great questions for doing Q&A on the show. David, last week's episode was like very fun. So I'm pumped I got to meet Dan. And thanks for bringing them on. Yeah, it was super fun. We had Dan Hill, who in addition to being the CEO of Waves first portfolio company, Alma Coffin and CEO, he was Airbnb's head of growth for a long time and had just great stories about growing Airbnb from, you know, series B days to $30 billion plus and just so much to learn from him. So really fun to have him on the LP show. Anyway, listeners, if you want to hear Dan talk about why Airbnb was successful sort of in this space and how they chose their metrics and a bunch of other great stuff, you can click the link in the show notes to support the show for five dollars a month or go to Kimberlite.fm slash acquired. That's K I M B E R L I T E dot FM slash acquired. I feel like we really need a jingle for that. Do do do. We could just play that every time. Yeah, that's yeah. A choir needs better jingles period. That might be one of my holiday holiday projects. Yeah. Back to the show. Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founder. So we knew there's a natural fit. We know the host of founders. Well, David Senra. Hi, David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how they group us together and then they say it's like the best curriculum for founders and executives. It really is. We use your show for research a lot. I listened to your episode of the story of Akio Marita before we did our Sony episodes. This incredible primer. You know, he's actually a good example of why people listen to founders and to acquired because all of history's greatest entrepreneurs and investors. They had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again if you do the research of him. But I think this is one of the reasons why people love both of our shows and they're such good compliments is on acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders. Listeners, the other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them because in my opinion, the greatest entrepreneur to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20-year-old Steve Jobs, he's talking about Edwin Land's my hero. So the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is the people may die, but the ideas never do. And so Edwin Land had passed away way before the apex of Apple. But Steve was still able to use those ideas. And now he's gone and we can use his ideas. And so I think what acquired is doing what a founder trying to do as well is find the best ideas in history and push them down the generations. Make sure they're not lost history. I love that. Well listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. All right. Now onto the show. On to the show indeed. David, I texted you before this. We have a little bit of follow up from from the last episode. We have some awesome listeners that wrote us in about Netflix part one. And since this is a two-parter, we do get to actually go back and and make a few corrections. The first one is actually on my carve out from last week where I mentioned that the good place was a Netflix show. That is a classic millennial mistake. It is completely not a Netflix show. It's an NBC show that just got syndicated on Netflix. But my cord cutting had blinded me from that. And Netflix originals have just gotten so good and plentiful that I just assumed that I was watching a Netflix show. So that was more shadowing for part two. I know. The other one is that we discussed that Blockbuster had an incredible business model where they only had to pay rack rate for DVDs. And then they could rent them as many times as they would like. Thanks to on Twitter, Jim underscore brown. We have a correction. It's difficult actually to track down the exact number. It's sort of buried in some academic papers. And I think it came out in some court case filings that I gave up on trying to actually find it out. But it's it's somewhere between 50 and $100 that they actually had to pay for every DVD rather than just getting to sort of buy them at store price in sort of a special deal that they'd orchestrated so that they could generate the sort of high rental revenues that they they got from each one of those DVDs. So good to know there and thank you to Jim for for correcting us. And the third one is we had an anonymous listener send us some amazing facts about red box after we briefly touched on it in the last episode. So red box as you know from the last episode was actually originally a project at Netflix that an executive quit to go and and work on full time. So outer wall, which was red boxes once parent company was acquired for over a billion dollars in 2016 by the private equity firm Apollo global management. And red boxes now a standalone company inside of Apollo turns out it's wildly profitable. They're actually working on on starting a streaming service of their own is standing up a second attempt of that. But looking at their core business like it's not hard to figure out why they're wildly profitable. It turns out running a retail footprint of six feet by six feet that rarely requires human intervention can be wildly profitable. No surprise there. They have like the you know if you think about sort of like the dollars per square foot per month at retail establishments like one way people always focus on improving the numerator there. But you could also lower the denominator. Yeah, they've sort of gained the system on that metric. But here's another crazy thing about red box right now. So in Disney's attempt to build their own relationship with customers through the in my opinion very dumbly named Disney plus they do not have a distribution agreement with red box. So what is red box due to get the Disney titles on their their machines. Well we heard a great story. It is official company policy to send employees store to store when new Disney movies come out to buy retail copies of the DVDs I guess Blu-rays and bring them back to stock the machines. This is this is actually how red box acquires Disney movies to put onto their their platform. Wow, which I kind of imagine are some of the most popular titles on red box machines. I just think in general I think we we sold the company short last episode. They deserve some of the credit also for destroying blockbuster because while Netflix was hard at work hammering them on the online front red box was also doing for one dollar what they used to do for three dollars and in many ways easier because they sort of had more endpoints at more stores. Blockbuster's main business was sort of under under attack there as well. So lots of kudos to red box for being a major player in this industry. Indeed. Indeed. All right so David can you take us in to what year 2007 rewind a little bit and start with streaming or are you going to like find some way to go to like early 30s. Not that far back this time but we will pick up the story in part two as listeners remember in part one we covered the story of quickster I mean Netflix from founding to 2009. Once again also in part two want to shout out the really excellent book Netflix by Gina Keating which provides a lot of the history in fact. And really for anyone who's more deeply interested in this company and this history can't recommend enough that you go read it. So we ended last time in 2009 Netflix not yet quickster had basically you know snatched victory from the the jaws of blockbuster to keep calling it quickster because like their whole business basically was quickster. Yes this was quickster. Okay everything we discussed in the last episode was quickster. They just reached 10 million subscribers it's 2009 there the recession has beset the US and the world recently and and Netflix is one of the few companies that is thriving during the recession they're basically on top of the world. But the waves are shifting streaming is coming and like any good you know C captains at C read Hastings in the Netflix management team they see this and they know that they're going to have to adapt and they're going to have to embrace this this new title wave of streaming that that they see coming. So to rewind a little bit how did streaming kind of come about so really I mean I think you can point to this was our first episode it was our first acquired episode right Disney Pixar. Yeah first or the second I can't remember Instagram or Pixar was one of my first. Yeah there's one and two but anyway Disney in 2006 had acquired Pixar and that of course brought Steve Jobs became the largest single shareholder in Disney and and Steve Jobs joined the Disney board and after that happened in a couple years following Disney made a made a pretty unprecedented move they brought all of their video content to the iTunes store and so for the first time all of a sudden I remember doing this in college and right after you could buy digital copies of Disney movies and ABC TV shows I remember doing this with lost and you could buy a whole season at a time now this was not streaming this was downloading you would buy it on iTunes download the entire file to your computer in the beginning there wasn't even a video iPod I like the disdain that you say for computer it wasn't something like archaic device it is it is I say as I'm talking into one but I'm I'm rapidly trying to move everything to iPad but and so that really kind of started to open the industries eyes this was the first like this was real content mainstream content that that now could be available digitally the other thing that happened right around this time is is US broadband penetration finally passed you know 50% and then kept growing and became really ubiquitous you know this this whole business whether downloads or or streaming would have been impossible in the in the dial up days for broadband finally enables it so Netflix of course and read Hastings in the management team they see all this happening and they know they need to do something so in 2007 they make a pretty key hire onto the team they hire a man named Anthony would now Anthony had been the founder of a successful DVR company so you know those like set top boxes that were like like T-vows so he had founded a competitor to T-vow called replay TV that had been successful and so they hire him to come and be a VP at Netflix and to work on what they're calling the Netflix box and the idea is that this would be a set top box made by Netflix that people would would buy and put in their homes next to their DVD players and initially the vision was it would have a hard drive in it and just like when you would download a Disney movie of the iTunes on your computer you would download a a movie from Netflix onto this box and would play it off the hard drive hooked up to your TV I think I glazed over that of the research like but that before streaming it really was like it was it was basically a NAS like a a network store you know I just keep a bunch of stuff at home well it was it was a replay TV it was a DVR that's what it was it was a hard drive they realized though that that actually with broadband like you know you have to wait to download the movie when you're in this old paradigm that that actually just streaming they had the technology to do that and that would be better so they pivot the project into that the the box is is coming along but read in the management team they started to get worried though this is late 2007 they they worry that if they release their own box they see that there's fights coming in this new paradigm they're going to have to fight with the cable companies they're going to have to fight with the content companies and they realize that if they release their own box they're also going to have to fight with the consumer electronics manufacturers and reads like one of his main jobs at this point is sort of going door to door with Xbox and with I think PlayStation and like really lining up these partnerships saying hey we think streaming is going to be a thing we're working on a way to get that delivered through the browser on computers but we know that a lot of people are going to be reticent to you know when we do this watch on computers so they they probably want to do on TVs you guys are plugged into TVs and and he's realizing like boy these negotiations are are not going to go well if I have like competitive device to you guys what does he do we've seen this before he tells Anthony yeah we're going to have to cancel the project just like they did with red box and and he says oh okay well you know we've basically built this thing how about we do something a little bit different I think they're two weeks from shipping from people who who know sort of how this process works they're in the third phase so it's DVT design and validation testing verification testing like the whole team has been over in China like manufacturing these things they've did done several revs they're coming off the line they I think they have a hundred or fifty units made that are done and perfect and they're taking those on the roadshow to like show sort of demos to potential partners yeah of like you know that there are this thing's baked it's baked yep and in a classic you know Netflix management team re-days things but it's you know nope we're changing our mind as we will see but would would convinces them okay rather than killing the whole project how about we spin this out as a separate company we've already built this device it will be who view Netflix to have this device out there to be the initial you know device streaming partner for this Netflix streaming service you know we can have a win-win here and I get to run you know my own company here well they talked over they decide okay they spend the company out and they name it roku and roku actually was a name so would had had essentially a shell company after the after selling replay TV and are moving on from replay TV it started a company called roku which I believe in Japanese means six is the number six and it was that this was his sixth company that he had started yeah yeah and and so he essentially restarts this company leaves Netflix and takes this box that they've built within Netflix and rebrands it as roku and launches it in early 2008 and it is you know it goes on to great success and is now its own public company IPOed earlier this year but they are the first device streaming partner for this Netflix streaming service and just like Netflix wanted following this this is sort of the proof concept they sign up Microsoft and Xbox as a device partner streaming comes that summer to Xbox 360 Netflix streaming and then they start you know going to PlayStation they go to all these places not going to them down one by one can we just pause and reflect for a moment what an unbelievably gutsy management decision that is like you have this whole like arm of your company for for listeners who are interested we'll put a link in the show notes the team like a month before canning it or maybe a couple weeks before canning it did an all hands where a group of employees did a parody video of the Dharma initiative from lost which was huge at the time of of these sort of like secret project to build I can't remember what they called what the sort of secret project name was I remember about lost is that it was it's like such a period piece now oh the codename was Griffin so it was it was like the Dharma initiative logo with Griffin in the middle but this video is amazing because it was shown at the all hands it's got everyone from you know people who worked on it to the manufacturing team in China to read Hastings like as part of this video and they're showing it to everyone at the all hands as like a hype video for get excited about this like new strategic direction the company is going to take we're doing hardware baby like we're doing our own video codex like we're going from silicon all the way up to the cloud and we're going to own the whole thing and then just like on the dime boom it's its own like it's its own company that goes on to be wildly successful I mean it's really amazing like I don't know if this says more about me and me living under a rock or just that like this history of Netflix is not told that both red box and Roku come out of Netflix like it's crazy they've had more spin-offs than they have their own acquisitions I think they've only ever acquired one company I know what their first was I don't know if there were other ones after that and their first was quite recent but the Roku thing what just one more note on this I try to do a bunch of research to figure out when they spun it out what did the ownership structure look like you're totally not living under a rock because I look through the entire Roku S1 and a couple times it mentions Netflix as obviously they have a large dependency on Netflix's business it mentions in two places a lease like that they shared with Netflix in the sort of early days but it doesn't mention anything about like Netflix is part of the founding story of the company read Hastings nor Netflix appears on the cap table when they're going public of sort of major shareholders which is interesting because Netflix invested six million dollars when they spun it off but I wonder if they'd just been deluded so much one other thing that's six million dollars I tried to find more information on that figure out like if there was a valuation on the company if they would it looks like there's a form defiled on Edgar which is the SEC's website that you can go to that shows an investment it doesn't name Netflix it just names read Hastings so maybe it was some kind of proxy thing because I assume it was Netflix and it's scanned improperly so like you get to read half the previous page and half of the next page while you're looking at this document and scrolling through it and none of it's in a digital format so it's like one of these things that's like you really have to scour to find anything and then you can't find that much other than the fact that it was killed and spun out amazing and this is now a you know billion and a half dollar market cap public company crazy so that's the story of the genesis of the one half of the streaming business for Netflix which is the distribution getting getting you know content into people's homes but but it turns out the other half of the streaming business the content side quite frankly proves to be the harder half over the coming years or at least the more capital intensive half so unlike DVD rental that Ben was addressing in the fall-up in the beginning of the show at the top of the episode unlike DVD rental there's no first sale doctrine here so to stream content and be it you know shows or films to people via service you have to negotiate with the rights holders of that content and you have to buy those rights from them now in the early very very early days the 2008-2009 when they're just getting started here the content companies don't really see the future as clearly as Netflix sees it here you know these are the days when cable network content deals are like still huge and the vast vast vast majority of these content companies revenues so they've used streaming as just kind of like a nice add-on so the first deal that content deal for streaming that Netflix actually does is with stars the pay TV cable network this is a total steel so they do a two-year deal in October 2008 with stars to get all of their content for twenty five million dollars so this is TV shows movies their back catalog everything that they have the rights to stars quickly comes to regret that but it's only a two-year to start to stars actually own the rights to all those movies that they're putting on their sort of like high hundreds cable channels yeah so I believe the way this works this is I'm mostly conjecturing here but I I'm recalling my old days as a media TMT investment banker around this time I believe the way it works is that stars hadn't negotiated with the with the content production company Disney Fox you know whoever NBC who had originally made the movies and TV shows they had acquired the rights to show them on cable and I believe it also included streaming or whatever the language but it wasn't really something that was contemplated them but they had the right to then resell those rights that's a theme between music and movies really all media is like you since you don't know what the next frontier is going to be sometimes people can sort of slip it into the contracts like if if it's like oh yeah we'll just bundle in forward looking like the VR rights to this thing and you're like yeah yeah whatever but like you don't know what's going to end up being huge and what's not yep totally this happens and Netflix also does a deal in 2008 with NBC Universal for streaming access to some of their content including Saturday Night Live I believe streaming the day after on Sunday once again just like we saw with Netflix in part one this is like instant product market fit so you know everybody who is is any inkling of watching video on a you know computer or mobile devices are emerging any screen at this point so you know mostly millennials and younger but but lots of other people too I mean YouTube has been around for several years at this point they just go nuts and and this is drives tons of signups for Netflix even during the recession I mean it's a way better product I mean like why would you the old paradigm is you only want to video when it's on TV you know when you want is on versus you can watch it whenever you want wherever you want like that's a no brainer customer value prop there and I remember in the summer of 2008 previous to that I wasn't able to do Netflix's what did they call it like instant watch or watch now feature I think it was instant queue you had your regular Netflix queue for DVDs and then the instant queue was your queue of what you wanted to watch you know lined up via streaming here so right yeah and and you could only it only worked on windows because like they just hadn't they hadn't gotten around to building the sort of Mac client for it yet and then when they did you had to like use I can't remember what browser it was but only worked in one browser and you needed silver light so like so yes sort of this oh my goodness the way that this works today and the way that it used to work it was just the clewgeast way that you could imagine trying to like it would take 15 minutes to get the video sort of set up on your computer so you could watch it this was the only reason I had silver light installed on my computers wow how quickly we're free yeah this is you know 2009 2010 Netflix is just but they've beaten blockbuster at this point yes they're competing with red box but like they're the only game in town when it comes to streaming they are having a bananza just adding subscribers like there's no tomorrow and so much so that by 2010 Ben gave the stat that today Netflix is still 15% of all US internet traffic back then in 2010 they were 20% of all US internet traffic oh wow internet grew yeah I assume well think about how much more streaming video there is now versus in 2010 right yeah it probably wasn't 68% of the internet or 58% of the internet then yeah yeah I mean of course there was YouTube much smaller than it was day but you know there was no there was no amps on prime streaming there was no Facebook video there was no you know snapchat there was no Instagram nothing infrastructure wise there also wasn't gigabit to the home then yep yep yep and Netflix already knew this was the future this is like not just the future this is now so they they realized they need to sign up as much content as possible and just keep this keep this train running so they're willing the content companies are also seeing this and saying oh wow we can extract a lot of dollars out of Netflix Netflix says we're happy to pay dollars we've got subscribers coming out the wazoo they sign in 2010 a remember their first deal with stars was 25 million dollars they sign an eight hundred million dollar deal five year deal with epics EPIX now epics was a joint venture between paramount which is part of viacom lion's gate paramount was the the film studio of viacom lion's gate independent and mgm which were the two remaining major independent film studios so they get all of their content all the back catalog all the new content that's coming out and mgm at the time I remember I was working on mall street they were facing bankruptcy and so they desperately needed this cash and it was this Netflix deal that between epics like really keeps a lot of these companies alive through the recession everyone else sees this and they start coming back to stars in mbc comeback they demand much more money and Netflix realizes they need to get really smart so they spin up a whole content acquisition department and they start spending a lot of money acquiring all this content so there's there's foreshadowing there Netflix spending a lot of money on content okay it's coming back but a quick real quick detour about the media industry so all of these content production companies the media industry has been around for a hundred years in the u.s there has been tons of consolidation they are either under the same parent company in the case of like time Warner or or or very closely tied to the cable companies to the distribution like content and distribution are all within the same house if not directly then at least they're in bed together also going on as a as a result of this cord cutting starts becoming a thing consumers are saying like man i'm getting so much great content from Netflix from youtube from streaming and it's the recession and you know cash is tight do i really need to be paying a hundred bucks a month for my cable subscription so so you've got the content side of the house then you're saying is like very incentivized to do these deals but the distribution side of the house is like yeah this is the thing accelerating our death like can we have a conversation for yeah exactly so they said the distribution side of the house the cable companies they start getting very protective versus Netflix now what do the cable companies also own most of in the us they own the broadband pipes to people's homes the most people in the u.s at this point time and and really still to this day i would assume are getting their internet connections in their homes that they're using to stream from their cable company from time Warner cable from comcast from whatever from the cable madam quick side note do you know about fast com they leave it so forever i use speed test dot net to test my sort of upload and download netflix was having all these issues through all the net neutrality stuff where as you're about to suggest the pipes did not like them because they were taking up most of the bandwidth but not paying anything special to be on them so netflix was getting throttled so what did they do they created fast dot com and put it on the same ip block and on the same cd ends as their content so then they were they ran a big campaign and encouraged users by the way fast dot com is a great way to check your upload and download it as far sort of like simpler and lighter than speed test they encourage consumers hey if you ever feel like gosh it might wise my netflix slow go to fast dot com and and compare that against how I asked you think your internet should be and you'll get a reading of you know what your is p is actually treating us as in terms of uploading download speed interesting well of course then what your referencing here is throttling the cable companies the the ISPs they start throttling Netflix because it's a competitive threat to their whole business model so what does Netflix do read hastings is like I can play politics I know how this works remember back to part one and his days on the California board of education he starts a pack a political action committee uh... called uh... not to support a particular political candidate it's called flicks pack and it's to lobby the FCC to set up net neutrality rules so if you we all go back in the time machine a little bit here and start remembering when did net neutrality start becoming a thing when did we first start hearing about this it was in twenty ten and it was because of this and it was because of netflix that really remember all these campaigns about like you know net neutrality and stop soap and all the all this stuff like uh who's behind it David some of us some of us wrote a big 40 page thesis paper on network neutrality in 2007 so like you know hipster net neutrality yeah you were just ahead of the curve I was it's the only time my life I can ever claim that and I remember these huge huge fights and and then finally at the end of end of twenty ten Netflix wins and the FCC approves rules essentially preventing ISPs from from blocking content that's under a attack again today I don't know actually the details of the latest FCC ruling um this year last year in the Trump administration uh I believe reversed a lot of this this is one of those things I followed and then the rest of the world's news got so insane that I lost the thread yeah yeah me too so I cannot speak authoritatively on this anymore anyway um so twenty ten basically goes really well for netflix I'm spending a lot of money but they're they're growing hugely twenty eleven also starts on a very positive note they finally launch international expansion now international was hard to do with the dvd rental business because you need it you know basically cooperation of the national post office and all this infrastructure and everything um but streaming you know it's just it's just bits it's not atoms and turns out a lot of the world speaks english too and watches us made a hollywood video content so first they expand first in Canada naturally and then before the end of the year in mexico and latin america um and this becomes a huge huge growth driver for them over you know the subsequent throughout the twenty tens now international is a a bigger business for netflix than their than their u.s. business um so all going well they're you know still kind of on the top of the world here and this is twenty eleven twenty eleven yep I don't think we talked about the chaos monkey in the last show correct no I don't know we didn't talk about the cast for it all right so this is the the time that netflix decides we're fully now an internet company in a bigger way you know that we're a streaming company and so we need to be world class of technology and anybody that has that watches netflix today sort of knows like it is remarkably bulletproof like that it kind of always works and how is that well netflix invented something that you can find on github now that's part of a larger suite of software uh that's it's open source in twenty eleven called the chaos monkey and what the chaos monkey and its original incarnation did was it was a software package that you would turn on on the server sort of on your on your whole infrastructure and it would just start pinging around all the different you know internals of your system and just kill random processes at will it was literally a chaos monkey yeah and and what it would do in the the philosophy behind the whole thing was what better way to uh prevent failure than to always be failing and be able to construct systems that are extremely resilient and sort of fail gracefully instead of failing in a catastrophic manner and so some of the original things that they did were the experience could degrade where the resolution would get worse or where your recommendations weren't available or your profile wasn't available but you could always do the number one thing that people want to watch on netflix which is search for a thing and then watch it and it's just crazy impressive mentality that you know back in twenty eleven they're pioneering sort of like a it's actually it's used in a ton of companies now there's that book famously named chaos monkeys about about Silicon Valley in general it's sort of a brilliant infrastructure decision and just showed the uh the sort of level of talent in the engineering department there they still run it now like nine to five or something so they don't have to wake people up in the middle of the night because the chaos monkey tips something over that that you know was still sensitive very is very humane it's a humane chaos monkey yeah that's well an apt analogy for what's about to happen here I feel like this is also the story of the business side of the netflix house which is like there's a chaos monkey running a monkey they keep shooting themselves in various body parts but managed to persevere uh at her very very robust uh as a business so summer twenty eleven now this is when the dominoes start to tip the other way they make an announcement so again we're now a couple years into this streaming business it's again instant product market fit people love it it's twenty percent of the internet they know this is the future so up until this point everybody who was a netflix subscriber to the DVD rental business just got the streaming baked into it like you just subscribed to netflix it's just one product it's like prime we're just gonna throw stuff in to sweeten the offer exactly summer twenty eleven they change the pricing structure they issue a press release and there are a couple there are a few things in this press release what gets all the attention is they come out they build this as a price cut it's anything but in reality come on don't don't bury the lead like PR rule number one if you're about to announce something that consumers eight do not make the title you're gonna love this I thought you're using me a varying the lead no the lead comes later no separate press press release but yes yeah no I'm saying yeah that Netflix that press release hardcore very yeah this is gunshot wound self-inflicted number one so what did they do they they changed the pricing their pricing tiers to so they they know of three options you you can subscribe to just DVD rentals and they build that as a price cut so cheaper than what just subscribing to Netflix was before you can subscribe to meanwhile they know the greater usage is on the streaming side yeah right you can subscribe to just streaming for also cheaper than the price of the old bundled Netflix plan or you can have the bundle you can have both and that goes up I think like 20% of price or 20 or 25% or something like that people react to a very negatively to this quote unquote price cut so negatively they lose a million subscribers basically instantly now they've grown a lot so it's not like you know with losing a million subscribers back in part one was like losing you know 20% of their business but still like it's the stock price takes a beating yeah still very significant people people are very upset my father was one of them and I don't know if he still listens to the show but I distinctly remember him like boycott a Netflix for a year or two before he signed back up and it was furious about this again this is the recession like it's just so tone def like people loved Netflix like people were losing their jobs and cutting the cord on their cable company but keeping Netflix because this was like they're you know they're happiness like it was like one of the most high whatever the you know those brand ratings that they do Netflix was like up there with Apple and Amazon and like the very very best best brands in America and this just did huge damage people felt betrayed their stock plummeted too I mean I think Netflix has always sort of been valued on their subscriber growth and actually more recently really on sort of what their projected the subscriber growth will be next quarter and this was to to have a down quarter what they actually lost subscribers it was like what yeah the only time this had happened in the past is what we saw in part one when when blockbuster launched total access so what are they gonna do Hacings has a plan of course now we should know I forgot to mention earlier at the end of 2010 also something you know long time coming foreshadow that we knew happened but sad for Netflix their great hero Barry McCarthy retires and leaves the company he decided not to leave his friends in the knife fight against blockbuster I'm sorry against Amazon when they thought that Amazon was coming in and so now they're safe so he can leave he leaves and he takes some time he becomes an investor with tcv and then does his short stint at clinical and then joins Spotify as we talked about in that episode but back to Netflix so there's no no Barry McCarthy read you know he has a plan to address this issue he thinks that the way to do it is you know he knows the future it's the public that doesn't get it they don't get the streaming is the future he is going to open their eyes to this he just needs to push harder in that first press release they about the price cut quote unquote they got so much negative reaction kind of at the end he said you know and this is a precursor to we are going to spin off the DVD rental as a separate business eventually he decides that the way to fix all of this is explained that this is really part of the bigger strategy and to do this spin off and executed and show America like the path forward so he decides the way he's going to do this so the plan is that they're spinning off the DVD rental business into quickster and a long time Netflix executive who we didn't talk about in the last episode Andy Renditch who ran I believe ran all DVD operations he's going to be the CEO now now quickster and he'd been there for like 12 years yes he'd been there for a long long long time how are they going to do this they're going to do what you know all the hip kids are doing these days they're going to make a video and they're going to post it on YouTube and it'll go viral and everybody will understand you know the vision great this is like the 7-11 dude a blockbuster coming back me like the kids they're going to come they're going to eat pizza the blockbuster stores was it was it party on the block rock the block rock the block this is the rock the block moment for Netflix they're going to post a viral video on YouTube well they make a video read and and and Andy they make a video and it does go viral in September 2011 hashtag winning hashtag winning but it goes viral for the wrong reasons we will link to this video in the show notes it is still on the Netflix YouTube channel I think this might be the most painful thing ever yep it's still there I so I thought it would be you know on YouTube somebody else and many people have mirrored it and you know copied it on their accounts it's still on the Netflix account this is amazing they're proud they're proud oh my god this is the one of the most painful videos I've ever watched in my life imagine the least like cool most fake like corporate like dad thing you could ever imagine and and then multiply by 10 that's this it's so bad and it's a 3.5 minute video the two of them basically like it's like scripted so like they're trying to be hip and cool they're out like patio furniture outside the Netflix headquarters and read is wearing like a like a teal like shirt these guys go tee and like most people never seen read in person at this point listeners if if if this is ever us and like we are we become like tone deaf like well maybe we are already please write us emails please acquire defmgmail.com don't worry if we do something like this I wouldn't be worried about getting feedback because within like days of this getting posted read on his personal blog he gets 30,000 comments on his blog basically just trashing him for like how bad this is so Saturday night live they it's so this goes so viral they parody the video on Saturday night live they've Fred Armason the you know the Portlandia guy he's Andy I think I forget who does does read we'll link to this in the show notes too and it's just like it's so funny you know this stock price get crushed the first press release this time it gets crushed even for like Netflix and quickster basically become the laughing stock of the internet. Hey a lot of their big bets pay off a lot of them don't but they take big bets. They take big bets this is one they really should have thought through a little more before the July press release they were trading at $305 a share after the quickster announcement they're down to $65 a share so they lose like was that 80% of their value as a company in like a couple months here and and the quickster thing itself like part of it is a big part is the way they announced this and how this went down it's also just like it's half baked like this is not a good product this is not well executed this is not well thought through so customers when they they announced they spin off and do it you have to have a separate account on quickster and Netflix separate billing separate cues that you manage separate customer service like separate company man what do you expect yeah talk about like a terrible experience this is this is like the kicker here Netflix didn't even grab the quickster Twitter handle so there was some dude out there who had the quickster Twitter handle and fairly he was like a pot smokey like soccer player guy and he's like just start to troll like Netflix that is like publicly extorting them and like you know so bad so bad what is the net of this what what all happens within one month it was September when they do this ill-advised YouTube video announcing quickster within a month they cancel quickster they completely unwind the whole company Andy rendage you know the 12 year next Netflix veteran who'd been tapped to CEO like he's gone he resides he leaves the company everybody you know like half the people who'd gone over to quickster they get laid off they're gone like they just completely like I mean this is one thing about Netflix and and read is like they make big decisions they make them confidently and you know if they're the wrong thing then they pull the plug so they they pull the plug on quickster another bad thing for Netflix oh well bad thing at the time I think good thing in the long term happens for them in 2011 Amazon they didn't launch the Netflix competitor in the DVD streaming and the DVD rental era they launched the Netflix streaming competitor Amazon instant video and they get into the streaming game and then early in 2012 they also do a deal with epics the joint venture that Netflix has done a deal with spend I think about the same amount of money about a billion dollars get all the same content and so now not only is Netflix just shot themselves you know in multiple body parts with this quickster thing now they have Amazon out there which is offering Amazon instant video bundled with prime if you're a prime subscriber already like Netflix is like oh yeah yeah you were paying for Netflix like now I'm gonna make you pay twice for this Amazon's like oh great have it for free oh yeah you want this entire company's value prop for free yeah yeah yeah do you know sweetens are offering a little bit yeah here you go so the net result of this is 2012 is a tough tough year for for Netflix I think of acambarify every quarter but I believe they missed their subscriber targets every quarter of the year the stock price is totally languishing still around the sixty dollars a share you know one thing they do start in 2012 though that is a name no one will recognize but foreshadows everything to come is Netflix produced their very first show called Lily Hammer yes they do which was a soprano's clone I don't think it does very I mean I don't never seen it never watched it yeah yeah but Harbinger of good things to come but one more bad thing in 2012 this is we will let's go back to the bad parts go back to the bad stuff let's keep ripping on Netflix it'll just make their rise so much better this was another unbelievable thing that I again I didn't know about the first part in part one and I didn't know about the second part here you cannot make this stuff up even if you did a Netflix special Carl Eiken who comes in to you know the stock prices languishing by the end of 2012 who returns but acquired super villain he's like Barry McCarty's gone great by taking another go at this one take another go at this one he is back in the movie business game he announces that he has accumulated a 10% equity stake in Netflix on the public markets I believe this is October 2012 and you know he's going to start getting involved I love how this happens to like in in public companies you can just slowly buy and buy and buy and buy and buy and then you know you don't want to announce that you're buying so it'll move the stock price and then like suddenly you just say hey guys you may not know this but through various sources I have a 10th of your company yeah incredible you know he thinks that that really what Netflix should do you know they've been so much this management here you know that but it's so much value and streaming is the future they represent strategic value they should sell themselves to a media company or or to another tech company do you know if he held like is he still a major Netflix shareholder he held until 2015 and then he announced in 2015 that he had liquidated his whole stake I believe it was about halfway through 2015 he made a ton of money a ton of money but the only I guess good thing for people who dislike Carl Eganer if you're if you're on the superhero side of the house here is he misses out on like a ton of gains still and like he believed in 2015 that like Amazon was gonna crush them and well that hasn't happened so he missed out on the majority of gains that he could have had but 2012 despite all this bad stuff that happens Netflix now like they're they've really been the only player in this huge new market of streaming for the last you know at this point three plus years they start figuring a couple things out that nobody else has figured out yet and this is really what what saves the company they realize they they start see seeing the data for the how people are streaming they're doing two things that were not obvious one they're binge watching so like when somebody sits down to start streaming Netflix they stream for a long time and if they're watching like a TV series or something they watch just episode after episode and and up until this point the media content industry operated on this assumption I remember this of like appointment viewing you know like you know people tuned in at 8 p.m. on you know Wednesday to watch the latest episode of madman or whatever and like that was with linear television that is still what works all the top shows on linear TV are still exactly that and actually most of them are alive it's just all sit around these like standalone like half an hour one hour like get your face and then tune in next week and and they realize that that's not what people want they want to watch the whole thing all at once and related to that the other thing that they figure out is unlike the DVD rental business the content that really works in streaming is television shows not films not not these self contained you know two to three hour films but like really really long form episodic content that people can binge watch television at this point this they're kind of like the you know the little sibling of the of the media world like it was the big blackbuster movies that everybody wanted to make yeah so this brings back an interesting and classic acquired fashion jumping forward to tech themes and we'll pull it back but this brings back something that I think we talked about in the marvel episode that is there's been a trend how many get the numbers wrong but if you look at like in 1985 out of the top 25 movies the number that were sequels it was like three and if in 2015 it was the exact opposite like 22 were either sequels or some form of original IP so you have this trend going on where Hollywood is spending more and more money on films so because they're spending a hundred million dollars plus on every single production they're taking less risk so they want more sort of sure things they're reusing IP from you know children's stories or or or bringing back movies from the 80s and 90s so the experimentation needs to go somewhere it's kind of the same thing as like startups like the sort of the lean startup where where do you sort of prototype whether IP is good or not so it sort of opens up the opportunity for this golden era of of television or golden era of of you know TV shows that attracts really top notch both writers directors actors and it really blows the doors wide open for some of the best people in the business who don't want to be part of Aquaman 7 to go and do something creative and original and Netflix is sort of the place where you could actually facilitate that format. Ben you referenced Lily Hammer in 2012 you know the one probably in and of itself wasn't that much of a bright spot but that was what you know the sign that Netflix had finally kind of figured this out what they'd learned from their customers was hey we need to pump more you know episodic series based quote-unquote television content into the streaming platform so they make Lily Hammer they released it in 2012 and then in 2013 they do two things one they bring back I remember when this happened even though I wasn't a fan of the show but it was just such a big deal they bring back arrested development yeah it was worse but better like it was more complex and crazy than the original that it's a development but like somehow it just it didn't quite have the magic but it was good enough that like you got your fix of what you felt like you knew this is a good example of giving people what they want you know for this new platform and then the other thing they do they debut in early 2013 is their first real big swing at content house of cards and this was just such a seminal moment I did some research on this because I remember at the time I binge watch the whole first and second seasons pretty aggressively and it was a huge fan of the show I remember at the time reading about it and just thinking like wow this is so special this company spent a hundred million dollars across these first two seasons and I remember looking it up at the time and I just sort of went back now to double check all that and see like what a big bet that was so this isn't early 2013 in 2012 the company had $290 million of cash on hand and they had committed a hundred million to creating just this two seasons of this one show a few more stats on this so like the even the total current assets including their entire content library prepaid content short-term investments all of that was just over two billion so like what a colossal bet for the company now if you go to today like they have three billion dollars in cash alone close to nine billion dollars in total assets you know you can sort of see how they're investing so much in content but like they created a cultural moment around oh my god Kevin Spacey and this incredibly high production value thing just dropped on netflix yeah well and it's crazy like they I mean one as we've seen time time again with this company when they swing they swing hard but this was one unlike the quickster debacle like this was so informed like of course they couldn't know what was going to happen with house of cards but it was informed by all the advantages they had so they knew you know Kevin Spacey we've learned a lot more about Kevin Spacey since 2013 but at the time he was this like actor that everybody kind of knew about him but nobody he wasn't like a box office draw like there wasn't if you had a blockbuster movie coming out you didn't want to cast Kevin's K-packs Kason point you don't want to cast Kevin Spatio he's not Leonardo Caprio here K-packs was great don't hate maybe there was less of us that that loved it but it was great well he didn't have massive feel to the traditional Hollywood movie studios however Netflix saw that people you know because they had all the data on what people were watching that once people watched a Kevin Spacey streamed a Kevin Spacey movie they tended to go find all the other movies that he had been that's so powerful watch them and they're like okay there's something going on here and then house of cards had been a British show that they re-adapted to the US and the British show was on Netflix and they were like man nobody knows about this thing but like people love it when people start watching it they get totally hooked and then they binge it so what do they do when they release house of cards they release I believe this is the first time this had ever happened they release all 13 episodes of the season all at once people in the content industry like why are you doing this you're completely upending the model like you know you're not gonna like you're gonna miss the ability to draw out this whole thing over a period of time like completely like huge win for Netflix it was David Fincher too right he directed it or or wrote it yeah I think so yeah and this he was super hot at the time because he had just done the social network and the girl with the dragon tattoo yep that's right that's right huge win with house of cards in early 2013 subscriptions pour in because again this is the first time there's like this water cooler moment everybody in America is talking about house of cards and you can get the whole season and binge watch it all at once and people are doing this and like the only way you can do that is if you subscribe to Netflix so subscriptions pour in the stock goes back up for the first time over $200 remember it was $300 before the whole quickster debacle so they're finally like getting back up and and then they followed they they realize this is gonna work so then this is the beginning of going all in on this content acquisition and production strategy later in the year they do a deal with Marvel before Marvel gets acquired by Disney to create episodic TV content around Marvel superheroes this is like Daredevil and Luke Cage and all the stuff you see on Netflix this is where all this comes from in 2014 they realize man we've got this like this this flywheel effect here where the more great original content that we have original and exclusive content that leads to more subscribers the more subscribers that we get the more financial ability we have to invest in original and acquired exclusive content how can we start accelerating this flywheel even more we can do this with the debt capital like this is we have a very predictable subscription based business if we can forecast our subscriber growth accurately and then you alluded to this about subscriber growth becoming the big thing for Netflix we should be able to raise debt ahead of this and use that debt to invest in content which we will know will drive subscriptions so 2014 they basically changed their whole capital market strategy they'd been you know like most tech companies at this point no debt completely equity financed and cashflow positive they start raising debt and investing it into content it's a point where now today they have over eight billion dollars in debt and and for folks that sort of don't deal in the equity versus debt world this is the perfect thing to take debt for it you as a company like it because it's non-delutive capital so nobody's equities get pushed down the people who are issuing you debt are very happy to give it because you can provide them incredibly high certainty about what your ability to repeatedly sort of generate cash on cash returns from you investing that that again the magic of subscription based businesses that we've talked about on acquired like you know what your revenues and cashflow is going to be yeah and to like way over simplify it I mean if you know that you have a 10% interest rate on that debt but you know that by spending that to accelerate your flywheel you can get 20% per year it's like how much debt can we have you know yeah so they start slowly they do I believe a four hundred million dollar bond deal in 2014 and then they start getting bigger bigger to the point where their most recent bond deal that I think they did this month in October 2018 was two billion dollars and and they have eight billion in total debt outstanding you know which is a huge amount for a tech company but but again based on the cashflow dynamics and the subscription dynamics of this business as long as they are for act can accurately forecast subscriber growth yeah it can work yeah I mean unless there's some if there's some competitive thing I mean as we saw with Tesla like if there's something that materially changes David to go back to your thing from the LP show the going sideways and sort of explaining what that is when you rack up a lot of debt with a belief that you're going to have very predictable cash flows and then there's something structural that changes in the industry that's when you can open yourself up to a world of hurt so that's sort of the only reason why you wouldn't want to just keep stacking it yeah I mean that's the danger of of debt so far though it's worked really really well so you know to wrap things up and get us get us to today um summer of 2014 as they're investing heavily into this strategy they passed 50 million global subscribers 36 million in the US 14 million internationally then in in 2016 in January they make a big announcement at CES that they are launching worldwide in 150 countries I believe literally every country except mainland China uh north korea and one or two others um Crimea yeah Crimea and Syria yeah and of course it's all you know English based they haven't actually translated Netflix into all these languages yet although they they start that project and now I believe they have translated into many of these languages they passed 75 million subscribers globally during the year in 2016 they released a hundred and 26 original films and TV shows series more than any other content company out there period any other cable channel or or network now actually I don't know if that includes like the I believe it's less than the big conglomerates like Disney as a whole or biocom as a whole um but of any one like division like Netflix is the largest single content production company and then the irony of ironies is in 2016 they actually do finally successfully execute the spin-off with quickster they just don't call it quickster DVD.com if you go to DVD.com that is the DVD rental business for Netflix so you can no longer subscribe to the online DVD rental via Netflix you now have to go to this separate company separate login DVD.com but is it a separate company like it's different shareholders uh it is a it is a DVD.com quote a Netflix company so I believe it is a hundred percent owned by Netflix and holy own subsidiary and it has something like they do like 120 million in revenue a year and like 60 million in profit or like you know cash flow so nice you know but no classic it's a growth stock yeah right value stock value stock um and and you know things just keep going from there so this year in 2018 they passed a hundred billion dollar market cap there've been several stock splits uh over the last few years so the stock price isn't isn't quite the same but now you know in October 2018 you know they just announced earnings and they now have just under 60 million US subscribers so if you go on a household basis uh assume there are a hundredish million US households that's 60% of the US market larger than any cable company in America, Comcast, Time Warner you know uh what have you Charter and 137 million subscribers worldwide uh which is just incredible. If you look at that sort of third quarter announcement sort of play forward what it's gonna be by the end of the year they're gonna do close to 15 billion dollars in revenue this year and over a billion in net income or profit and I think this will be their first year that they that they do a billion dollars in net net income yeah one of my other favorite stats on catching us up to today in the first half of 2018 the stock doubled so I think that was something like 70 billion dollars of market cap were created like 70 billion dollar market cap companies don't double in six months not that stock price is necessarily exactly value creation but um yeah pretty impressive one this is you know maybe something to get into here in in tech themes that's probably the right moment to transition into it you know for years people I'm talking about the fang stocks and loving Netflix in with um here with Facebook with Amazon with Google uh but Netflix is actually much for most of the last few years and even today much much smaller than those companies and you know I think that's how you can get such uh you know a doubling in in market cap is you know they're only quote unquote I think about a hundred and thirty billion dollar market cap company you know compare that to the you know five hundred million to trillion dollar market caps of the other fang companies another interesting data point about them being smaller I was surprised to learn they only had 5500 employees where if you look at someone like an Amazon who has you know eight X the market cap but they have a hundred X the employees compared to the other fang stocks they have remarkably few employees for their valuation because you look at Microsoft that has 130 Amazon has over 600,000 Apple has 132,000 including retail you know even Facebook's over 30,000 Google at 85 I mean there's there's no one that's down in this sort of like sub 10,000 employee category I sort of wonder two things one is it because their product offering is so simple that most of the sort of product and engineering work that you would you know typically have big teams on it is a lot of sort of infrastructure and that they've really paired down the the product line to be pretty streamlined but I also wonder a lot of these people that are working on these productions I mean those aren't employees you sort of staff up those productions and staff them down on sort of a contract basis are we like ankles deep into into the water of tech themes now let's do it doing this all right I mean at this point we're two and a half hours into history of Netflix I think we can get a bit of tech for the team so there's a great tweet a while ago it was from one of John Groober's like three and a half hour podcasts on the talk show that was like I can't remember the last time I wasn't listening to the talk show it's like we hope to not quake it there but we do actually have a pretty good meaty tech themes part because I think whereas the last episode was really more narrative this one there's a lot of good analysis to be done on Netflix and so I'll start with some of the more sort of like things that are interesting to point out but not crazy analytical so one of them is there's a great business insider page and we'll we'll link to this in the show notes that shows the evolution of the homepage over the years I was thinking about it it seems very obvious to go to Netflix now and and just start watching like that's what you do you go to Netflix you start watching but they had to do a ton of education over the years both on the sort of innovative DVD model and then on this crazy idea that you could stream movies over the internet on your computer and for many years there in the awkward middle the the homepage was like this cluttered mess to explain how to do all this so there was like one half of it was like one two three like we will mail you a DVD you will watch it you will put it in this envelope you will mail it back and these like infographics of how to do that because that that was confusing and then on top it was like or instant like click here then downloads overlight and I mean it's this big hairy explanation to consumers to tell people what they did and today you go to Netflix dot com you don't have any options they've done a tremendous job number one doing what they needed to do to be sort of really messy to educate people on what are these paradigms that we're basing our company around but then also once they've sort of hit critical mass and this this tipping point where now they can be incredibly simple and there's a bunch of stuff that they've cut over time that has been really like it's crazy looking at the Netflix today and thinking about the Netflix that that was so the things that they've done that have been less over time you know DVDs are this subsidiary they spun out that's that top box they said note of any machines they deprecated a lot of these things that were brand so like search on their site used to be flex finder and their algorithm used to be cinematch and they like they were it was all about having all these like branded things that they were telling you about themselves they in 2013 or something launched this very advanced social feature where you would connect your Facebook and then it would make recommendations based on things that your friends liked they've completely cut that and the only thing you can do with Facebook anymore is log in with Facebook it really reminds me of the time the the Steve Jobs coming back to Apple and pointing out the product matrix and saying like we're getting rid of three quarters of this Netflix never really change leaderships but sort of spiritually they had this moment where the public now knew what they did and they could sort of drop all of the posturing and all of the education and just be we deliver this thing that has an incredible value prop and perfect product market fit and that's all we do the one that that just sparked was we didn't really talk about amazon and the history and facts other than mention that you know they launched what instant video that became prime video I think all that that really did everybody was so terrified of it and in 2012 that was part of you know why I was such a bad year for Netflix and the stock price in a market that is growing so big and growing so fast as streaming into like the streaming market is is displacing the cable all of video content consumption you know in America that is a way bigger market than the DVD rental business so like in a smaller market like still very large yet smaller market like the DVD rental business blockbuster and Netflix fighting it out like eventually became like a you know a fight to the death but still even though these companies are so big amazon video amazon video division and Netflix like the market is so big they're just helping one another amazon launching even like an essentially free version of Netflix is just helping Netflix grow right now I think and likewise Netflix is just helping Amazon video grow because they're each adding like their own exclusive content and and people are like well you know I really want to like I want to watch man in the high castle and I want to watch house of cards so like I'm just going to subscribe to both and like they're educating the market you know both ways so interesting to think about myself in that situation like I'm subscribed to Netflix because that's where I go to watch stuff I'm subscribed to amazon because of course I'm gonna subscribe to prime other than like the their exclusives I really just haven't gone there to watch stuff and I don't know I think lots of our listeners probably are like I watch all my stuff there but for whatever reason like netflix is the the default for me and it's only when I hit the wall if I can't find anything do I go over to to amazon I'm not sure I would pay for amazon if it wasn't bundled into my prime subscription well it'll be interesting to see I mean we're gonna hit people have been forecasting this but it hasn't seem to happen yet hit subscription fatigue where it's like look I'm not gonna do my HBO now and Netflix and Amazon and Disney f-ing plus like I you know well I think we'll have to see yeah we'll have to see how to see where that lands and see what people's comfort number is yeah but it's interesting like to this point like it hasn't I don't think any of these companies have heard one another Amazon is definitely behind in subscribers I think the in the same research report that said that Amazon that Netflix was 15% of internet traffic the amount that you can attribute to prime video I think is like or Amazon video at all is like less than a third of that interesting the the other quick tech theme that we talk about all the time on the show but that this highlighted for me which Dan Hill on the latest LP episode you know talked about if you make something that people love it can kind of overcome all sins right like Netflix kept screwing up so many times about you know product wise all the stuff you were just talking about like the whole quickster thing but like at the end of the day like people loved the fact that they could you know binge watch all 13 episodes of house cards like how amazing is that of course they're going to tell their friends and if you can make something that people love that they will tell their friends about like that is a recipe for success you know despite many other failures along the way all right drifting toward business model the magic of zero distribution costs and particularly when you don't have a rev share in place is you know worth talking about here where this is you know if you compare Netflix to like a Spotify for example Netflix licenses all of this content up front or creates it so they don't even have any licensing fee they just sort of create it and take all the risk or spend a create all that risk so then all the marginal revenue goes to them but you know they they have high capital cost high operational cost very high fixed cost to create this content but like little little marginal cost so then the game for them becomes like okay how much can we blow it out once we have this thing how can we get the maximum mutilization out of that asset this kind of dives into two points that Ben Thompson of Stratekery talks about these and their fantastic points and I'd say he talks about them so often it makes them so well that we would be remiss not to sort of credit him with this thinking when we talk about it you know now that Netflix has this huge subscriber base as I sort of mentioned how big can we blow it out they can dump a hundred million into things like House of Cards without batting an eyelash since the cost of producing a show is spread across a massive amount of subscribers so there's strategy to produce a broad set of shows for a broad audience is the winning strategy in this market and compare that against what HBO is thinking a few years ago and some others have done this too of we want to produce amazingly well produced content that really hits home for a narrow audience you just can't amortize the cost of that across nearly as many people and so over time like you just can't afford to spend to create the best content because you just don't have as many people to deliver it to you know you can find yourself between a rock in a hard place if you're not thinking about the same thing that Netflix is thinking about which is more subscribers to sort of reduce the per person cost of producing expensive content for sure that is a winning strategy they've also done both right lower like there's a tons of niche like Netflix produced niche content on Netflix they just don't spend that much money like I feel like they're really good analytically at understanding like what is the ROI in terms of either new subscriber growth or subscriber retention that we're going to get for this piece of content and for something like House of Cards that's going to be so broad based in reach like they can spend a hundred million dollars for something like a documentary on there's actually a pretty good like documentary on like the roots of hip hop on Netflix that I watched on a plane once and like you know great lots of people should watch it right but it's not like it's clearly low budget you know like they did the math on how much they could invest in that there's also a pretty bad documentary on Vince Carter called the Carter effect they make all kinds of us we had to watch that late one night well okay so I'll throw out a little counter argument to that so the thing that drives new subscriber growth for them is hit shows so when they have a quarter that tons and tons and tons of people come and sign up for Netflix it's because they have an orange as the new black that draws in all the people you know Netflix of strategy has been to stay away from sports and live and things like that that are not evergreen content even though they they want to create evergreen content and they amass this really rich catalog there is a little devil in the details that is people that sign up that quarter are probably signing up because they have this new hit piece of content that that everybody's coming for and so I think your point still stands that they'll spend a bunch of money on the big splashy thing and then they'll spend a little bit of money producing sort of the long tail of niche based stuff to make sure they satisfy all the different niches on their their platform but I felt it would be a failure not to point that out okay I have another one that I've been like almost talking about that I want to I want to actually hit and this is another good strategy thing so Netflix's flywheel so they focus on this content that's relatively evergreen staying away from live so the more capital that they amass either through debt or equity or earnings the more content they can license or produce which then makes the product better for users so more users come to pay and then kind of feeds back into that cycle of the more capital they amass so then theoretically they have this thing going on where the product actually gets better because the catalog gets richer so either they can charge more money over time or they can keep their prices the same and reduce marketing costs to reach people that would have been reticent to pay for a worse product but now that the product is amazing because it has all this content we can actually start to like really saturate the far edges while keeping the price point the same for people that previously wouldn't have wanted it that bad a lot of things about how they structurally set up the business enable them to create this virtuous cycle and succeed more as they scale instead of less as they scale because I think for a lot of businesses like cost of acquiring a customer goes up over time because you've already hit all your best customers and gotten them and then you have to spend more but they just have this amazing characteristic where the product gets better it's funny I haven't quite thought about this but it's a little bit like Uber right like there are a few of these businesses out there that are truly special where you actually have a period in your growth curve where your customer acquisition cost goes down now I don't know we haven't done the analysis or math to know if this what you're saying is true about Netflix but it makes sense at least intellectually like Uber got to a point I believe it's now probably their incremental cost of customer acquisition at this point is probably going up but there was a point where it went down massively because the service improved so much with density and ubiquity of adoption I think it's a tipping point like if you think about Uber it's like it needs to get sufficiently good so that there's a ride within three minutes and then I kind of don't care how many drivers are on the platform after that but Netflix may not have this sort of point of inversion where it's like literally always more content is better interesting yeah but there's probably diminishing returns on that too actually that's a pretty interesting framework to think about marketplace or aggregator or platform businesses when is it that they don't have that good enough sort of like point where the more you operate the more valuable you get indefinitely instead of with diminishing returns one more point to make here which is kind of just an interesting thing to know about the company over the last three years Netflix has grown at subscriber base by 30% year over year give or take like 1% basically every year they're growing 30% interestingly they're basically the company is extremely data driven about when to do marketing spend and sort of when they feel it's a good idea to go and spend on customers so I think a lot of this stuff we're sort of talking about is is true in the abstract like the product getting more valuable over time new big hits drawing people in but Netflix based on their earnings reports appears to care about growing 30% you over the year and then flexing different levers to get there so sometimes they spend more money on content which for other companies you could sort of think about as product investment and sometimes they yeah and sometimes they spend more money on marketing and I think it's probably I would imagine the way that it kind of works is like when they feel like they have opportunity to create a superstar show they go hard and do it if it works and they're going to hit their 30% growth and they don't need to do an enormous amount of marketing spend if it doesn't then they need to do more marketing spend to bring people onto the platform it's just kind of an interesting way to think about driving the business and since that's been so constant it's sort of clear what levers they're moving to accomplish what end I'm so glad we took like all of this time to dive in the Netflix like I at least did not understand this company or its history at all before diving in here despite how nominally ubiquitous it is in Silicon Valley one last thing I also assumed before really like diving in and looking at market caps that they were much bigger than they are because people talk about them as a fangstock and like what are the fangstocks this is great yet another thing we'll link to in the show notes a great tweet today by Benedict Evans at injuries and harrow its with a graph showing on the x-axis revenue on the y-axis revenue growth and sort of plotting all these companies like apple amazon google facebook they're sort of understandably at least way far to the right in terms of total revenue and also growing pretty quickly Netflix is like way smaller in terms of revenue than than these other companies and also not like they have less growth revenue growth in facebook does less than amazon does like we talk about them like there are this you know they're one of those five but it's kind of arbitrary and that's the point that Ben is making I think I can't have already put my old media tmd investment baker have back on I think maybe the justification for that is that is is back to just like the stability and predictability of subscription based businesses like the thing about Netflix is like they know you know they know what their revenues going to be the extent that they understand their churn rates and their grossed subscriber ads churn and then thus net subscriber you know growth or or losses well and can forecast that accurately like that is an incredibly stable and predictable business and that has value in terms of valuation versus like a you know an amazon well prime is a part of it but like you just bang stuff on amazon like you may buy more you may buy less you know like or you know facebook advertisers may advertise more may advertise less same for google or apple may create a product may not you know there's just a more inherent unpredictability there yeah still feels arbitrary sure well I were no longer investment bankers is there something worth grading in here so we talked about grading the spin off of the DVD business just have something to grade I think it's worth it to just do it quickly I mean like it's really like what if they didn't yeah what if they didn't I mean of course it was the right thing to do the future was streaming the DVD rental business online DVD rental business was going to go the way of the offline DVD rental business of blockbuster like that market is it still exists but was shrinking of course they had to transition the company they just executed it terribly the first time and then executed the right way the second time where they just didn't talk about it I would say like a for strategy f for execution like f minus for execution but I don't know what's your take yeah I'm with you the only thing that I have on sort of execution is like do you group timing into execution because I think they couldn't they couldn't have done it quietly when they did it and the question is should they have done it a different way at the time probably but how much better could you have done it or you know was it was it pressing did it need to be done then or could it wait three years yeah no there's no reason to do it then other than read hastings feeling like he you know wanted to be you know push America and the public into his vision of the future which was correct it was just you know you just sort of waited a couple years which gets into anywhere past tech themes but like Steve Jobs and Apple do this all the time and they take shit for it and then it's fine like they pulled the floppy drive out of the iMac and they pulled the headphone jack off the phone and like you know you can argue that was a little too early but Apple usually gets these things right though like when they pulled the headphone jack like they released AirPods you know it's like here's a better alternative the thing is when when the quickster when they did quickster streaming wasn't better yeah it was better on some dimensions but a lot of the content wasn't available you know and so like it wasn't quite there that it was just obviously better on all dimensions to go to the new thing and Apple toes this line for sure but like but they present you with the like here if you buy this if you buy the AirPods they're amazing they're way better yeah ask a point Carvouts Carvouts mine real quick I believe on the Zappos episode with Alfred Lin uh we did a carve out of Justin O'Bernes Google versus Apple Maps deep analysis you're remembering what Carvouts were on what episodes yeah yeah we go deep next level uh he did an awesome follow up this month on the new Apple Maps and is it is it now better than Google Maps spoil alert no in some ways if you're interested in in forests yeah in some ways but yeah um well with the whole read amazing work as was the last one I've got a podcast to recommend it is from the very first person that I followed on Twitter I discovered this the other day when taking a deep dive down the Twitter Red Hole Kevin Rose I used to be like a really big dignation fan I think I watched every episode of dignation yeah when when he was on tech TV uh the screen oh yeah and then G4 G4 oh yeah sorry oh I used to watch that in high school it was actually that show was like a big part about me wanting to like get into tech dude and it was a cable channel like that I know like that was on TV long tail content cable channels good businesses I think this probably had a good amount to do with me getting into the the tech industry too I mean I think uh who would have thought that by watching Kevin and Alex drink beers on their couch talking about tech news that one day we could grow up to do the same thing David the more things change yeah well he's got this great podcast episode uh where um Kevin's very into sort of like quantified self uh type things I know we don't use that phrase anymore because the way of this sort of passe and and you know now it's digital health or whatever but he's got this um sleep PhD researcher on from UC Berkeley who's starting a company um it's absolutely fascinating learning facts about sleep I think sleep is going to be the thing 20 30 50 years from now I don't know when but lack of sleep will be treated like smoking some of the facts that he's throwing out on there about the results of even depriving yourself of a few hours of sleep from one night in your body's ability to repair cells before they can uh start to become cancerous for example that there's just a tremendous amount that uh sleep helps us um repair and there's another one specific thing that you mentioned that was fascinating was when you take uh sleeping pills you're not you're not actually sleeping like you're not conscious but like he's like I wouldn't call that sleep and you're you're not doing your body you're not putting your body into the state um that it really needs to accomplish a lot of the sort of healing and repair and sort of regulatory things that it does so well worth the hour or whatever it is to to listen to it and actually has sparked sort of a new area of interest and um uh set of sort of companies and ideas that I'm I'm starting to look into awesome well listeners thank you for joining us if you like the show and you want to hear more uh maybe like a week from now but you're you know acquired so out yet and your Jones in for it um we would love you to support the show and become a limited partner it's at kimberlight.fm slash acquired you can click the link in the show notes or go there thank you so much for for listening as always I think that is all the things that I have to say yeah we'll see you next time for season finale all right see you later