September 16, 2019 • 36 mins
Bethany talks with WSJ reporter Sahil Patel about the future of Netflix. Netflix is an incredibly aggressive company with a long term plan to monopolize all our time. There is no chilling going on. CEO Reed Hastings often describes Netflix’s business as a virtuous cycle, saying “We get more customers, we get more money, we can afford more content, we get more customers.” But here’s the thing about virtuous circles: They can turn vicious. Bethany and Sahil discuss what it will take for Netflix to maintain its dominance in the face of extreme competition and many vulnerabilities coming to light.
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Episode Transcript
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Speaker 1 (00:01):
I'm Bethany McClain. Thanks so much for downloading making a
killing last week. It was so much fun to be
back with a bang speaking to Mike Isaac about Uber
and why their uber pumped approach is changing. This week,
we're focusing on another company beloved by millennials, Netflix, It's
(00:24):
telling that over the past decade, Netflix and Chill has
been one of the most popular entries in the Urban Dictionary.
There was a brief moment when I really thought it
did just mean watching movies anyway. According to Netflix's own stats,
we now collectively watch one billion hours of content on
their platform every week, streamed almost one hundred and fifty
(00:44):
million subscribers in one hundred and ninety countries. It's easily
the biggest subscription service on the planet, and with the
acquisition of almost ten millions new subscribers in the first
quarter of twenty nineteen, their best quarter ever. It's safe
to say Netflix is everywhere. But for how long is omnipresent?
The same is omnipotent. Let's take a quick look at
(01:06):
the house that read Hastings built. Over its two decades
plus of existence, Netflix has done three things that no
one thought possible and By doing them before anyone else
understood they really were possible, the company got a huge
head start. All of these things help explain why the
stock has soared some eighty five hundred percent in the
last decade. Number one, Netflix is, of course a subscription business.
(01:31):
That's how the company makes its money. The two basic
factors in that model are how many people are subscribed
each month in what price they pay. When more people subscribe,
revenues go up, and you don't have to raise prices. Voila.
In twenty seventeen, Netflix hit a major milestone, garnering more
subscribers than all the cables TV channels in America combined.
(01:54):
But with major new companies like Disney entering the streaming
business and in Disney's case, also removing its content from Netflix,
will Netflix be able to maintain its phenomenal growth, let
alone hang on to existing subscribers. Number two Red Hastings
and team had the crazy foresight back in two thousand
and seven to launch the first streaming product long before
(02:15):
the market was even ready for it. In essence, they
bet the company on it. Competitors didn't see the value
and dismissed streaming, giving Netflix time to develop the best streaming,
the largest library of titles, in the biggest subscriber base.
But can others catch up? They are certainly going to try.
The third thing, House of Cards. Okay, Netflix originals, but
(02:38):
House of Cards, which got rave reviews from critics and
fans and launched in twenty thirteen, marked a crucial turning
point in Netflix's growth as a company. By releasing every
episode of the show's first season simultaneously, Netflix introduced audiences
to the concept of binge watching. And while you know
the rest of the story, but here's the thing. Content
(02:59):
is increasingly defensive. In twenty eighteen, Netflix spent twelve billion
dollars in cash on content, more than any traditional film
studio or television company. They're going to keep burning cash.
Will that become a problem? Make no mistake. This is
an incredibly aggressive company with a long term plan to
monopolize all our time. Remember the infamous twenty seventeen tweet
(03:22):
sleep is my greatest enemy. There is no chilling going
on here. CEO Read Hastings has described Netflix business as
a virtual circle. He says, we get more customers, we
get more money, we can afford more content, We get
more customers, but Here's the thing about virtuous circles. They
can turn vicious in an instant. And there are skeptics,
(03:43):
some of whom even say Netflix is a Ponzi scheme
because of the amount of cash it blows through, cash
that is recouped through you guessed it, new subscribers, major
new competitors are coming. Is all of this a sign
of tougher times to come? Sahio Patel wrote a piece
for Digitay Entire. After a long winning streight, Netflix's vulnerabilities
are becoming clear. My favorite line in the piece, even
(04:06):
the Death Star had vulnerabilities. I'm looking forward to talking
with the Heel who has joined The Wall Street Journal
about what comes next for Netflix. So the Office, Yes,
are you a fan? I am a fan. What does
it mean that The Office and along with other shows
are leaving Netflix. People have said that this is going
to be a turning point for Netflix. Is it i
(04:28):
hedge again saying it's going to be a turning point
for Netflix? Just take it back a little. A lot
of the big media companies that are supposedly competitive with
Netflix or fear Netflix and see them as maybe an
existential threat. For a long time, did business with them right.
It was it paid really well to license The Office
and Friends and all these movies that you had to Netflix,
(04:49):
and it was just a check that was rolling in.
It looked really good in terms of a profit margin.
Now they are all investing in streaming services because they
know that the future of television, the future of pertainment
is going to be heavily in streaming. And so now
you have to make these really difficult decisions. Right, The
Office does really well on Netflix. A lot of people
watch The Office on Netflix. A lot of people watch
(05:10):
Friends on Netflix. Do we leave it there, collect that
paycheck or do we put it onto our own thing
and hopefully drive subscribers to our own thing in lieu
of going to Netflix to watch this. In terms of
whether it will impact Netflix, I mean, you can't say no,
because ten hours not spent binging Friends on Netflix is
still going to hurt them in some way. But to
(05:30):
say it's going to be I think catastrophic for Netflix
is probably a little bit overblown. Were you surprised over
the years as you watch the big media companies essentially
collect pennies along the way while waiting for Netflix to
eat them. The way in which they feel their own
distraction in a sense. Well, you know, I wouldn't say
surprised because I don't think they really knew the extent
(05:51):
to which they were helping Netflix. There are tons of stories.
Just didn't figure it out. They didn't figure it out, No,
I mean, there was there are tons of stories out there, right,
they thought Netflix was the crazy one. They're gonna pay
us this much at this much of a premium for
stuff that's sitting on our shelf, Like, okay, let's collect
that money. Let's collect you know, hundreds of millions of dollars,
show it on our balance sheet and say, hey, look
(06:12):
at the incredible profits that we're driving quarter over quarter,
a year over year. They didn't see it five ten
years in the future when they realized, oh, by licensing
all this stuff to Netflix, now people are spending more
time on Netflix and they're spending less time with us. Crap.
But doesn't it sound incredibly obvious in retrospect that they
should have seen this coming Yes, in retrospect, obviously, right,
(06:34):
But I think one thing not to defend them too much,
because I think they should have seen it coming back then,
no one really knew how big Netflix could be. I mean, Netflix,
maybe knew or had a hunch or at least made
the correct bets to make it happen. But we're talking
ten years ago. I mean, I was a Netflix DVD
subscriber when when streaming first came out, Like, that's cool,
I get to watch free movies. But I think it's
(06:56):
safe to say it's hard to predict that something could
become as big as it is until it happens. And
you also have to realize I mean, I mean, these
are businesses, these are media companies, and what do they
do They run on? Can you show revenue growth quarter
over quarter, a year over year, and when you have
all this free money coming in, it's hard to look
away from it. You're not really thinking five ten years
(07:16):
out into the future. Unfortunately for them, now we live
in an industry that is entirely about five ten years
from now versus what your revenue looks like here over year.
What was the moment for you when you saw, both
covering Netflix or as a consumer who used it, that
this was not just a niche product, that this was
actually going to be the way the world was going.
I think it goes back to their inevitable push into
(07:38):
original programming, right A lot of people like to talk
about House of Cards, and House of Cards was a
big deal, but there was a lot of let's say,
derision among old media types, being like, the tech company
is going to start making TV shows, they don't know
how to do it. Well, a House of Cards was
made by a studio that knows how to make television.
Netflix just paid the right amount to win the rights
to it exclusively. Right. It was a show that was
(08:02):
being bitten on by at least HBO, So this wasn't
just some run of the mill, algorithmically created premium television product.
It had big names attached. It had a really emmy
worthy look to it. So when Netflix made that move,
then you started seeing, you know, posters of House of
Cards everywhere they did. They did the traditional playbook when
you have a big TV show, a big movie, what
do you do? You don't do just run TV ads.
(08:23):
You you take over billboards and buses and subways. And
they did all of that right and low and behold.
Very quickly they started winning Emmy nominations. I think around
that time when they said, hey, just because we're from
Silicon Valley doesn't mean we can't play your playbook in
terms of how to do entertainment and original programming correctly.
I think that was sort of like, oh, okay, this
is this is going to become a bigger and biggert
(08:44):
It was the moment where derision turned to fear or
at least two nervousness. Yeah, nervousness probably the right. So
I want to come back to this idea of algorithmically
driven content because that's like, I think that's a key
thing to the Netflix story. But before we go there,
talk to me a little bit about Read Hastings, because
he tech guy, not an entertainment guy, never worked in entertainment,
and was that part of the reason that the networks
(09:05):
were a little bit dismissive of Netflix, do you think
for sure? And you know, not without cause. I mean
not to call out anyone in particular, but there's a
lot of examples of tech companies trying to do television
and entertainment and not doing it well. There are more
failures in that area, both big and small, than we've
ever seen in terms of success, right, no one has
(09:27):
succeeded to the level. What's the most profound one? Well,
I mean you can talk about everyone from from Xbox
to to AOL to Yahoo. There are a lot of
tech companies that tried to do original programming television, whether
it was short form, long form, whatever you want to
call it, they tried, and I mean, how many of
them are really considered major players in that area right now.
(09:48):
But it's such a great observation because old media companies
had history on their side, right, and these guys don't.
So they had a reason to shrug their shoulders at Netflix. Ye,
Yet this time they were wrong, wrong, And I think
I think what was interesting about Netflix is they didn't
really try to break the mold in a lot of
ways to just like go through it. Yes, watching television
(10:11):
and movies streamed through a device was inherently different, but
it was still television. You were still watching TV shows
whether were thirty minutes sixty minutes per episode, you're watching
movies that were ninety minutes two hours. The format didn't change,
only the delivery of it changed. Right. Instead of you
having a cable chord or having a satellite, you were
literally just going into an app through your Xbox, or
(10:33):
through your iPad, or through some sort of internet connected device, right,
So the actual content didn't change much, and what they
did very smartly. Was didn't go from the very beginning
into original problem like, no, let's buy stuff that people
like to watch. We know people pay for HBO Stars
and Showtime because they like to watch movies and shows.
Let's buy a lot of those movies and shows. And remember,
(10:53):
Netflix in the beginning had a huge movie library. That's
not as much today relative of what it was in
the past, but that a huge movie So they really
built up this user experience of like I can turn
on Netflix and I can just watch movies that I've
seen a million times, but I still love watching and
just enjoy watching them. And that's how they began to
build that streaming subscriber base. Even the binging thing, Like,
(11:13):
let's be fair, the concept of watching multiple episodes of
the same television show in one sitting is not unique
in neuter Netflix. People had Law and Order marathons, right,
although they've somehow gotten credit for it, But I've had
it for it, right, But like I have watched some
of my favorite shows on USA network ten years ago,
you know, exactly exactly right. But again, what I think
(11:35):
Netflix did was it made everything a lot more convenient.
It was more on demand, it was whenever you wanted to.
It wasn't programmed based on a channel where you had
to watch it at a certain time of day, could
watch it whenever, and they had your favorite stuff, your
favorite shows, your favorite movies, and they've built up this
this incredible customer base. And then they did all the
things that they now get celebrated for it, which is
the original programming and building this massive user base. So
(11:55):
they did it correctly in a lot of ways, in
a way that a lot of tech companies. What's interesting
is that as you talk is that I'm thinking that
Read Hastings knew both what to change, what to do differently,
but he also knew what to keep the same, which
strikes me as a pretty remarkable balancing act. You do
you agree with that, and and do you give the
credit to that to him? I would. I would give
him a ton of credit for that. I would. I
would also give even though they were sort of like
(12:16):
dragged into it, a lot of credit for the people
who ultimately have turned Huloon toward it has become today. Look,
the user behavior was there. I don't have the stats
on me in terms of how it is now versus
back then, but piracy was a gigantic issue. Right, people
were streaming episodes on YouTube and all these downloading them
from torn sites like that was a rampant issue. There
(12:37):
was plenty of data to tell you that people wanted
to watch their favorite movies and TV shows on their
computers or on their you know, their internet connected TV
devices on their iPads. Right, one of, if not the
biggest thing Netflix capitalize on us. We see this behavior,
let's find them illegal ways of getting it, because then
they will come to us and they will pay us
for it. They didn't start out with originals. They started
(12:59):
out with basically hitting a consumer need at the time.
So we watch a billion hours of content every week
on Netflix. I'm sorry, I'm just stunned by that staggering figure.
Does that make to your mind? Netflix the most important
entertainment company today, It's up there. If it's not number one,
it's probably number two behind YouTube. It's just stunning figures, right,
that they've come to monopolize so much of our time.
(13:21):
So what does it mean that Netflix competitors? Back to
this idea and the people who should have been Netflix's
competitors from the beginning but perhaps didn't understand what they were.
What does it mean that they're waking up today taking
back a little bit of content. We just had the
announcement that Friends would be taken off Netflix along within
the office, they're launching their own streaming services that are
going to repeat with Netflix. What's this landscape like? Much
(13:43):
more noisier and messier and cluttered than it was in
the past, and it's going to become even more so
when these services actually launch. Right, Disney's coming out with
the Disney Plus at the end of the year, NBC
and WarnerMedia have theirs coming out next year. They've all
woken up to I want to say Netflix awn as
a threat. I think they've all woken up to streaming
as an existential game changer for their businesses. Sorry, but
(14:07):
linear television is not going to be the future. It's
it's going to be a piece of your business going forward,
a diminishing piece, but it's going to be still a vital,
important piece. But as more and more time is spent
on demand and just streaming environments, you have to have
a strategy for that. Why are they all waking up now?
Because the numbers are finally real. Court cutting really really
(14:29):
became a concern, and I'm putting that lightly in the
last two three years. It was when Disney said, oh,
we lost subscribers on ESPN, the most valuable piece of
real estate in television. We lost subscribers the most expensive
channel to buy on cable. At least it got real
really fast. It's not out of like any kind of
forward thinking of some of them. More forward thinking. I'll
(14:51):
give credit to some companies they don't get sort of
the same level of attention as some of the newer
ones that are coming out. But like CBS has been
playing in a streaming game for four and a half
years now close to five. Have they really Yeah, yeah,
I mean they have their SPAT product with All Access show.
They own Showtime, so they have Showtimes SVAT as well,
but they also have these free streaming services for news
and live sports, news, entertainment news. They're much smaller products,
(15:12):
don't get me wrong, relative to obviously Netflix, but they've
made efforts and if they launched four and a half
years ago, that means it took at least a year
maybe two prior to that to actually get their pieces
in place to make this a viable working product. But yeah,
to go back to your question, they're waking up now
because their hand has been forced so amid this changing
landscape with Disney plus with NBC Universal, what's the biggest
(15:33):
threat to Netflix? Can? Can you say? Or is it
just that the landscape is becoming much more complicated. It's
hard to believe that any of the upcoming news streaming
services will seriously debt Netflix. I think really even Disney,
even Disney, I don't think. I don't think it's either or.
I don't think you're paying fifty You know, a family
paying fifteen dollars for Netflix and seven dollars for Disney
(15:55):
is like all crap. I can only do one or
the other. I think it's multiple reasons. One, it's as
you said in your intra, right, it's one hundred and
fifty million subscriber head start. That's a really good head start, right,
And it's going to be even more by the time
Disney launches, and by the time Disney built any meaningful scale.
Netflix has seen this coming and they're making their best.
There's a reason they're buying kids animation companies, and like
(16:18):
they know what they're doing in terms of like what
they kind of program they need to keep people around
and to add more subscribers, So I don't see them
as direct threats to Netflix. And I think the other thing,
and I think maybe the most fundamental thing that people
need to focus on when it comes to Netflix, is
Netflix is not trying to replace HBO. It's not trying
to replace Showtime, Bravo. It's trying to replace at all. Right,
(16:39):
It's not trying to replace one thing, It's trying to
replace everything because Netflix isn't a television network. Netflix is
is Comcast, It's direct TV. It is every channel, with
the exception of live news and live sports. It's the
only two things they don't have, and for the foreseeable
future they've said that they're not interested in that, right,
but so remove that element of it. Everything else you
can get a version of on Netflix. You want Emmy
(17:00):
winning dramas, got it. You want unscripted lifestyle shows, We
got Queer Eye. They are looking to replace all of
pay TV now. Pay TV costs anywhere from if you
include the new virtual services, anywhere from forty fifty dollars
to one hundred plus dollars or more per month right
for all these channels, right, or you have Netflix for
(17:20):
fifteen bucks a month. So I think Netflix's value proposition
is so good right now that they actually probably over
the next I don't know, five ten years, we'll be
able to routinely raise prices and there will be a
significant backlash towards that because it's become such an integral
part of our lives. How let me ask you, on
a month to month basis, how often are you thinking
about your Netflix subscription? Do you? Do you often think
(17:42):
about canceling? No? Never, That's what I'm saying right. I
don't think most people, especially in the established markets like
the USUK, you're not thinking every month like is this unsubscribe?
It's part of your diet now, the way Spotify is,
the way a lot of other things that you pay
for on a monthly basis is. Doesn't mean they don't
have to worry about churn, but by being first movers,
they've you kind of are just used to paying Netflix,
(18:04):
and that's a significant advantage when you have competitive threats. Ultimately,
then is this dynamic more negative for those who would
compete with Netflix? Because we are bounded by something, right,
We are bounded by still our human need to sleep,
and and just by the sheer messiness of too many subscriptions. Right,
So if Netflix is a given, what does that mean
for NBC Universal and for Disney? Are they then facing
a tougher road than they might expect? I would like
(18:27):
to believe. Maybe that's a little bit of the optimist
to me that they know how tougher road it's going
to be. But forget the other things that you pay for,
Forget Spotify and the other you know, your newspaper, magazine
subscriptions that you might have. And most people have some
combination of Netflix, Amazon, and Hulu. You're probably gonna keep
your Netflix. Most people are probably gonna keep Amazon because
(18:49):
today shipping at the very least, Plus they got movies
and TV shows. Maybe you like Kulu because you like
to watch television and you don't wanted to watch at
eight pm on a Thursday night, but you want to
watch that episode on the weekend where you can catch up.
So you already two to three deep, right, So I
think what we're going to really be looking at is
the newer entrance fighting for whatever that particular consumer's diet is.
Is it. If it's four, you're fighting for one or
(19:10):
two spots. If it's five, you got more, right, That's
what you're fighting for. That seems more likely to me
than saying of one of these are going to knock
off a Netflix. I have to admit it sounds like
crumbs fighting over Christ. It is in a lot of ways,
I'm a little bit more confident in Disney than I
am in some of the others. Disney being Disney has
the brand and ban the existing content, right, the existing
(19:31):
content and the existing infrastructure and business to like feed
it into this just massive Disney machine. But you're right,
I mean, a lot of these companies are hoping that
they're not scraps. But for the foreseeable future, that seems
to be what we're looking at. So you'd argue that
the slightly slowing subscriber growth is just a blip or
just a thing and not necessarily Yeah, I think the
slowing subscriber growth is more indicative of Netflix's size in
(19:56):
the US and developed markets then it is comparedive might change,
but right now it seems more like when you have
sixty million subscribers or whatever the number is now in
the US. Let's be fair. PATV at its peak was
ninety I mean, and that was also a balloon number, right, So,
like I think them saying it's going to slow as
more be like, hey, we're getting closer to the law
(20:17):
of large numbers. Yes, exactly. Okay, so there's this issue
of subscribers, where the subscribers go, but also what happens
to Netflix's content and what about licensing? Do you expect
these licensing deals to get tougher? I mean, there's long
been this argument that network shouldn't license to Netflix because
they were unleashing this monster. And now that networks seem
to know that, does the licensing game become trickier and
(20:39):
does that become a problem for Netflix. It's definitely going
to be trickier. It's a problem in the sense that
something that you wanted might be a little bit tougher
to get Now is inherently an issue or a problem.
But I do think a lot of it is again
just a little bit overblown. One reason is I don't
think it's going to happen at the full scale that
(21:00):
people sort of are saying it is. Let's go to
the current example, right, Friends is going to get off Franflix.
Right Warner Brothers, which is also owned by WarnerMedia, just
sold Sandman to Netflix. It's gonna be a Netflix Original
h Netflix still pays a premium for content that it
buys from outside studios and producers, and so the whole
thing is a lot more incestuous. Then it's a lot
(21:22):
more Yeah, it's a lot more complicated because it's hard
to walk away from the money. We are talking about businesses,
whether it's a licensing division or a production division, where
you are measured by growth and revenue. Right, and now
you're telling them full stop, stop doing what your job is,
stop licensing stuff out. So it's not going to be
a full stop I think. I think what's going to
be messier is now you're gonna see all these companies
(21:44):
like really like handering and like trying to like figure out, Okay, well,
what do we sell them exclusively, what do we keep exclusively?
What do we try to share? And Netflix will be
if they're interested in the property, are going to be
willing to play ball and buy it. It's more of
a media company problem than a Netflix problem in my opinion.
When it comes to license thing, are there must have
shows or is it are there a lot of things
that will work as long as you can get enough
(22:05):
or does it have to be driven by one or
two key shows. It's a fair argument to say, I
don't think Friends is driving subscribers. I don't think The
Office is driving subscribers anymore. Okay, Netflix, sorry than keeping
subscribers okay, because sometimes you just want to land your
couch and watch five hours of the Office. The thing
about Netflix is a lot of their originals, with the
exception of Orange and New Black and maybe a handful
(22:25):
of others, most of the originals have not come beyond
three seasons. That's an issue that they all probably need
to figure out down the road I'm assuming are are
working on. You need shows with longevity to build a
kind of loyalty where on a Sunday afternoon, I'm like,
screw it, I'm just gonna watch this for hours, right right.
But I don't think license programming drives subscriptions to level
the originals. Do you show that you market like, I
(22:48):
want to check this out because its star as this
person at s all? Right? I think it drives usage,
which ultimately is a big driver for retention. Yeah. So,
I think when it comes to these licensed programs, the
greater difficulty or Warner Media or NBC are going to
have isn't getting people to subscribe to the service because yes,
they'll love the office. But I don't think as many
(23:08):
people will go to these services and subscribe because friends
in the office are there. That's a that's an ad on.
How does Netflix keep the quality of originals high even
as it reaches to do more and more? And do
you think that the number of hits has been impressive
relatives of the year number of shows it's cranked out?
Do you do you try to think about that ratio
got the averages is definitely different than HBO is right.
(23:29):
The Netflix can afford more middle of the of the
pack shows than an HBO can. But again it goes
back to Netflix is not HBO. Netflix is trying to
be everybody. You might not like Adam Sandler, well, a
lot of people do. And he might make a movie
that you think is crap or a mediocre but a
lot of people love it and it's on Netflix, right,
and it's a new original that they can only get
(23:49):
on neflex, So that will drive subscriptions. So I think
with Netflix it's twofold. One look at just in the
past year or two years, like they've signed pretty expensive,
high profile talent deals with Shanna Rhymes, Ryan Murphy, Kenya
Barris who does Blackish on ABC. Like, these are big
(24:09):
time creators and talent who know how to make great
shows in great movies. That's not going to stop. I mean,
money runs Hollywood, right If Netflix says I will give
you thee hundred million dollars, please Ben Affleck and friends
go make Triple Frontier. They know the talent that they
need to get to make high quality original stuff that
is exclusive to them. Another element of that, you know
(24:31):
the deals they have with with Ryan Murphy and Shanna Raimes, etc.
That's produced an house, so they're not paying a premium
to a studio like Warner Brothers to make it for them.
It's actually more cost efficient for them to produce more
of their original programing in the house because they own
it entirely, they don't have to pay extra money to
get it. So I think Netflix can keep up the
(24:53):
quality because I mean they're now pretty much Hollywood. They
know who they need to get and what kind of
stuff they need to get to make it work. So
back to that hundred billion they spent and back to
the thirteen billion they spent on new content deals in
twenty eighteen. Netflix used to generate cash. But ever since
they started spending and spending and spending on content, they
have not and the company uses obviously the high yeld
debt market to finance it's cash needs. Do you see
(25:15):
this as a risk? Yeah, I mean any kind of
significant debt is a risk, and I think it's one
of the biggest things that people go to in saying
this can't last forever or it's a Ponzi scheme when
you have when you're raising debt to pay off debt
and have these insane, unheard of content obligations. Yeah, it's
it's a it's an absolute risk. If you say it's
(25:35):
not a risk, then you're ignoring reality. Ignoring reality. You
can't understate sort of just how warped people feel by
Netflix when it comes to entertainment issue. Right. I've had executives.
I've had executives everywhere from from Fox to Disney to
NBC just like privately will complain, like you know, we're
(25:58):
judged based on revenue growth, we're judge profitability, We're judged
on these things. And then you have a company here
that we are threatened by that can just tell the
market we're not gonna be profitable, We're not gonna be
revenue positive or cash flow positive for years and the
market doesn't care. So I can understand why it's frustrating
to tow immedia companies to hear that and see that, right,
(26:19):
the valuation go higher and higher, being like, well, they're
still burning through cash. But I think we're also seeing look,
we're seeing examples or like, you know, I think there
there were reports just in the last week or so
where Netflix doesn't have unlimited cash right there, they're making
a more sincere effort. I think I believe it was
the information that a report that's saying that, you know,
we want to be a little bit more efficient in
(26:40):
how we spend on our original movies and just original programming,
which makes sense. You're you're becoming a more and more
mature programming business. You want to make sure your dollars
are spent the most wisely in terms of how much
they've racked up. Yes, it's an absolute risk if the
subscriber growth stalls globally, not just in the US, right
globally for consecutive quarters, So that's sticks ahead. If they
(27:03):
are not able to turn out as consistently new or
fresh original program that people want to pay for that rehastings.
Virtual cycle could turn visions all right, but we haven't
seen the evidence of that yet. That's kind of the
weird thing, right, we haven't seen the evidence of that
abating completely yet. Yes, there are external factors that we
should be thinking about, right Like, I think it's fair
(27:25):
to say that Netflix is trying to be a business
that could be let's say two hundred fifty three, four
hundred million global subscribers right Well, to get to that,
you need markets like Indian China, which are going to
be incredibly difficult to penetrate for different reasons, and they're
not going to be as friendly to an outside service
trying to be a market leader in their market. So
(27:47):
that's the thing that they need to figure out. And
you have competitive services rising up, not just here but
all across the globe. So there are definitely risks in
taking up the amount of debt that they have. But
it kind of also goes back to Look, it's a
it's a service that's fifteen dollars a month, they go
up to twenty, that's a significant raise and revenue. I mean,
(28:07):
I'm not saying it's going to be that simple or
easy for them. But there's room they're not. There's absolutely risk,
but you know, just to go and not trying to
be that's trying to defend them too much, because I
still I agree with a lot of media cup saying
it's kind of insane that we're talking about a company
that is able to just raise this much that tell
the market they're not going to be profitable for a while,
(28:27):
and everyone being cool with it. It's kind of mind boggling.
But it's mind boggling because it's the error we're in now. Right,
it's so much short term pressure for so many companies
except for the few profit growth. It's it's subscriber growth,
it's it's we know you're growing to an end goal
that we believe you can get to, or we are
making an educated guests that you will be able to
get to. So here's when a few companies get that
(28:49):
dispensation right right, right, So an incredible amount of risk,
but you know, to their credit, they have never shied
away from it. They're pretty open about how much that
that they're taken on, how much more they'll take on.
I've had this conversation in a couple of times with
disources in the industry, in so in new ways, it
feels like the ultimate boom or bust story in entertainment.
It's either going to do the impossible, do it all,
(29:10):
or it's going to come tumbling down. Right. I guess
that is the thing with virtuous or vicious circles. They
have to keep becoming more virtuous and they have to
do it all or at some point it breaks. And
when it breaks and it goes the other way, it
reverses with astounding rapidity. Right, And I think a version
of what your sources are saying, right, And there are
a lot of people in media who think at some
point that has to break. I can't necessarily disagree with that,
(29:33):
because you can't be perfect forever. You can't have an
endless winning streak. But again, they're in a really good
position right now. What's fascinating as you were talking, I
was thinking that the issue with Amazon may not be
so much fighting over subscribers as it may be fighting
over content. And it's fascinating that Amazon is one of
the other companies you can point to that has that
same dispensation from investors, right, And so Amazon can pay
(29:56):
anything they want for content, and that actually you could
see that nexus becoming part of the problem for Netflix
right in the war for content, and in the way
in which a war between Amazon and Netflix could actually
drive up the price of content even more because they
are two companies that don't have to care at least
for right now. Well, especially Amazon. I think you can
make a to a certain degree in argument that Disney
(30:17):
can one day play a role in that as well, right,
Because for Disney, it's yes, they have to make hit movies,
hit TV shows Before Disney pluses to succeed, it just
needs to be folded into the entire Disney umbrella. Right, Like,
at the end of the day, if Disney can get
more people buying merchandise and and cruise tickets and going
to the parks, right, isn't that ultimately a win as
(30:40):
part of their IP strategy so to speak. Yeah, what's
really interesting right now is, at least for Netflix, the
business is the content. What happens down the road when
we see more companies like an Amazon where the business
isn't the content. The content feeds the is part of
the business. And you argued in your piece that that
may mean Netflix has to do something other than subscriptions.
(31:01):
Do you do you think that's likely. I think it's likely,
and you're beginning to see it in terms of merchandising,
and I think, barring a significant change in fortune, it's
more likely that Netflix follows a Disney model. I think,
you know, you sell Stranger Things, cups, t shirts, and
license that IP and make create these new revenue streams.
(31:23):
Right if they're able to successfully create more original programming
that is the kind of like loyalty breeding hit that
like a Stranger Things is, I think they'll they'll they
can build a meaningful commerce and and you know, sort
of different types of revenue streams. On the question of advertising,
I'm I'm skeptical, at least in the near term. I
don't see a scenario. And this is usually the kind
(31:46):
of things that people call back when it inevitably happens.
But in the near term, I find it very difficult.
It's just very difficult to see Netflix adopting traditional forms
of advertising. Back to this notion of what could end
the virtuous circle, one thing that often does is people.
And I was thinking when I listened to a few
things read Hastings said that he said sleep In Fortnite
(32:07):
are bigger competitors to Netflix than any rival companies, and
he said, you know, there's a ton of competition out there,
and Disney and Apple add to it a little bit more,
but frankly, I doubt it will be material. Do you
see any creeping signs of arrogance in read Hastings It
sounds a little bit now, it's it's so overblown. I
love it. It's it is arrogant, but it works for them.
(32:29):
It's such a savvy way to tell the market how
you're thinking. It's a it seems very progressive and forward. Look,
every minute I go play Fortnite, I am not going
to AMC to watch a movie. Right, it's a it's
a part of my friends. It's a BS statement. Every
time I'm sleeping, i am not going you know, I'm
(32:49):
not watching NBC on Thursday nights like sleep in, video
games and all these things are always competitors. But it's
savvy in that by saying that you're you're you're telegraphing
to the market, like here's how we're thinking of our
service as this global platform for all consumption of high
quality video, TV, film, maybe more interactive programming down the road. Right,
(33:12):
is there anything frightening about a world where if Netflix does,
if Netflix is the boom story, if it does completely work,
is there anything frightening about a world where Netflix controls
all of our content? Anyone controlling anything is a scary,
scary idea. I think as big as Netflix is today,
there's data the shows they only own like ten percent
(33:32):
of viewing time in the US, which so that means
there is a lot of room for us to grow.
I think people will always be looking for new choices.
I think that's what it goes back to the I
don't think it's Netflix or anything else. Yes, they're trying
to replace all of television, but I think people still
will have Netflix, and they'll have their other services to
go out to. I think Disney is going to do well.
(33:55):
I think their service is going to do really well.
They have the best ip in the business, and the
best content in the business, and the franchises to make
it happen. So, yes, the idea of Netflix controlling all
of our consumption is scary, but I just don't think
it's possible for them to do that. Do that whether
we're talking about honestly film or television, or we're talking
about other forms of entertainment. Right, YouTube's a big, big deal.
You know, Fortnite is a growing deal. So Read Hastings
(34:16):
in the company just put that out there. But that's there,
That's that's their thing. They will global domination. But I
think they're not going to be the only one that
if they succeed, there won't be they won't be the
only choice. Is that in the end, what Read Hastings
wants to think global global domination. I would say, if
he would love a company that has four hundred million
paying subscribers around the world, I mean, would it? Right?
I mean that's again, that's how they've positioned the company
(34:38):
to the market, right, That's why they have this ability
in this room to grow and keep investing in content
to make it happen. Well, it's a fascinating time and
I look forward to continuing to read what you write.
Thank you for coming on. Well, thank you. This is
a lot of fun. So I was surprised that Sahel
(35:01):
was relatively sanguine about Netflix's prospects. I am a numbers girl,
and to me, the cash burn with no real end
in sight is scary, particularly in an era where interest
rates may start to rise. I find it fascinating that
his industry sources talk about boom or bust. Either Netflix
rules our entire entertainment universe or the whole thing falls apart.
(35:24):
That's the thing about virtuous circles. It's really hard to
predict in advance what might make them turn vicious. So
just because you don't see it doesn't mean it isn't there.
That's why I don't think Netflix investors should relax, despite
Sahel's relative sanguinity. Anyway, I also found one thing about
this interview incredibly reassuring. Maybe it's not great for Netflix investors,
(35:46):
but I love love that the company cannot yet use
data to predict hits. The machines haven't figured us out,
at least not yet. There is hope for the human race.
Making a Killing is the co production of Pushkin Industries
and Chalk and Blade. It's produced by Ruth Barnes and
(36:07):
Rosie Stouffer. My executive producers are Alison McClain no relation
in Making Casey. The executive producer at Pushkin is Mia Loebel.
Engineering by Jason Gambrell and Jason Roskowski. Our music is
by Jed Flood. Special thanks to Jacob Weisberg at Pushkin
and everyone on the show I'm Bethany McLain. Thank you
(36:29):
so much for listening. You can find me on Twitter
at Bethany mac twelve and let me know which episodes
you've most enjoyed.
I'm Bethany McClain. Thanks so much for downloading making a
killing last week. It was so much fun to be
back with a bang speaking to Mike Isaac about Uber
and why their uber pumped approach is changing. This week,
we're focusing on another company beloved by millennials, Netflix, It's
(00:24):
telling that over the past decade, Netflix and Chill has
been one of the most popular entries in the Urban Dictionary.
There was a brief moment when I really thought it
did just mean watching movies anyway. According to Netflix's own stats,
we now collectively watch one billion hours of content on
their platform every week, streamed almost one hundred and fifty
(00:44):
million subscribers in one hundred and ninety countries. It's easily
the biggest subscription service on the planet, and with the
acquisition of almost ten millions new subscribers in the first
quarter of twenty nineteen, their best quarter ever. It's safe
to say Netflix is everywhere. But for how long is omnipresent?
The same is omnipotent. Let's take a quick look at
(01:06):
the house that read Hastings built. Over its two decades
plus of existence, Netflix has done three things that no
one thought possible and By doing them before anyone else
understood they really were possible, the company got a huge
head start. All of these things help explain why the
stock has soared some eighty five hundred percent in the
last decade. Number one, Netflix is, of course a subscription business.
(01:31):
That's how the company makes its money. The two basic
factors in that model are how many people are subscribed
each month in what price they pay. When more people subscribe,
revenues go up, and you don't have to raise prices. Voila.
In twenty seventeen, Netflix hit a major milestone, garnering more
subscribers than all the cables TV channels in America combined.
(01:54):
But with major new companies like Disney entering the streaming
business and in Disney's case, also removing its content from Netflix,
will Netflix be able to maintain its phenomenal growth, let
alone hang on to existing subscribers. Number two Red Hastings
and team had the crazy foresight back in two thousand
and seven to launch the first streaming product long before
(02:15):
the market was even ready for it. In essence, they
bet the company on it. Competitors didn't see the value
and dismissed streaming, giving Netflix time to develop the best streaming,
the largest library of titles, in the biggest subscriber base.
But can others catch up? They are certainly going to try.
The third thing, House of Cards. Okay, Netflix originals, but
(02:38):
House of Cards, which got rave reviews from critics and
fans and launched in twenty thirteen, marked a crucial turning
point in Netflix's growth as a company. By releasing every
episode of the show's first season simultaneously, Netflix introduced audiences
to the concept of binge watching. And while you know
the rest of the story, but here's the thing. Content
(02:59):
is increasingly defensive. In twenty eighteen, Netflix spent twelve billion
dollars in cash on content, more than any traditional film
studio or television company. They're going to keep burning cash.
Will that become a problem? Make no mistake. This is
an incredibly aggressive company with a long term plan to
monopolize all our time. Remember the infamous twenty seventeen tweet
(03:22):
sleep is my greatest enemy. There is no chilling going
on here. CEO Read Hastings has described Netflix business as
a virtual circle. He says, we get more customers, we
get more money, we can afford more content, We get
more customers, but Here's the thing about virtuous circles. They
can turn vicious in an instant. And there are skeptics,
(03:43):
some of whom even say Netflix is a Ponzi scheme
because of the amount of cash it blows through, cash
that is recouped through you guessed it, new subscribers, major
new competitors are coming. Is all of this a sign
of tougher times to come? Sahio Patel wrote a piece
for Digitay Entire. After a long winning streight, Netflix's vulnerabilities
are becoming clear. My favorite line in the piece, even
(04:06):
the Death Star had vulnerabilities. I'm looking forward to talking
with the Heel who has joined The Wall Street Journal
about what comes next for Netflix. So the Office, Yes,
are you a fan? I am a fan. What does
it mean that The Office and along with other shows
are leaving Netflix. People have said that this is going
to be a turning point for Netflix. Is it i
(04:28):
hedge again saying it's going to be a turning point
for Netflix? Just take it back a little. A lot
of the big media companies that are supposedly competitive with
Netflix or fear Netflix and see them as maybe an
existential threat. For a long time, did business with them right.
It was it paid really well to license The Office
and Friends and all these movies that you had to Netflix,
(04:49):
and it was just a check that was rolling in.
It looked really good in terms of a profit margin.
Now they are all investing in streaming services because they
know that the future of television, the future of pertainment
is going to be heavily in streaming. And so now
you have to make these really difficult decisions. Right, The
Office does really well on Netflix. A lot of people
watch The Office on Netflix. A lot of people watch
(05:10):
Friends on Netflix. Do we leave it there, collect that
paycheck or do we put it onto our own thing
and hopefully drive subscribers to our own thing in lieu
of going to Netflix to watch this. In terms of
whether it will impact Netflix, I mean, you can't say no,
because ten hours not spent binging Friends on Netflix is
still going to hurt them in some way. But to
(05:30):
say it's going to be I think catastrophic for Netflix
is probably a little bit overblown. Were you surprised over
the years as you watch the big media companies essentially
collect pennies along the way while waiting for Netflix to
eat them. The way in which they feel their own
distraction in a sense. Well, you know, I wouldn't say
surprised because I don't think they really knew the extent
(05:51):
to which they were helping Netflix. There are tons of stories.
Just didn't figure it out. They didn't figure it out, No,
I mean, there was there are tons of stories out there, right,
they thought Netflix was the crazy one. They're gonna pay
us this much at this much of a premium for
stuff that's sitting on our shelf, Like, okay, let's collect
that money. Let's collect you know, hundreds of millions of dollars,
show it on our balance sheet and say, hey, look
(06:12):
at the incredible profits that we're driving quarter over quarter,
a year over year. They didn't see it five ten
years in the future when they realized, oh, by licensing
all this stuff to Netflix, now people are spending more
time on Netflix and they're spending less time with us. Crap.
But doesn't it sound incredibly obvious in retrospect that they
should have seen this coming Yes, in retrospect, obviously, right,
(06:34):
But I think one thing not to defend them too much,
because I think they should have seen it coming back then,
no one really knew how big Netflix could be. I mean, Netflix,
maybe knew or had a hunch or at least made
the correct bets to make it happen. But we're talking
ten years ago. I mean, I was a Netflix DVD
subscriber when when streaming first came out, Like, that's cool,
I get to watch free movies. But I think it's
(06:56):
safe to say it's hard to predict that something could
become as big as it is until it happens. And
you also have to realize I mean, I mean, these
are businesses, these are media companies, and what do they
do They run on? Can you show revenue growth quarter
over quarter, a year over year, and when you have
all this free money coming in, it's hard to look
away from it. You're not really thinking five ten years
(07:16):
out into the future. Unfortunately for them, now we live
in an industry that is entirely about five ten years
from now versus what your revenue looks like here over year.
What was the moment for you when you saw, both
covering Netflix or as a consumer who used it, that
this was not just a niche product, that this was
actually going to be the way the world was going.
I think it goes back to their inevitable push into
(07:38):
original programming, right A lot of people like to talk
about House of Cards, and House of Cards was a
big deal, but there was a lot of let's say,
derision among old media types, being like, the tech company
is going to start making TV shows, they don't know
how to do it. Well, a House of Cards was
made by a studio that knows how to make television.
Netflix just paid the right amount to win the rights
to it exclusively. Right. It was a show that was
(08:02):
being bitten on by at least HBO, So this wasn't
just some run of the mill, algorithmically created premium television product.
It had big names attached. It had a really emmy
worthy look to it. So when Netflix made that move,
then you started seeing, you know, posters of House of
Cards everywhere they did. They did the traditional playbook when
you have a big TV show, a big movie, what
do you do? You don't do just run TV ads.
(08:23):
You you take over billboards and buses and subways. And
they did all of that right and low and behold.
Very quickly they started winning Emmy nominations. I think around
that time when they said, hey, just because we're from
Silicon Valley doesn't mean we can't play your playbook in
terms of how to do entertainment and original programming correctly.
I think that was sort of like, oh, okay, this
is this is going to become a bigger and biggert
(08:44):
It was the moment where derision turned to fear or
at least two nervousness. Yeah, nervousness probably the right. So
I want to come back to this idea of algorithmically
driven content because that's like, I think that's a key
thing to the Netflix story. But before we go there,
talk to me a little bit about Read Hastings, because
he tech guy, not an entertainment guy, never worked in entertainment,
and was that part of the reason that the networks
(09:05):
were a little bit dismissive of Netflix, do you think
for sure? And you know, not without cause. I mean
not to call out anyone in particular, but there's a
lot of examples of tech companies trying to do television
and entertainment and not doing it well. There are more
failures in that area, both big and small, than we've
ever seen in terms of success, right, no one has
(09:27):
succeeded to the level. What's the most profound one? Well,
I mean you can talk about everyone from from Xbox
to to AOL to Yahoo. There are a lot of
tech companies that tried to do original programming television, whether
it was short form, long form, whatever you want to
call it, they tried, and I mean, how many of
them are really considered major players in that area right now.
(09:48):
But it's such a great observation because old media companies
had history on their side, right, and these guys don't.
So they had a reason to shrug their shoulders at Netflix. Ye,
Yet this time they were wrong, wrong, And I think
I think what was interesting about Netflix is they didn't
really try to break the mold in a lot of
ways to just like go through it. Yes, watching television
(10:11):
and movies streamed through a device was inherently different, but
it was still television. You were still watching TV shows
whether were thirty minutes sixty minutes per episode, you're watching
movies that were ninety minutes two hours. The format didn't change,
only the delivery of it changed. Right. Instead of you
having a cable chord or having a satellite, you were
literally just going into an app through your Xbox, or
(10:33):
through your iPad, or through some sort of internet connected device, right,
So the actual content didn't change much, and what they
did very smartly. Was didn't go from the very beginning
into original problem like, no, let's buy stuff that people
like to watch. We know people pay for HBO Stars
and Showtime because they like to watch movies and shows.
Let's buy a lot of those movies and shows. And remember,
(10:53):
Netflix in the beginning had a huge movie library. That's
not as much today relative of what it was in
the past, but that a huge movie So they really
built up this user experience of like I can turn
on Netflix and I can just watch movies that I've
seen a million times, but I still love watching and
just enjoy watching them. And that's how they began to
build that streaming subscriber base. Even the binging thing, Like,
(11:13):
let's be fair, the concept of watching multiple episodes of
the same television show in one sitting is not unique
in neuter Netflix. People had Law and Order marathons, right,
although they've somehow gotten credit for it, But I've had
it for it, right, But like I have watched some
of my favorite shows on USA network ten years ago,
you know, exactly exactly right. But again, what I think
(11:35):
Netflix did was it made everything a lot more convenient.
It was more on demand, it was whenever you wanted to.
It wasn't programmed based on a channel where you had
to watch it at a certain time of day, could
watch it whenever, and they had your favorite stuff, your
favorite shows, your favorite movies, and they've built up this
this incredible customer base. And then they did all the
things that they now get celebrated for it, which is
the original programming and building this massive user base. So
(11:55):
they did it correctly in a lot of ways, in
a way that a lot of tech companies. What's interesting
is that as you talk is that I'm thinking that
Read Hastings knew both what to change, what to do differently,
but he also knew what to keep the same, which
strikes me as a pretty remarkable balancing act. You do
you agree with that, and and do you give the
credit to that to him? I would. I would give
him a ton of credit for that. I would. I
would also give even though they were sort of like
(12:16):
dragged into it, a lot of credit for the people
who ultimately have turned Huloon toward it has become today. Look,
the user behavior was there. I don't have the stats
on me in terms of how it is now versus
back then, but piracy was a gigantic issue. Right, people
were streaming episodes on YouTube and all these downloading them
from torn sites like that was a rampant issue. There
(12:37):
was plenty of data to tell you that people wanted
to watch their favorite movies and TV shows on their
computers or on their you know, their internet connected TV
devices on their iPads. Right, one of, if not the
biggest thing Netflix capitalize on us. We see this behavior,
let's find them illegal ways of getting it, because then
they will come to us and they will pay us
for it. They didn't start out with originals. They started
(12:59):
out with basically hitting a consumer need at the time.
So we watch a billion hours of content every week
on Netflix. I'm sorry, I'm just stunned by that staggering figure.
Does that make to your mind? Netflix the most important
entertainment company today, It's up there. If it's not number one,
it's probably number two behind YouTube. It's just stunning figures, right,
that they've come to monopolize so much of our time.
(13:21):
So what does it mean that Netflix competitors? Back to
this idea and the people who should have been Netflix's
competitors from the beginning but perhaps didn't understand what they were.
What does it mean that they're waking up today taking
back a little bit of content. We just had the
announcement that Friends would be taken off Netflix along within
the office, they're launching their own streaming services that are
going to repeat with Netflix. What's this landscape like? Much
(13:43):
more noisier and messier and cluttered than it was in
the past, and it's going to become even more so
when these services actually launch. Right, Disney's coming out with
the Disney Plus at the end of the year, NBC
and WarnerMedia have theirs coming out next year. They've all
woken up to I want to say Netflix awn as
a threat. I think they've all woken up to streaming
as an existential game changer for their businesses. Sorry, but
(14:07):
linear television is not going to be the future. It's
it's going to be a piece of your business going forward,
a diminishing piece, but it's going to be still a vital,
important piece. But as more and more time is spent
on demand and just streaming environments, you have to have
a strategy for that. Why are they all waking up now?
Because the numbers are finally real. Court cutting really really
(14:29):
became a concern, and I'm putting that lightly in the
last two three years. It was when Disney said, oh,
we lost subscribers on ESPN, the most valuable piece of
real estate in television. We lost subscribers the most expensive
channel to buy on cable. At least it got real
really fast. It's not out of like any kind of
forward thinking of some of them. More forward thinking. I'll
(14:51):
give credit to some companies they don't get sort of
the same level of attention as some of the newer
ones that are coming out. But like CBS has been
playing in a streaming game for four and a half
years now close to five. Have they really Yeah, yeah,
I mean they have their SPAT product with All Access show.
They own Showtime, so they have Showtimes SVAT as well,
but they also have these free streaming services for news
and live sports, news, entertainment news. They're much smaller products,
(15:12):
don't get me wrong, relative to obviously Netflix, but they've
made efforts and if they launched four and a half
years ago, that means it took at least a year
maybe two prior to that to actually get their pieces
in place to make this a viable working product. But yeah,
to go back to your question, they're waking up now
because their hand has been forced so amid this changing
landscape with Disney plus with NBC Universal, what's the biggest
(15:33):
threat to Netflix? Can? Can you say? Or is it
just that the landscape is becoming much more complicated. It's
hard to believe that any of the upcoming news streaming
services will seriously debt Netflix. I think really even Disney,
even Disney, I don't think. I don't think it's either or.
I don't think you're paying fifty You know, a family
paying fifteen dollars for Netflix and seven dollars for Disney
(15:55):
is like all crap. I can only do one or
the other. I think it's multiple reasons. One, it's as
you said in your intra, right, it's one hundred and
fifty million subscriber head start. That's a really good head start, right,
And it's going to be even more by the time
Disney launches, and by the time Disney built any meaningful scale.
Netflix has seen this coming and they're making their best.
There's a reason they're buying kids animation companies, and like
(16:18):
they know what they're doing in terms of like what
they kind of program they need to keep people around
and to add more subscribers, So I don't see them
as direct threats to Netflix. And I think the other thing,
and I think maybe the most fundamental thing that people
need to focus on when it comes to Netflix, is
Netflix is not trying to replace HBO. It's not trying
to replace Showtime, Bravo. It's trying to replace at all. Right,
(16:39):
It's not trying to replace one thing, It's trying to
replace everything because Netflix isn't a television network. Netflix is
is Comcast, It's direct TV. It is every channel, with
the exception of live news and live sports. It's the
only two things they don't have, and for the foreseeable
future they've said that they're not interested in that, right,
but so remove that element of it. Everything else you
can get a version of on Netflix. You want Emmy
(17:00):
winning dramas, got it. You want unscripted lifestyle shows, We
got Queer Eye. They are looking to replace all of
pay TV now. Pay TV costs anywhere from if you
include the new virtual services, anywhere from forty fifty dollars
to one hundred plus dollars or more per month right
for all these channels, right, or you have Netflix for
(17:20):
fifteen bucks a month. So I think Netflix's value proposition
is so good right now that they actually probably over
the next I don't know, five ten years, we'll be
able to routinely raise prices and there will be a
significant backlash towards that because it's become such an integral
part of our lives. How let me ask you, on
a month to month basis, how often are you thinking
about your Netflix subscription? Do you? Do you often think
(17:42):
about canceling? No? Never, That's what I'm saying right. I
don't think most people, especially in the established markets like
the USUK, you're not thinking every month like is this unsubscribe?
It's part of your diet now, the way Spotify is,
the way a lot of other things that you pay
for on a monthly basis is. Doesn't mean they don't
have to worry about churn, but by being first movers,
they've you kind of are just used to paying Netflix,
(18:04):
and that's a significant advantage when you have competitive threats. Ultimately,
then is this dynamic more negative for those who would
compete with Netflix? Because we are bounded by something, right,
We are bounded by still our human need to sleep,
and and just by the sheer messiness of too many subscriptions. Right,
So if Netflix is a given, what does that mean
for NBC Universal and for Disney? Are they then facing
a tougher road than they might expect? I would like
(18:27):
to believe. Maybe that's a little bit of the optimist
to me that they know how tougher road it's going
to be. But forget the other things that you pay for,
Forget Spotify and the other you know, your newspaper, magazine
subscriptions that you might have. And most people have some
combination of Netflix, Amazon, and Hulu. You're probably gonna keep
your Netflix. Most people are probably gonna keep Amazon because
(18:49):
today shipping at the very least, Plus they got movies
and TV shows. Maybe you like Kulu because you like
to watch television and you don't wanted to watch at
eight pm on a Thursday night, but you want to
watch that episode on the weekend where you can catch up.
So you already two to three deep, right, So I
think what we're going to really be looking at is
the newer entrance fighting for whatever that particular consumer's diet is.
Is it. If it's four, you're fighting for one or
(19:10):
two spots. If it's five, you got more, right, That's
what you're fighting for. That seems more likely to me
than saying of one of these are going to knock
off a Netflix. I have to admit it sounds like
crumbs fighting over Christ. It is in a lot of ways,
I'm a little bit more confident in Disney than I
am in some of the others. Disney being Disney has
the brand and ban the existing content, right, the existing
(19:31):
content and the existing infrastructure and business to like feed
it into this just massive Disney machine. But you're right,
I mean, a lot of these companies are hoping that
they're not scraps. But for the foreseeable future, that seems
to be what we're looking at. So you'd argue that
the slightly slowing subscriber growth is just a blip or
just a thing and not necessarily Yeah, I think the
slowing subscriber growth is more indicative of Netflix's size in
(19:56):
the US and developed markets then it is comparedive might change,
but right now it seems more like when you have
sixty million subscribers or whatever the number is now in
the US. Let's be fair. PATV at its peak was
ninety I mean, and that was also a balloon number, right, So,
like I think them saying it's going to slow as
more be like, hey, we're getting closer to the law
(20:17):
of large numbers. Yes, exactly. Okay, so there's this issue
of subscribers, where the subscribers go, but also what happens
to Netflix's content and what about licensing? Do you expect
these licensing deals to get tougher? I mean, there's long
been this argument that network shouldn't license to Netflix because
they were unleashing this monster. And now that networks seem
to know that, does the licensing game become trickier and
(20:39):
does that become a problem for Netflix. It's definitely going
to be trickier. It's a problem in the sense that
something that you wanted might be a little bit tougher
to get Now is inherently an issue or a problem.
But I do think a lot of it is again
just a little bit overblown. One reason is I don't
think it's going to happen at the full scale that
(21:00):
people sort of are saying it is. Let's go to
the current example, right, Friends is going to get off Franflix.
Right Warner Brothers, which is also owned by WarnerMedia, just
sold Sandman to Netflix. It's gonna be a Netflix Original
h Netflix still pays a premium for content that it
buys from outside studios and producers, and so the whole
thing is a lot more incestuous. Then it's a lot
(21:22):
more Yeah, it's a lot more complicated because it's hard
to walk away from the money. We are talking about businesses,
whether it's a licensing division or a production division, where
you are measured by growth and revenue. Right, and now
you're telling them full stop, stop doing what your job is,
stop licensing stuff out. So it's not going to be
a full stop I think. I think what's going to
be messier is now you're gonna see all these companies
(21:44):
like really like handering and like trying to like figure out, Okay, well,
what do we sell them exclusively, what do we keep exclusively?
What do we try to share? And Netflix will be
if they're interested in the property, are going to be
willing to play ball and buy it. It's more of
a media company problem than a Netflix problem in my opinion.
When it comes to license thing, are there must have
shows or is it are there a lot of things
that will work as long as you can get enough
(22:05):
or does it have to be driven by one or
two key shows. It's a fair argument to say, I
don't think Friends is driving subscribers. I don't think The
Office is driving subscribers anymore. Okay, Netflix, sorry than keeping
subscribers okay, because sometimes you just want to land your
couch and watch five hours of the Office. The thing
about Netflix is a lot of their originals, with the
exception of Orange and New Black and maybe a handful
(22:25):
of others, most of the originals have not come beyond
three seasons. That's an issue that they all probably need
to figure out down the road I'm assuming are are
working on. You need shows with longevity to build a
kind of loyalty where on a Sunday afternoon, I'm like,
screw it, I'm just gonna watch this for hours, right right.
But I don't think license programming drives subscriptions to level
the originals. Do you show that you market like, I
(22:48):
want to check this out because its star as this
person at s all? Right? I think it drives usage,
which ultimately is a big driver for retention. Yeah. So,
I think when it comes to these licensed programs, the
greater difficulty or Warner Media or NBC are going to
have isn't getting people to subscribe to the service because yes,
they'll love the office. But I don't think as many
(23:08):
people will go to these services and subscribe because friends
in the office are there. That's a that's an ad on.
How does Netflix keep the quality of originals high even
as it reaches to do more and more? And do
you think that the number of hits has been impressive
relatives of the year number of shows it's cranked out?
Do you do you try to think about that ratio
got the averages is definitely different than HBO is right.
(23:29):
The Netflix can afford more middle of the of the
pack shows than an HBO can. But again it goes
back to Netflix is not HBO. Netflix is trying to
be everybody. You might not like Adam Sandler, well, a
lot of people do. And he might make a movie
that you think is crap or a mediocre but a
lot of people love it and it's on Netflix, right,
and it's a new original that they can only get
(23:49):
on neflex, So that will drive subscriptions. So I think
with Netflix it's twofold. One look at just in the
past year or two years, like they've signed pretty expensive,
high profile talent deals with Shanna Rhymes, Ryan Murphy, Kenya
Barris who does Blackish on ABC. Like, these are big
(24:09):
time creators and talent who know how to make great
shows in great movies. That's not going to stop. I mean,
money runs Hollywood, right If Netflix says I will give
you thee hundred million dollars, please Ben Affleck and friends
go make Triple Frontier. They know the talent that they
need to get to make high quality original stuff that
is exclusive to them. Another element of that, you know
(24:31):
the deals they have with with Ryan Murphy and Shanna Raimes, etc.
That's produced an house, so they're not paying a premium
to a studio like Warner Brothers to make it for them.
It's actually more cost efficient for them to produce more
of their original programing in the house because they own
it entirely, they don't have to pay extra money to
get it. So I think Netflix can keep up the
(24:53):
quality because I mean they're now pretty much Hollywood. They
know who they need to get and what kind of
stuff they need to get to make it work. So
back to that hundred billion they spent and back to
the thirteen billion they spent on new content deals in
twenty eighteen. Netflix used to generate cash. But ever since
they started spending and spending and spending on content, they
have not and the company uses obviously the high yeld
debt market to finance it's cash needs. Do you see
(25:15):
this as a risk? Yeah, I mean any kind of
significant debt is a risk, and I think it's one
of the biggest things that people go to in saying
this can't last forever or it's a Ponzi scheme when
you have when you're raising debt to pay off debt
and have these insane, unheard of content obligations. Yeah, it's
it's a it's an absolute risk. If you say it's
(25:35):
not a risk, then you're ignoring reality. Ignoring reality. You
can't understate sort of just how warped people feel by
Netflix when it comes to entertainment issue. Right. I've had executives.
I've had executives everywhere from from Fox to Disney to
NBC just like privately will complain, like you know, we're
(25:58):
judged based on revenue growth, we're judge profitability, We're judged
on these things. And then you have a company here
that we are threatened by that can just tell the
market we're not gonna be profitable, We're not gonna be
revenue positive or cash flow positive for years and the
market doesn't care. So I can understand why it's frustrating
to tow immedia companies to hear that and see that, right,
(26:19):
the valuation go higher and higher, being like, well, they're
still burning through cash. But I think we're also seeing look,
we're seeing examples or like, you know, I think there
there were reports just in the last week or so
where Netflix doesn't have unlimited cash right there, they're making
a more sincere effort. I think I believe it was
the information that a report that's saying that, you know,
we want to be a little bit more efficient in
(26:40):
how we spend on our original movies and just original programming,
which makes sense. You're you're becoming a more and more
mature programming business. You want to make sure your dollars
are spent the most wisely in terms of how much
they've racked up. Yes, it's an absolute risk if the
subscriber growth stalls globally, not just in the US, right
globally for consecutive quarters, So that's sticks ahead. If they
(27:03):
are not able to turn out as consistently new or
fresh original program that people want to pay for that rehastings.
Virtual cycle could turn visions all right, but we haven't
seen the evidence of that yet. That's kind of the
weird thing, right, we haven't seen the evidence of that
abating completely yet. Yes, there are external factors that we
should be thinking about, right Like, I think it's fair
(27:25):
to say that Netflix is trying to be a business
that could be let's say two hundred fifty three, four
hundred million global subscribers right Well, to get to that,
you need markets like Indian China, which are going to
be incredibly difficult to penetrate for different reasons, and they're
not going to be as friendly to an outside service
trying to be a market leader in their market. So
(27:47):
that's the thing that they need to figure out. And
you have competitive services rising up, not just here but
all across the globe. So there are definitely risks in
taking up the amount of debt that they have. But
it kind of also goes back to Look, it's a
it's a service that's fifteen dollars a month, they go
up to twenty, that's a significant raise and revenue. I mean,
(28:07):
I'm not saying it's going to be that simple or
easy for them. But there's room they're not. There's absolutely risk,
but you know, just to go and not trying to
be that's trying to defend them too much, because I
still I agree with a lot of media cup saying
it's kind of insane that we're talking about a company
that is able to just raise this much that tell
the market they're not going to be profitable for a while,
(28:27):
and everyone being cool with it. It's kind of mind boggling.
But it's mind boggling because it's the error we're in now. Right,
it's so much short term pressure for so many companies
except for the few profit growth. It's it's subscriber growth,
it's it's we know you're growing to an end goal
that we believe you can get to, or we are
making an educated guests that you will be able to
get to. So here's when a few companies get that
(28:49):
dispensation right right, right, So an incredible amount of risk,
but you know, to their credit, they have never shied
away from it. They're pretty open about how much that
that they're taken on, how much more they'll take on.
I've had this conversation in a couple of times with
disources in the industry, in so in new ways, it
feels like the ultimate boom or bust story in entertainment.
It's either going to do the impossible, do it all,
(29:10):
or it's going to come tumbling down. Right. I guess
that is the thing with virtuous or vicious circles. They
have to keep becoming more virtuous and they have to
do it all or at some point it breaks. And
when it breaks and it goes the other way, it
reverses with astounding rapidity. Right, And I think a version
of what your sources are saying, right, And there are
a lot of people in media who think at some
point that has to break. I can't necessarily disagree with that,
(29:33):
because you can't be perfect forever. You can't have an
endless winning streak. But again, they're in a really good
position right now. What's fascinating as you were talking, I
was thinking that the issue with Amazon may not be
so much fighting over subscribers as it may be fighting
over content. And it's fascinating that Amazon is one of
the other companies you can point to that has that
same dispensation from investors, right, And so Amazon can pay
(29:56):
anything they want for content, and that actually you could
see that nexus becoming part of the problem for Netflix
right in the war for content, and in the way
in which a war between Amazon and Netflix could actually
drive up the price of content even more because they
are two companies that don't have to care at least
for right now. Well, especially Amazon. I think you can
make a to a certain degree in argument that Disney
(30:17):
can one day play a role in that as well, right,
Because for Disney, it's yes, they have to make hit movies,
hit TV shows Before Disney pluses to succeed, it just
needs to be folded into the entire Disney umbrella. Right, Like,
at the end of the day, if Disney can get
more people buying merchandise and and cruise tickets and going
to the parks, right, isn't that ultimately a win as
(30:40):
part of their IP strategy so to speak. Yeah, what's
really interesting right now is, at least for Netflix, the
business is the content. What happens down the road when
we see more companies like an Amazon where the business
isn't the content. The content feeds the is part of
the business. And you argued in your piece that that
may mean Netflix has to do something other than subscriptions.
(31:01):
Do you do you think that's likely. I think it's likely,
and you're beginning to see it in terms of merchandising,
and I think, barring a significant change in fortune, it's
more likely that Netflix follows a Disney model. I think,
you know, you sell Stranger Things, cups, t shirts, and
license that IP and make create these new revenue streams.
(31:23):
Right if they're able to successfully create more original programming
that is the kind of like loyalty breeding hit that
like a Stranger Things is, I think they'll they'll they
can build a meaningful commerce and and you know, sort
of different types of revenue streams. On the question of advertising,
I'm I'm skeptical, at least in the near term. I
don't see a scenario. And this is usually the kind
(31:46):
of things that people call back when it inevitably happens.
But in the near term, I find it very difficult.
It's just very difficult to see Netflix adopting traditional forms
of advertising. Back to this notion of what could end
the virtuous circle, one thing that often does is people.
And I was thinking when I listened to a few
things read Hastings said that he said sleep In Fortnite
(32:07):
are bigger competitors to Netflix than any rival companies, and
he said, you know, there's a ton of competition out there,
and Disney and Apple add to it a little bit more,
but frankly, I doubt it will be material. Do you
see any creeping signs of arrogance in read Hastings It
sounds a little bit now, it's it's so overblown. I
love it. It's it is arrogant, but it works for them.
(32:29):
It's such a savvy way to tell the market how
you're thinking. It's a it seems very progressive and forward. Look,
every minute I go play Fortnite, I am not going
to AMC to watch a movie. Right, it's a it's
a part of my friends. It's a BS statement. Every
time I'm sleeping, i am not going you know, I'm
(32:49):
not watching NBC on Thursday nights like sleep in, video
games and all these things are always competitors. But it's
savvy in that by saying that you're you're you're telegraphing
to the market, like here's how we're thinking of our
service as this global platform for all consumption of high
quality video, TV, film, maybe more interactive programming down the road. Right,
(33:12):
is there anything frightening about a world where if Netflix does,
if Netflix is the boom story, if it does completely work,
is there anything frightening about a world where Netflix controls
all of our content? Anyone controlling anything is a scary,
scary idea. I think as big as Netflix is today,
there's data the shows they only own like ten percent
(33:32):
of viewing time in the US, which so that means
there is a lot of room for us to grow.
I think people will always be looking for new choices.
I think that's what it goes back to the I
don't think it's Netflix or anything else. Yes, they're trying
to replace all of television, but I think people still
will have Netflix, and they'll have their other services to
go out to. I think Disney is going to do well.
(33:55):
I think their service is going to do really well.
They have the best ip in the business, and the
best content in the business, and the franchises to make
it happen. So, yes, the idea of Netflix controlling all
of our consumption is scary, but I just don't think
it's possible for them to do that. Do that whether
we're talking about honestly film or television, or we're talking
about other forms of entertainment. Right, YouTube's a big, big deal.
You know, Fortnite is a growing deal. So Read Hastings
(34:16):
in the company just put that out there. But that's there,
That's that's their thing. They will global domination. But I
think they're not going to be the only one that
if they succeed, there won't be they won't be the
only choice. Is that in the end, what Read Hastings
wants to think global global domination. I would say, if
he would love a company that has four hundred million
paying subscribers around the world, I mean, would it? Right?
I mean that's again, that's how they've positioned the company
(34:38):
to the market, right, That's why they have this ability
in this room to grow and keep investing in content
to make it happen. Well, it's a fascinating time and
I look forward to continuing to read what you write.
Thank you for coming on. Well, thank you. This is
a lot of fun. So I was surprised that Sahel
(35:01):
was relatively sanguine about Netflix's prospects. I am a numbers girl,
and to me, the cash burn with no real end
in sight is scary, particularly in an era where interest
rates may start to rise. I find it fascinating that
his industry sources talk about boom or bust. Either Netflix
rules our entire entertainment universe or the whole thing falls apart.
(35:24):
That's the thing about virtuous circles. It's really hard to
predict in advance what might make them turn vicious. So
just because you don't see it doesn't mean it isn't there.
That's why I don't think Netflix investors should relax, despite
Sahel's relative sanguinity. Anyway, I also found one thing about
this interview incredibly reassuring. Maybe it's not great for Netflix investors,
(35:46):
but I love love that the company cannot yet use
data to predict hits. The machines haven't figured us out,
at least not yet. There is hope for the human race.
Making a Killing is the co production of Pushkin Industries
and Chalk and Blade. It's produced by Ruth Barnes and
(36:07):
Rosie Stouffer. My executive producers are Alison McClain no relation
in Making Casey. The executive producer at Pushkin is Mia Loebel.
Engineering by Jason Gambrell and Jason Roskowski. Our music is
by Jed Flood. Special thanks to Jacob Weisberg at Pushkin
and everyone on the show I'm Bethany McLain. Thank you
(36:29):
so much for listening. You can find me on Twitter
at Bethany mac twelve and let me know which episodes
you've most enjoyed.
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