September 26, 2024 • 23 mins
Netflix Co-CEO Ted Sarandos started his career as somewhat of a human movie recommendation algorithm. At his video rental store job in Phoenix, Sarandos had a reputation among locals for knowing exactly which films they've enjoyed in the past, and which other titles in the store they might want next. These days, he's one of the most powerful people in Hollywood, leading the $310 billion entertainment behemoth that started the streaming wars: Netflix. Sarandos sat for an interview for "The David Rubenstein Show: Peer to Peer Conversations" and discussed how Netflix evolved from mailing DVDs to making award-winning original programming. This interview was recorded September 19 at the Johns Hopkins Bloomberg Center in Washington DC.
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Speaker 1 (00:02):
One of the most valuable entertainment companies in the world
and one of the most popular entertainment companies in the
world is Netflix. It currently has more than two hundred
and seventy five million subscribers.
Speaker 2 (00:11):
I recently had a chance in Washington, d C.
Speaker 1 (00:13):
To sit down with the co CEO of that company,
Ted Surrandos, and ask him how he got started this
company from a very modest background, and how he now
sees the future of Netflix. So, when you joined Netflix
in two thousand, the company was about three years old
but relatively small. Did you ever in your wildest dreams
imagine the company would be one of the most valuable
(00:34):
companies in the world and you would have today a
market value of over three hundred billion dollars.
Speaker 3 (00:40):
The short answer to that question is no. I think
when we joined we had a couple hundred people, including
the people who are stuffing DVD envelopes. Back then, Blockbuster
was the biggest entertainment brand in the world, with a
market gap of about eight billion dollars. They were definitely
the biggest in terms of global footprint. I mean, most
(01:01):
people watch their movies renting a DVD from Blockbuster, and
at eight billion, that seemed almost unattainable when we went
public in two thousand and two, about two hundred and
fifty million.
Speaker 1 (01:10):
So for people who were too young to remember, this,
Blockbuster was a place where you go to buy something
called a DVD, yes, and you went there, you rented them,
and then you put them back on your VCR, and
then you after a couple of days, like a library book,
you bring it back and so forth. The novelty that
Netflix had when it first started in nineteen ninety seven,
as I recall, was that you didn't have to go
(01:31):
to a Blockbuster. You could order something I guess online
and then you would have it sent to you by
a FedEx or equivalent kind of company.
Speaker 3 (01:38):
Right through the US mail okay ESPs.
Speaker 1 (01:40):
So who came up with the idea of saying, well,
FedEx is a little old and mailing is old, and
we want to go to streaming. Who was the brilliant
person that came up with that idea?
Speaker 3 (01:49):
You know, the company was always conceived to be a
digital company, read Hastings. When he came up with this idea,
he was thinking about it very much. So when he
named the company even he called it Netflix, not DVD Flix,
and this idea. When I met Reid in nineteen ninety nine.
He describes Netflix pretty much like it is right now.
And this was at a time when no literally no
(02:11):
entertainment was coming into the home on the internet, and
he described a world where all home entertainment would come
in on the internet.
Speaker 1 (02:18):
So when streaming came along, the theory was that people
would be willing to pay let's say a monthly subscribing rate,
right and that they would see programming they couldn't otherwise
easily get. But the idea of doing your own program
it was relatively novel. Now you are seen as the
person who came up with the idea of not just
taking stuff that's already out there, the one hundred thousand
(02:39):
things that might already be available, but producing your own
programming for Netflix.
Speaker 2 (02:43):
So where'd you get that idea from?
Speaker 3 (02:45):
So in the very beginning, we didn't really think much
about doing original programming because it wasn't the problem we
were trying to solve. The problem was really distribution and
how to you in the consumer relationship with how to
watch a movie? You go to the video store, you
rent it, you return it, you pay a light fee
if you're late, and it was a very clunky way
to distribute things in this way, the subscription revenue, the
(03:05):
subscription model gave the people the ability not to ever
have a late fee. They could kind of pick and
choose that however they wanted things. So we were solving
a distribution problem one and the other one was maybe
a bigger problem, which was marketing. It's incredibly inefficient to
market movies and TV shows to people because tastes are
so diverse and so eclectic that in order for me
(03:28):
to tell you about a movie that I think you
might like, I probably have to take out an ad
in the newspaper and tell the whole city about it
and hope that you see it.
Speaker 1 (03:35):
So the industry lore is that you got this off
the ground by agreeing to pay one hundred million dollars
to a new show that had not actually showed.
Speaker 2 (03:45):
There was House of Cards, Plow. It was a lot
like real estate. It's all about location, location, location.
Speaker 1 (03:51):
And it had not produced a single anything yet, but
it was a concept. When you told read Hastings, I
guess what, I just spent one hundred million dollars to
buy something and exists.
Speaker 2 (04:00):
Yet did he say great idea?
Speaker 3 (04:02):
No? He was a little surprised, but when I explained
it to him, he was very supportive of it immediately.
You have to remember, recreated this company culture that enabled
me to take a big swing like that, and for me,
I looked at it as a kind of classic risk reward. Yes,
this is a lot of money. If this doesn't work,
we will have dramatically overpaid for a show, which we
(04:25):
kind of at risk of doing all the time. But
if it does work, we could fundamentally change the course
of the business.
Speaker 2 (04:30):
If it didn't work and you think you might be
out of a job.
Speaker 3 (04:33):
I told I prepared my wife that it was a possibility.
She said, she said, will you get fired to this?
Other one guy said, well, it's fireable, it's firerable.
Speaker 1 (04:41):
There's another idea that you were credited with and I
think correctly with coming up with, which is called binge watching.
Speaker 2 (04:47):
I guess I could call it. I don't know if
you like that word.
Speaker 1 (04:50):
Didn't initially, Okay, So I understand binge watching. And this historically,
when there was a TV series on, you watched a
series episode one week, the next week, you watch the
second one next week. So on you came up with
the idea of having are the ability to watch everything
right at once, more or less binge watching, as they
call it. Did you come up with that idea or
(05:10):
did it evolve some way, or how did it come about?
Speaker 3 (05:13):
It was pretty heavily informed by what people were doing
back in the back in the earliest days on DVD,
I noticed that we'd have disc that would have four
episodes of a show on it, and they would turn
very fast because people were churning through the show as
quick as they could. And then when we started streaming,
we were licensing shows that had already aired on television,
so we got them a year later, but we got
(05:33):
the whole season and we just put it all up,
so we on a notice, when you're watching, some people
watch two episodes at a time, some people watch three.
Nobody watched one. So when we got how came to
House the cards, we had to decide how to release it,
and I said, well, don't we just put it like
the other thousands of things on Netflix and do it
all at once and see what happens.
Speaker 2 (05:51):
Now.
Speaker 1 (05:51):
Sometimes in the business world, particularly the technology world, somebody
might have a great idea and they have an advance
on somebody for maybe two years or so, and then
everybody else figures out what they should be doing, and
they catch up, and sometimes they have more resources than
they beat the original person who came up with the concept.
Were you worried that programmers like our companies had programming
like Disney would figure out streaming and then wipe you out?
Speaker 2 (06:12):
Or you never were worried about that.
Speaker 3 (06:14):
No, always worried about that. We couldn't believe it took
so long for them to catch up to it. In fact,
as one of the motivators to make our own content
was I was pretty sure that if we were right,
that all of these people who are supplying us their
old shows would never sell to us.
Speaker 1 (06:27):
When you started producing shows and making your own shows,
did you become the most popular person in Hollywood? Because
all of a sudden somebody has somebody who can green
light something and so could you go out to dinner
or lunch without having people descend upon you with scripts
and so forth?
Speaker 2 (06:43):
How did you deal with all that?
Speaker 3 (06:44):
Yeah, it was heavy because we were a new buyer
is very popular in town so and I would say
that it was never limited just to business hours. So
if you're out at a restaurant with my wife and
someone would come in and start pitching away at the table.
Somebody tells these people in film school, if you ever
see a buyer anywhere, sell to them?
Speaker 1 (07:01):
Does that ever work there? But you ever never went
to nobody came up and lunch. But an idea that
you're actually.
Speaker 3 (07:06):
I can't think of one.
Speaker 1 (07:08):
You know, there's been a lot of consolidation in recent
years in the entertainment world. You know, Time Warner was
sold in effect, and then you've got Powamount.
Speaker 2 (07:16):
Now being sold.
Speaker 1 (07:17):
Is all of this good for you because there's consolidation
and then you have fewer people to compete it with.
Or is it not so good because you have more
powerful people that can compete against you.
Speaker 3 (07:25):
Yeah, a little bit of both. So I think it's
competition has been very good people. I usually don't talk
about other people's shows publicly, but like people. As someone
asked me recently, what's the show that's not on Netflix
that you like? And I said The Bear. And the
reason I talk about the show is because I think
it raises the bar for everybody. So I think you
have one competition out there to keep you push, to
keep pushing you.
Speaker 1 (07:46):
But the consolidation won't occur by your buying one of
these major studios, because that's not in your house of
cards kind of thing.
Speaker 3 (07:52):
This is not in our DNA because they were most
mostly builders. We had done a few a handful of
small IP inquisitions over the years, and that may change
over the next in the next few years, but for
now we're trying to without the I would say a
big library of IP can be a really nice benefit
for us. That's really been a benefit not to have it,
(08:13):
because it's got it's pushed us to make really original,
creative things and not to stay corralled into one pool
of IP. And we're spending about seventeen billion dollars on
our programming and as our revenue grows, well, that number
will keep growing because we do think that there's an
incredible appetite for more movies and more TV shows that
people love now on.
Speaker 1 (08:33):
A few years ago, there was a writer's strike in Hollywood,
and one of the issues before it got resolved is
how you deal with artificial intelligence. How do you prevent
artificial intelligence from taking over what writers do, and how
do you compensate them when artificial intelligence does something that
adds to what they've already done. So is artificial intelligence
important part of your business now? And how do you
use AI and deciding what to produce and how to
(08:55):
produce it?
Speaker 3 (08:57):
For me, I really mostly think of AI as a
create wars tool, not a creative tool. So I think
creators will use it to make to tell better stories.
We're not using it to tell stories instead of them,
And I don't think and I don't think we'd be
very effective at it, or AI would be very effective
at doing that instead of people.
Speaker 1 (09:14):
So when you put something on Netflix, you can analyze
within an hour or so or maybe ten minutes, whether
people are watching it. And do you get those kind
of data algorithms that show you exactly how much people
like it? And do you actually change things after you
see what people like, or how do you deal with
the instant feedback you get?
Speaker 3 (09:33):
What I'm really looking for is if they watch episode one,
do they roll in episode two? And if they do two,
do they get to three? And how much time are
they spending. We're in a really unique place in entertainment
history right now where every time you release a new
movie or a new TV show, you are used to
only compete with three other shows on three other networks
today you compete with every single thing ever made, and
(09:55):
one click away you could just switch to something else.
So you want to watch these things? Are people? If
if you push play, do you stick around? That to
me is the biggest indicator of do we do it right?
Speaker 1 (10:05):
So let's talk about today where Netflix says today you
have how many subscribers.
Speaker 3 (10:11):
Two hundred and seventy seven million subscribers, So you figure
a couple of people per household watching, You've got about
a viewership now over five hundred million people.
Speaker 1 (10:21):
So two hundred and seventy seven million subscribers are more
than half in the United States, or.
Speaker 3 (10:26):
About seventy percent from outside the United.
Speaker 1 (10:28):
States, seventy percent outside What is the second biggest country
out of the United States.
Speaker 3 (10:33):
Well, we report by territory, by regions, so Amia is
the second largest outside of the United States, but we're
very big in the UK and Brazil.
Speaker 1 (10:43):
So for twenty plus years or so, your subscriber numbers
went up every month, it seems, without fail. And then
one month, I think you announced in a quarterly earnings
that actually subscribers went down a little bit. All of
a sudden, the world took a large part of your
market capitalization away. Were you shocked that people were so
upset about the fact that you lost a few subscribers
compared to where they thought you should be.
Speaker 3 (11:03):
Probably the magnitude of it was shocking, because we knew
the fundamentals of the business were intact and fine. It
just you had a whip saw effect from covid. There
are a lot of things that were happening that we're
still trying to figure out. But it was a kind
of a temporary blip, but it was it was. It
was a hard thud.
Speaker 1 (11:20):
But your market cap has come way back and higher
than it's ever been right currently, and so that blip
was not a big problem, I guess. But one of
the things you did that also upset people for a
while was you said you can't use your past code
to give it to somebody else, and not historically, as
I understand it, somebody could say to his friend, I
(11:40):
have a pass code for Netflix, why don't you use it?
And I assume I was taking revenue away from you.
And how did you figure out how big that problem was,
and how did you have the courage to say, you
know more of that and not worry that people were
going to get rid of their Netflix subscription.
Speaker 3 (11:53):
Well, we had it was a couple of times. One
was revenue, but the other part of it was this
personalization helping you find something to watch works better if
you don't have five or six different people using your account.
So for us, it was a really a way to
really hone in with the personalization technology, but also a
way to kind of test the value proposition. If you've
got our average members are watching about two hours in
(12:15):
Netflix every day. So basically when you go back out
to people and say, hey, you know that thing that
you're using for two hours a day and not paying for,
we'd like you to get your own account. And what's
turned out nicely about that is most people say, yeah,
that's well worth it for me to do that.
Speaker 1 (12:29):
Now, when I had my company and I was the
co CEO of it, I had a co co who
I started the company with, so we got along well,
we had different responsibilities and it worked out reasonably. Well,
you have a co CEO, let me talk about initially
you are the company was started by Reid Hastings and
he asked you to be the co co Were you
surprised that a founder of a company took somebody who
had been employee and made him the co CO was
(12:50):
out a surprise to you.
Speaker 3 (12:51):
It was a surprise. It would be a shock if
I didn't know Read that well at the time, because
I back to my first time I met Read in
ninety nine. He did talk about this desire to build
a company that would be around decades and centuries after him,
so he foresaw some kind of succession already. So I
believe that Reid saw this succession that we just went
(13:11):
through recently fifteen years ago, and started acting on it
twelve years ago, and which is very unusual. I think
your point, as you point out, for a founder, but
for somebody who really is thinking about the company first
and the longevity of a company first. He's been amazing
about that.
Speaker 1 (13:25):
So he stepped back. He's executive chairman now, not involved
day to day. But when he stepped back, did you say, well,
now I should be the sole CEO, or did you
say I want to co CEO? In addition to what
you know my own responsibile I.
Speaker 3 (13:38):
Think in classic Read fashion, he modeled something that really worked,
and we did it together for a few years, so
I really got the sense of how well it works.
I think Greg Greg and I read and I worked
together for more than twenty years, and Greg and I
worked together for about fifteen years. So we had the same,
very similar shorthand we had complimentary skill sets, I believe,
and we push each other in a healthy way. And
(14:00):
what's cool about having a co ceo? You know, there's
saying you know, usually sayings are rooted in reality, it's
lonely at the top. I think there's something to that.
And having somebody to be able to kick around hard
problems with that isn't an employee or a board member
is really helpful.
Speaker 2 (14:17):
Tell us about your background. Where were you born.
Speaker 3 (14:19):
I was born in Long Branch, New Jersey. Was there
for a few years and my family moved to Phoenix, Arizona.
I was raised in Phoenix.
Speaker 1 (14:27):
That's what in those days was out on usual ago
from New Jersey to Arizona. Why do they move to Arizona.
Speaker 3 (14:33):
It's a great story. My grandfather, who was a Greek immigrant,
grew up reading cowboy novels. When he actually when he
came to America, he came to be a trail cook.
He thought that was a real job in America, and
he ended up being a cook cook. But he loved
the American West and he always talked about it. And
he took one vacation in his life and it was
(14:54):
to Arizona, and he saw a rodeo and he wore
a bolo tie every day till the day he died,
and talked about roode on Arizona. So when he passed away,
all eight of his kids moved to Arizona.
Speaker 1 (15:05):
Really yeah, So how old were you when you moved
to Arizona?
Speaker 3 (15:09):
I think six years old.
Speaker 1 (15:10):
And did you say we're going to watch the cowboys,
We're going to be living at the cowboys or what
you think about that?
Speaker 3 (15:16):
Yeah? I didn't. We didn't see any cowboys and we
got there either. It's an I was pretty developed. It
was a pretty small town back then, Arizona.
Speaker 2 (15:21):
What did your family, your parents do?
Speaker 3 (15:23):
My father passed away recently, but he is He was
a union electrician and my mom was to stay home mom.
She took care of myself and I had three older
sisters and a younger brother who I just recently lost him.
Speaker 1 (15:35):
So when you were a boy, what were you interested?
You want to be an athlete? Did you want to
be an artist or what did you want to be?
Speaker 3 (15:41):
I wanted to be from the earliest I remember actually
thinking about what I wanted to do. I wanted to
be a journalist from probably ten years old or so,
but loved movies and television. I we had my parents
were young, We were you know, with the couse was
pretty chaotic. I kind of like order, and I kind
of liked the order that I saw on television, Like
(16:03):
those families that sat down for dinner on TV. We
did not do that my growing up. And the schedule
of television, I found it to be very appealing. But
I really fell in love with movies and television at
a pretty young age, and through that saw a journalist
as heroes and I just wanted to be a journalist.
Speaker 2 (16:20):
So you graduate from high school, then what did you do?
Speaker 3 (16:22):
I did. I was the editor of the school newspaper
in high school, and I went to community college because
I couldn't afford a university at the time, and was
editing the college paper, the community college newspaper, Glendale Community College.
There I met a lot of really incredible people. Probably
one of the more influential ones was Ed Asner, who
(16:45):
kind of made this connection for me between entertainment and
politics and just opened my mind to a different world
to do now. I also had an epiphanade about that
time that I wasn't a very good writer, so likely
I was not going to be a professional journalist.
Speaker 2 (17:01):
So okay, So eventually you got a job at a
video store.
Speaker 3 (17:05):
That's what I was. That was my part time job
when I was going to Glendall Community College, and then
when I realized I wasn't going to pursue that degree,
I kind of dropped out and it was meant to
be a year, but it turned out to be a
permanent move to business.
Speaker 1 (17:18):
So I understand that you became so knowledgeable about videos
that when people come in and say what should I rent,
you actually had actually seen a lot of these videos,
and you could make recommendations. People came in because they
liked your recommendations. I wanted to see what you're going
to recommend.
Speaker 3 (17:30):
It's true. I again, for no reason, my mother, when
we did not have the money for it, my mom
bought a VCR. The early time, I didn't know anyone
else who had a VCR, and serendipitously, the second video
store in the state of Arizona opened up a few
blocks from my house, so I started you know, devouring
movies by rent renting them. And then I get a
(17:50):
job at that store and the stores are empty all day,
so you can watch movies all day. I watched everything
in the store, and I had a pretty good memory
for it back then, and I could remember what people
liked when they brought something back, and I remember that
that was like this, and this was like that. And
sometimes the store would get so busy, but people would
wait for me so they could ask me what to
watch tonight.
Speaker 1 (18:09):
So did you go to the owner of the store
and say I should be the manager of the store.
I'm so popular here, or how did you think you
were an advance your career by being knowledgeable about these videos?
Speaker 3 (18:18):
Well, it wasn't a plan. He came to me and said, hey,
we love what you do here, and my wife's had
a couple of kids since you've been here, and the
business has been growing. It grew to several store chain
and he goes, I never seen my wife and I
need to take some time off, and would you take
things over? And he gave me the keys to a
video rental chain. And it was an MBA course in
(18:39):
film school all wrapped into one for me.
Speaker 2 (18:40):
How did you go from there to Netflix?
Speaker 3 (18:43):
Well, in between, I went to home video distribution, so
the companies that sold the vhs and DVDs to the
video stores. And while I was there, I did a
pretty unique deal with Warner Brothers and Sony to revenue
share DVDs, which just hadn't been done before. And read
Hastings It got written about it in a trade magazine
(19:04):
and read read it and said this is what we need.
And so a mutual friend introduced us.
Speaker 1 (19:08):
But if that article hadn't been in that trade press,
you could still be at that DVD story.
Speaker 3 (19:12):
You think there is still one by the way, it's
still open that first store, that one store is still
open there.
Speaker 1 (19:18):
The company is extremely successful. The problems you may have
had you seem to be behind you. So what is
the future of Netflix? Do you think you can keep
growing the subscriber base or how do you view your
future success? What is your goal to be in the future.
Speaker 3 (19:32):
To do well, I think we've got plenty of room
to grow both the subscriber base and revenue. For a
lot with a long runway, two hundred and seventy seven
million sounds like a lot of folks, But you know
you could double that and still not be halfway to
what the pay television universe was. And this is a
much better product economically and choice and control and all
the things that go into it. So I think there's
(19:53):
plenty of room to continue to grow the spaces that
were in you know, professional television and film and games.
This is a six hundred billion dollar consumer spend market
that we're about five percent of, and we go only
get about ten percent of screen time today, so about
ten percent of the time you're watching something on television,
you're watching Netflix, So a lot of room to grow
both of them.
Speaker 1 (20:13):
You are always being pitched on new projects that you're
going to presumably do in the future. There are other areas.
You're in sports now, you're in games. I guess you'd
say you're you're into you know, the traditional content you have.
Speaker 2 (20:25):
Are you going to do news at some point?
Speaker 3 (20:28):
It's a pretty well served market. There's a lot of
choices of how to get to news. So it hasn't
been an expertise of ours yet, so we're not really
looking at that.
Speaker 1 (20:36):
Hey, the most important thing I think people really want
is interview shows. Yeah, you have enough interview shows on
your yours.
Speaker 3 (20:41):
I have a feeling this would be a good pilot
for ya.
Speaker 1 (20:44):
What is the last thing you've watched on Netflix? And
if I say, all of a sudden, I want to
watch one thing on Netflix, what do you think I
should watch?
Speaker 3 (20:52):
For the first part of that is the thing I
like to watch the most on Netflix is the thing
that my wife and I can watch together. We do
not have similar taste in movies and television that everyone's
in all you find something that you really love to
watch together. And for us, that was the new season
of Emily in Paris that we just binged through in
two sittings and she loved it and it was a great,
great fun for me too. And for you. We have
(21:15):
a new show coming in just starting this week called Monsters,
the Eric and Lyleman Ninda story Ryan Murphy who created Dahmer,
and it's a phenomenal drama.
Speaker 1 (21:27):
Let's talk about your future. Yeah, you're now in the
company for how many years?
Speaker 3 (21:31):
I'll be twenty five, nicks to carp.
Speaker 2 (21:33):
So twenty five years and you were how sixty years old?
Speaker 1 (21:37):
Okay, well that's a teenager to me. So you're very young.
So do you have any interest in ever, Let's say
going to government, public service, running for office, being an ambassador,
or anything.
Speaker 3 (21:47):
I would I would love to do something in public
service that I can't see myself running for office, but
I would love just to be of service to the country.
Speaker 2 (21:53):
So at some point you might do that.
Speaker 1 (21:55):
Y at some point, did your parents live to see
your success and did they ever tell you how proud
they were of you?
Speaker 3 (22:02):
My dad passed away two years ago, and he did
see the success. And I don't think he totally understood
what I did, but he knew that it was pretty cool,
and he knew because people would tell him, that's pretty
cool what your son does. And my mom unfortunately passed
away before Netflix became what it is today. But at
(22:24):
the beginning we first started, you know, House of Cards
Days was a show up on all the award shows.
My mom likes to like to watch a lot of television,
and so she would always love to see me on
television at an award show, and she would call me
every once in a while and say, Hey, I'm watching
this award show. Are you there? I go, No, that's
the SP's mom. I'm not part of the SPS. So
but she got she really got a kick out of
(22:45):
it all, so yeah, but they didn't get to see
all of it, but they got a sense of it.
Speaker 1 (22:48):
And did they have a Netflix subscription to do? Buy
them one or they already had one?
Speaker 3 (22:52):
They I bought them one.
Speaker 1 (22:53):
And what would you like to see as your legacy
to the world of entertainment? What do you think legacy
should be or will be?
Speaker 3 (23:02):
You know, I hope it has been that or is
or will be or how every want to praise it
will be the guy who put the audience first. Tony
Bennett was a great friend of mine and he was
my hero, and he said it bestie said, the audience
is the most important member of the band. And I
feel like what I want approach that we put into
(23:23):
Netflix and into the programming, into our films and TV
and our games, is that we put the audience first
and think about how are they going to love it?
Speaker 2 (23:31):
First?
Speaker 3 (23:31):
We'll build a business model around it for but think
about how will you please in the audience first?
Speaker 2 (23:37):
Thanks for listening to hear more of my interviews. You
can subscribe and download my podcast on Spotify, Apple, or
wherever you listen.
One of the most valuable entertainment companies in the world
and one of the most popular entertainment companies in the
world is Netflix. It currently has more than two hundred
and seventy five million subscribers.
Speaker 2 (00:11):
I recently had a chance in Washington, d C.
Speaker 1 (00:13):
To sit down with the co CEO of that company,
Ted Surrandos, and ask him how he got started this
company from a very modest background, and how he now
sees the future of Netflix. So, when you joined Netflix
in two thousand, the company was about three years old
but relatively small. Did you ever in your wildest dreams
imagine the company would be one of the most valuable
(00:34):
companies in the world and you would have today a
market value of over three hundred billion dollars.
Speaker 3 (00:40):
The short answer to that question is no. I think
when we joined we had a couple hundred people, including
the people who are stuffing DVD envelopes. Back then, Blockbuster
was the biggest entertainment brand in the world, with a
market gap of about eight billion dollars. They were definitely
the biggest in terms of global footprint. I mean, most
(01:01):
people watch their movies renting a DVD from Blockbuster, and
at eight billion, that seemed almost unattainable when we went
public in two thousand and two, about two hundred and
fifty million.
Speaker 1 (01:10):
So for people who were too young to remember, this,
Blockbuster was a place where you go to buy something
called a DVD, yes, and you went there, you rented them,
and then you put them back on your VCR, and
then you after a couple of days, like a library book,
you bring it back and so forth. The novelty that
Netflix had when it first started in nineteen ninety seven,
as I recall, was that you didn't have to go
(01:31):
to a Blockbuster. You could order something I guess online
and then you would have it sent to you by
a FedEx or equivalent kind of company.
Speaker 3 (01:38):
Right through the US mail okay ESPs.
Speaker 1 (01:40):
So who came up with the idea of saying, well,
FedEx is a little old and mailing is old, and
we want to go to streaming. Who was the brilliant
person that came up with that idea?
Speaker 3 (01:49):
You know, the company was always conceived to be a
digital company, read Hastings. When he came up with this idea,
he was thinking about it very much. So when he
named the company even he called it Netflix, not DVD Flix,
and this idea. When I met Reid in nineteen ninety nine.
He describes Netflix pretty much like it is right now.
And this was at a time when no literally no
(02:11):
entertainment was coming into the home on the internet, and
he described a world where all home entertainment would come
in on the internet.
Speaker 1 (02:18):
So when streaming came along, the theory was that people
would be willing to pay let's say a monthly subscribing rate,
right and that they would see programming they couldn't otherwise
easily get. But the idea of doing your own program
it was relatively novel. Now you are seen as the
person who came up with the idea of not just
taking stuff that's already out there, the one hundred thousand
(02:39):
things that might already be available, but producing your own
programming for Netflix.
Speaker 2 (02:43):
So where'd you get that idea from?
Speaker 3 (02:45):
So in the very beginning, we didn't really think much
about doing original programming because it wasn't the problem we
were trying to solve. The problem was really distribution and
how to you in the consumer relationship with how to
watch a movie? You go to the video store, you
rent it, you return it, you pay a light fee
if you're late, and it was a very clunky way
to distribute things in this way, the subscription revenue, the
(03:05):
subscription model gave the people the ability not to ever
have a late fee. They could kind of pick and
choose that however they wanted things. So we were solving
a distribution problem one and the other one was maybe
a bigger problem, which was marketing. It's incredibly inefficient to
market movies and TV shows to people because tastes are
so diverse and so eclectic that in order for me
(03:28):
to tell you about a movie that I think you
might like, I probably have to take out an ad
in the newspaper and tell the whole city about it
and hope that you see it.
Speaker 1 (03:35):
So the industry lore is that you got this off
the ground by agreeing to pay one hundred million dollars
to a new show that had not actually showed.
Speaker 2 (03:45):
There was House of Cards, Plow. It was a lot
like real estate. It's all about location, location, location.
Speaker 1 (03:51):
And it had not produced a single anything yet, but
it was a concept. When you told read Hastings, I
guess what, I just spent one hundred million dollars to
buy something and exists.
Speaker 2 (04:00):
Yet did he say great idea?
Speaker 3 (04:02):
No? He was a little surprised, but when I explained
it to him, he was very supportive of it immediately.
You have to remember, recreated this company culture that enabled
me to take a big swing like that, and for me,
I looked at it as a kind of classic risk reward. Yes,
this is a lot of money. If this doesn't work,
we will have dramatically overpaid for a show, which we
(04:25):
kind of at risk of doing all the time. But
if it does work, we could fundamentally change the course
of the business.
Speaker 2 (04:30):
If it didn't work and you think you might be
out of a job.
Speaker 3 (04:33):
I told I prepared my wife that it was a possibility.
She said, she said, will you get fired to this?
Other one guy said, well, it's fireable, it's firerable.
Speaker 1 (04:41):
There's another idea that you were credited with and I
think correctly with coming up with, which is called binge watching.
Speaker 2 (04:47):
I guess I could call it. I don't know if
you like that word.
Speaker 1 (04:50):
Didn't initially, Okay, So I understand binge watching. And this historically,
when there was a TV series on, you watched a
series episode one week, the next week, you watch the
second one next week. So on you came up with
the idea of having are the ability to watch everything
right at once, more or less binge watching, as they
call it. Did you come up with that idea or
(05:10):
did it evolve some way, or how did it come about?
Speaker 3 (05:13):
It was pretty heavily informed by what people were doing
back in the back in the earliest days on DVD,
I noticed that we'd have disc that would have four
episodes of a show on it, and they would turn
very fast because people were churning through the show as
quick as they could. And then when we started streaming,
we were licensing shows that had already aired on television,
so we got them a year later, but we got
(05:33):
the whole season and we just put it all up,
so we on a notice, when you're watching, some people
watch two episodes at a time, some people watch three.
Nobody watched one. So when we got how came to
House the cards, we had to decide how to release it,
and I said, well, don't we just put it like
the other thousands of things on Netflix and do it
all at once and see what happens.
Speaker 2 (05:51):
Now.
Speaker 1 (05:51):
Sometimes in the business world, particularly the technology world, somebody
might have a great idea and they have an advance
on somebody for maybe two years or so, and then
everybody else figures out what they should be doing, and
they catch up, and sometimes they have more resources than
they beat the original person who came up with the concept.
Were you worried that programmers like our companies had programming
like Disney would figure out streaming and then wipe you out?
Speaker 2 (06:12):
Or you never were worried about that.
Speaker 3 (06:14):
No, always worried about that. We couldn't believe it took
so long for them to catch up to it. In fact,
as one of the motivators to make our own content
was I was pretty sure that if we were right,
that all of these people who are supplying us their
old shows would never sell to us.
Speaker 1 (06:27):
When you started producing shows and making your own shows,
did you become the most popular person in Hollywood? Because
all of a sudden somebody has somebody who can green
light something and so could you go out to dinner
or lunch without having people descend upon you with scripts
and so forth?
Speaker 2 (06:43):
How did you deal with all that?
Speaker 3 (06:44):
Yeah, it was heavy because we were a new buyer
is very popular in town so and I would say
that it was never limited just to business hours. So
if you're out at a restaurant with my wife and
someone would come in and start pitching away at the table.
Somebody tells these people in film school, if you ever
see a buyer anywhere, sell to them?
Speaker 1 (07:01):
Does that ever work there? But you ever never went
to nobody came up and lunch. But an idea that
you're actually.
Speaker 3 (07:06):
I can't think of one.
Speaker 1 (07:08):
You know, there's been a lot of consolidation in recent
years in the entertainment world. You know, Time Warner was
sold in effect, and then you've got Powamount.
Speaker 2 (07:16):
Now being sold.
Speaker 1 (07:17):
Is all of this good for you because there's consolidation
and then you have fewer people to compete it with.
Or is it not so good because you have more
powerful people that can compete against you.
Speaker 3 (07:25):
Yeah, a little bit of both. So I think it's
competition has been very good people. I usually don't talk
about other people's shows publicly, but like people. As someone
asked me recently, what's the show that's not on Netflix
that you like? And I said The Bear. And the
reason I talk about the show is because I think
it raises the bar for everybody. So I think you
have one competition out there to keep you push, to
keep pushing you.
Speaker 1 (07:46):
But the consolidation won't occur by your buying one of
these major studios, because that's not in your house of
cards kind of thing.
Speaker 3 (07:52):
This is not in our DNA because they were most
mostly builders. We had done a few a handful of
small IP inquisitions over the years, and that may change
over the next in the next few years, but for
now we're trying to without the I would say a
big library of IP can be a really nice benefit
for us. That's really been a benefit not to have it,
(08:13):
because it's got it's pushed us to make really original,
creative things and not to stay corralled into one pool
of IP. And we're spending about seventeen billion dollars on
our programming and as our revenue grows, well, that number
will keep growing because we do think that there's an
incredible appetite for more movies and more TV shows that
people love now on.
Speaker 1 (08:33):
A few years ago, there was a writer's strike in Hollywood,
and one of the issues before it got resolved is
how you deal with artificial intelligence. How do you prevent
artificial intelligence from taking over what writers do, and how
do you compensate them when artificial intelligence does something that
adds to what they've already done. So is artificial intelligence
important part of your business now? And how do you
use AI and deciding what to produce and how to
(08:55):
produce it?
Speaker 3 (08:57):
For me, I really mostly think of AI as a
create wars tool, not a creative tool. So I think
creators will use it to make to tell better stories.
We're not using it to tell stories instead of them,
And I don't think and I don't think we'd be
very effective at it, or AI would be very effective
at doing that instead of people.
Speaker 1 (09:14):
So when you put something on Netflix, you can analyze
within an hour or so or maybe ten minutes, whether
people are watching it. And do you get those kind
of data algorithms that show you exactly how much people
like it? And do you actually change things after you
see what people like, or how do you deal with
the instant feedback you get?
Speaker 3 (09:33):
What I'm really looking for is if they watch episode one,
do they roll in episode two? And if they do two,
do they get to three? And how much time are
they spending. We're in a really unique place in entertainment
history right now where every time you release a new
movie or a new TV show, you are used to
only compete with three other shows on three other networks
today you compete with every single thing ever made, and
(09:55):
one click away you could just switch to something else.
So you want to watch these things? Are people? If
if you push play, do you stick around? That to
me is the biggest indicator of do we do it right?
Speaker 1 (10:05):
So let's talk about today where Netflix says today you
have how many subscribers.
Speaker 3 (10:11):
Two hundred and seventy seven million subscribers, So you figure
a couple of people per household watching, You've got about
a viewership now over five hundred million people.
Speaker 1 (10:21):
So two hundred and seventy seven million subscribers are more
than half in the United States, or.
Speaker 3 (10:26):
About seventy percent from outside the United.
Speaker 1 (10:28):
States, seventy percent outside What is the second biggest country
out of the United States.
Speaker 3 (10:33):
Well, we report by territory, by regions, so Amia is
the second largest outside of the United States, but we're
very big in the UK and Brazil.
Speaker 1 (10:43):
So for twenty plus years or so, your subscriber numbers
went up every month, it seems, without fail. And then
one month, I think you announced in a quarterly earnings
that actually subscribers went down a little bit. All of
a sudden, the world took a large part of your
market capitalization away. Were you shocked that people were so
upset about the fact that you lost a few subscribers
compared to where they thought you should be.
Speaker 3 (11:03):
Probably the magnitude of it was shocking, because we knew
the fundamentals of the business were intact and fine. It
just you had a whip saw effect from covid. There
are a lot of things that were happening that we're
still trying to figure out. But it was a kind
of a temporary blip, but it was it was. It
was a hard thud.
Speaker 1 (11:20):
But your market cap has come way back and higher
than it's ever been right currently, and so that blip
was not a big problem, I guess. But one of
the things you did that also upset people for a
while was you said you can't use your past code
to give it to somebody else, and not historically, as
I understand it, somebody could say to his friend, I
(11:40):
have a pass code for Netflix, why don't you use it?
And I assume I was taking revenue away from you.
And how did you figure out how big that problem was,
and how did you have the courage to say, you
know more of that and not worry that people were
going to get rid of their Netflix subscription.
Speaker 3 (11:53):
Well, we had it was a couple of times. One
was revenue, but the other part of it was this
personalization helping you find something to watch works better if
you don't have five or six different people using your account.
So for us, it was a really a way to
really hone in with the personalization technology, but also a
way to kind of test the value proposition. If you've
got our average members are watching about two hours in
(12:15):
Netflix every day. So basically when you go back out
to people and say, hey, you know that thing that
you're using for two hours a day and not paying for,
we'd like you to get your own account. And what's
turned out nicely about that is most people say, yeah,
that's well worth it for me to do that.
Speaker 1 (12:29):
Now, when I had my company and I was the
co CEO of it, I had a co co who
I started the company with, so we got along well,
we had different responsibilities and it worked out reasonably. Well,
you have a co CEO, let me talk about initially
you are the company was started by Reid Hastings and
he asked you to be the co co Were you
surprised that a founder of a company took somebody who
had been employee and made him the co CO was
(12:50):
out a surprise to you.
Speaker 3 (12:51):
It was a surprise. It would be a shock if
I didn't know Read that well at the time, because
I back to my first time I met Read in
ninety nine. He did talk about this desire to build
a company that would be around decades and centuries after him,
so he foresaw some kind of succession already. So I
believe that Reid saw this succession that we just went
(13:11):
through recently fifteen years ago, and started acting on it
twelve years ago, and which is very unusual. I think
your point, as you point out, for a founder, but
for somebody who really is thinking about the company first
and the longevity of a company first. He's been amazing
about that.
Speaker 1 (13:25):
So he stepped back. He's executive chairman now, not involved
day to day. But when he stepped back, did you say, well,
now I should be the sole CEO, or did you
say I want to co CEO? In addition to what
you know my own responsibile I.
Speaker 3 (13:38):
Think in classic Read fashion, he modeled something that really worked,
and we did it together for a few years, so
I really got the sense of how well it works.
I think Greg Greg and I read and I worked
together for more than twenty years, and Greg and I
worked together for about fifteen years. So we had the same,
very similar shorthand we had complimentary skill sets, I believe,
and we push each other in a healthy way. And
(14:00):
what's cool about having a co ceo? You know, there's
saying you know, usually sayings are rooted in reality, it's
lonely at the top. I think there's something to that.
And having somebody to be able to kick around hard
problems with that isn't an employee or a board member
is really helpful.
Speaker 2 (14:17):
Tell us about your background. Where were you born.
Speaker 3 (14:19):
I was born in Long Branch, New Jersey. Was there
for a few years and my family moved to Phoenix, Arizona.
I was raised in Phoenix.
Speaker 1 (14:27):
That's what in those days was out on usual ago
from New Jersey to Arizona. Why do they move to Arizona.
Speaker 3 (14:33):
It's a great story. My grandfather, who was a Greek immigrant,
grew up reading cowboy novels. When he actually when he
came to America, he came to be a trail cook.
He thought that was a real job in America, and
he ended up being a cook cook. But he loved
the American West and he always talked about it. And
he took one vacation in his life and it was
(14:54):
to Arizona, and he saw a rodeo and he wore
a bolo tie every day till the day he died,
and talked about roode on Arizona. So when he passed away,
all eight of his kids moved to Arizona.
Speaker 1 (15:05):
Really yeah, So how old were you when you moved
to Arizona?
Speaker 3 (15:09):
I think six years old.
Speaker 1 (15:10):
And did you say we're going to watch the cowboys,
We're going to be living at the cowboys or what
you think about that?
Speaker 3 (15:16):
Yeah? I didn't. We didn't see any cowboys and we
got there either. It's an I was pretty developed. It
was a pretty small town back then, Arizona.
Speaker 2 (15:21):
What did your family, your parents do?
Speaker 3 (15:23):
My father passed away recently, but he is He was
a union electrician and my mom was to stay home mom.
She took care of myself and I had three older
sisters and a younger brother who I just recently lost him.
Speaker 1 (15:35):
So when you were a boy, what were you interested?
You want to be an athlete? Did you want to
be an artist or what did you want to be?
Speaker 3 (15:41):
I wanted to be from the earliest I remember actually
thinking about what I wanted to do. I wanted to
be a journalist from probably ten years old or so,
but loved movies and television. I we had my parents
were young, We were you know, with the couse was
pretty chaotic. I kind of like order, and I kind
of liked the order that I saw on television, Like
(16:03):
those families that sat down for dinner on TV. We
did not do that my growing up. And the schedule
of television, I found it to be very appealing. But
I really fell in love with movies and television at
a pretty young age, and through that saw a journalist
as heroes and I just wanted to be a journalist.
Speaker 2 (16:20):
So you graduate from high school, then what did you do?
Speaker 3 (16:22):
I did. I was the editor of the school newspaper
in high school, and I went to community college because
I couldn't afford a university at the time, and was
editing the college paper, the community college newspaper, Glendale Community College.
There I met a lot of really incredible people. Probably
one of the more influential ones was Ed Asner, who
(16:45):
kind of made this connection for me between entertainment and
politics and just opened my mind to a different world
to do now. I also had an epiphanade about that
time that I wasn't a very good writer, so likely
I was not going to be a professional journalist.
Speaker 2 (17:01):
So okay, So eventually you got a job at a
video store.
Speaker 3 (17:05):
That's what I was. That was my part time job
when I was going to Glendall Community College, and then
when I realized I wasn't going to pursue that degree,
I kind of dropped out and it was meant to
be a year, but it turned out to be a
permanent move to business.
Speaker 1 (17:18):
So I understand that you became so knowledgeable about videos
that when people come in and say what should I rent,
you actually had actually seen a lot of these videos,
and you could make recommendations. People came in because they
liked your recommendations. I wanted to see what you're going
to recommend.
Speaker 3 (17:30):
It's true. I again, for no reason, my mother, when
we did not have the money for it, my mom
bought a VCR. The early time, I didn't know anyone
else who had a VCR, and serendipitously, the second video
store in the state of Arizona opened up a few
blocks from my house, so I started you know, devouring
movies by rent renting them. And then I get a
(17:50):
job at that store and the stores are empty all day,
so you can watch movies all day. I watched everything
in the store, and I had a pretty good memory
for it back then, and I could remember what people
liked when they brought something back, and I remember that
that was like this, and this was like that. And
sometimes the store would get so busy, but people would
wait for me so they could ask me what to
watch tonight.
Speaker 1 (18:09):
So did you go to the owner of the store
and say I should be the manager of the store.
I'm so popular here, or how did you think you
were an advance your career by being knowledgeable about these videos?
Speaker 3 (18:18):
Well, it wasn't a plan. He came to me and said, hey,
we love what you do here, and my wife's had
a couple of kids since you've been here, and the
business has been growing. It grew to several store chain
and he goes, I never seen my wife and I
need to take some time off, and would you take
things over? And he gave me the keys to a
video rental chain. And it was an MBA course in
(18:39):
film school all wrapped into one for me.
Speaker 2 (18:40):
How did you go from there to Netflix?
Speaker 3 (18:43):
Well, in between, I went to home video distribution, so
the companies that sold the vhs and DVDs to the
video stores. And while I was there, I did a
pretty unique deal with Warner Brothers and Sony to revenue
share DVDs, which just hadn't been done before. And read
Hastings It got written about it in a trade magazine
(19:04):
and read read it and said this is what we need.
And so a mutual friend introduced us.
Speaker 1 (19:08):
But if that article hadn't been in that trade press,
you could still be at that DVD story.
Speaker 3 (19:12):
You think there is still one by the way, it's
still open that first store, that one store is still
open there.
Speaker 1 (19:18):
The company is extremely successful. The problems you may have
had you seem to be behind you. So what is
the future of Netflix? Do you think you can keep
growing the subscriber base or how do you view your
future success? What is your goal to be in the future.
Speaker 3 (19:32):
To do well, I think we've got plenty of room
to grow both the subscriber base and revenue. For a
lot with a long runway, two hundred and seventy seven
million sounds like a lot of folks, But you know
you could double that and still not be halfway to
what the pay television universe was. And this is a
much better product economically and choice and control and all
the things that go into it. So I think there's
(19:53):
plenty of room to continue to grow the spaces that
were in you know, professional television and film and games.
This is a six hundred billion dollar consumer spend market
that we're about five percent of, and we go only
get about ten percent of screen time today, so about
ten percent of the time you're watching something on television,
you're watching Netflix, So a lot of room to grow
both of them.
Speaker 1 (20:13):
You are always being pitched on new projects that you're
going to presumably do in the future. There are other areas.
You're in sports now, you're in games. I guess you'd
say you're you're into you know, the traditional content you have.
Speaker 2 (20:25):
Are you going to do news at some point?
Speaker 3 (20:28):
It's a pretty well served market. There's a lot of
choices of how to get to news. So it hasn't
been an expertise of ours yet, so we're not really
looking at that.
Speaker 1 (20:36):
Hey, the most important thing I think people really want
is interview shows. Yeah, you have enough interview shows on
your yours.
Speaker 3 (20:41):
I have a feeling this would be a good pilot
for ya.
Speaker 1 (20:44):
What is the last thing you've watched on Netflix? And
if I say, all of a sudden, I want to
watch one thing on Netflix, what do you think I
should watch?
Speaker 3 (20:52):
For the first part of that is the thing I
like to watch the most on Netflix is the thing
that my wife and I can watch together. We do
not have similar taste in movies and television that everyone's
in all you find something that you really love to
watch together. And for us, that was the new season
of Emily in Paris that we just binged through in
two sittings and she loved it and it was a great,
great fun for me too. And for you. We have
(21:15):
a new show coming in just starting this week called Monsters,
the Eric and Lyleman Ninda story Ryan Murphy who created Dahmer,
and it's a phenomenal drama.
Speaker 1 (21:27):
Let's talk about your future. Yeah, you're now in the
company for how many years?
Speaker 3 (21:31):
I'll be twenty five, nicks to carp.
Speaker 2 (21:33):
So twenty five years and you were how sixty years old?
Speaker 1 (21:37):
Okay, well that's a teenager to me. So you're very young.
So do you have any interest in ever, Let's say
going to government, public service, running for office, being an ambassador,
or anything.
Speaker 3 (21:47):
I would I would love to do something in public
service that I can't see myself running for office, but
I would love just to be of service to the country.
Speaker 2 (21:53):
So at some point you might do that.
Speaker 1 (21:55):
Y at some point, did your parents live to see
your success and did they ever tell you how proud
they were of you?
Speaker 3 (22:02):
My dad passed away two years ago, and he did
see the success. And I don't think he totally understood
what I did, but he knew that it was pretty cool,
and he knew because people would tell him, that's pretty
cool what your son does. And my mom unfortunately passed
away before Netflix became what it is today. But at
(22:24):
the beginning we first started, you know, House of Cards
Days was a show up on all the award shows.
My mom likes to like to watch a lot of television,
and so she would always love to see me on
television at an award show, and she would call me
every once in a while and say, Hey, I'm watching
this award show. Are you there? I go, No, that's
the SP's mom. I'm not part of the SPS. So
but she got she really got a kick out of
(22:45):
it all, so yeah, but they didn't get to see
all of it, but they got a sense of it.
Speaker 1 (22:48):
And did they have a Netflix subscription to do? Buy
them one or they already had one?
Speaker 3 (22:52):
They I bought them one.
Speaker 1 (22:53):
And what would you like to see as your legacy
to the world of entertainment? What do you think legacy
should be or will be?
Speaker 3 (23:02):
You know, I hope it has been that or is
or will be or how every want to praise it
will be the guy who put the audience first. Tony
Bennett was a great friend of mine and he was
my hero, and he said it bestie said, the audience
is the most important member of the band. And I
feel like what I want approach that we put into
(23:23):
Netflix and into the programming, into our films and TV
and our games, is that we put the audience first
and think about how are they going to love it?
Speaker 2 (23:31):
First?
Speaker 3 (23:31):
We'll build a business model around it for but think
about how will you please in the audience first?
Speaker 2 (23:37):
Thanks for listening to hear more of my interviews. You
can subscribe and download my podcast on Spotify, Apple, or
wherever you listen.
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