Netflix (Part 2)

We complete our two-part Netflix special with the company’s bold transition to streaming, including of course the most (in)famous spin-out in business history. Rising from the ashes of Qwikster, we chronicle Netflix’s rebirth as a media company and long journey back to the top of the FAANG mountaintop! Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Links:Netflix’s Qwikster apology video: https://youtu.be/c8Tn8n5CIPkSNL parody of the apology video: https://bit.ly/2PWEyyZEvolution of Netflix home page: https://read.bi/2KvHdteThe Chaos Monkey: https://bit.ly/1qkqDxZ Benedict Evans’ chart of FAANG stocks: https://bit.ly/2r3D72A Carve Outs: Ben: Kevin Rose interviews Matthew Walker on sleep: https://bit.ly/2LpIl5vDavid: Justin O’Beirne on Apple’s new Maps: https://bit.ly/2zrQ76Z

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  Oh my God, David, look at that podcast room you are in, that foam padding.

• 0:16Ben Gilbert?

  Welcome to season three, episode nine of Acquired, the show about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:24David Rosenthal?

  I'm David Rosenthal.

• 0:25Ben Gilbert?

  And we are your hosts. Today, we are back with the acquired version of Terminator 2, the second part of our Netflix episode. You like that, David? It's just for you.

• 0:37David Rosenthal?

  Oh, man, that's great. That's great. Love it.

• 0:40Ben Gilbert?

  Listeners, now if you remember, the last episode we did covered the DVD saga of Netflix and where we left our heroes in 2009, shortly before the epic launch of Quickster. So today, we're going to dive in on the era of streaming and later, original content. So David, I wanted to have a fun fact to start us off on Netflix. So as you remember, they were once a plucky startup mailing DVDs to customers and a remnant of the pre-dot-com bubble, starting in 97. And they were doing this even before most people had DVD players. They were waiting for the DVD wave to crest. This company now accounts for 15% of all internet traffic.

• 1:21David Rosenthal?

  I know. That's in my show notes.

• 1:25Ben Gilbert?

  Well, sorry to blow your cover early, but streaming movies and TV as a category actually now makes up 58% of downstream internet traffic. And no single service accounts for more of that bandwidth than Netflix does. And at peak times, it can even account for 40% of the US's concurrent internet traffic. So you could imagine maybe like 8:00 PM Eastern or something like that.

• 1:49David Rosenthal?

  Absolutely incredible.

• 1:51Ben Gilbert?

  Yeah. And this is with some of the best compression and optimization technology that like humans as a species have figured out how to do. The last episode was about a company fighting to get its first 500,000 customers. And this episode is very much about sort of global domination. All right, listeners, we announced on the last episode that we had formally launched the Acquired Limited Partner Program. And we've been just totally floored by how many of you have have joined our LP community and are listening to the bonus show and are sending us really great questions for doing Q and A on the show. David, last week's episode was like very fun, so I'm pumped I got to meet Dan. And thanks for bringing him on.

• 2:28David Rosenthal?

  Yeah, it was super fun. We had Dan Hill, who, in addition to being the CEO of Wave's first portfolio company, Alma, co-founder and CEO, he was Airbnb's head of growth for a long time and had just great stories about growing Airbnb from, you know, Series B days to $30 billion plus. And just so much to learn from him. So really fun to have him on the LP show.

• 2:54Ben Gilbert?

  Anyway, listeners, if you want to hear Dan talk about why Airbnb was successful, sort of in the space and how they chose their metrics and a bunch of other great stuff, you can click the link in the show notes to support the show for $5 a month, or go to kimberlite.fm/ acquired. That's K I M B E R L I T E dot FM slash acquired.

• 3:12David Rosenthal?

  I feel like we really need a jingle for that.

• 3:14Ben Gilbert?

  Do do do. We could just play that every time.

• 3:18David Rosenthal?

  Yeah.

• 3:19Ben Gilbert?

  Yeah, acquired needs better jingles, period. That might be one of my holiday, holiday projects.

• 3:23David Rosenthal?

  Yeah.

• 3:26David Rosenthal?

  Back to the show.

• 3:29Ben Gilbert?

  All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 3:48David Rosenthal?

  Yep, your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 4:09Ben Gilbert?

  Right, and that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap, and the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 4:31David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 4:49Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you.

• 5:17Ben Gilbert?

  All right, now, on to the show.

• 5:19David Rosenthal?

  On to the show, indeed.

• 5:21Ben Gilbert?

  David, I texted you before this. We have a little bit of follow-up from the last episode. We have some awesome listeners that wrote us in about Netflix Part 1, and since this is a two-parter, we do get to actually go back and make a few corrections. The first one is actually on my carve-out from last week, where I mentioned that The Good Place was a Netflix show. That is a classic millennial mistake. It is completely not a Netflix show. It's an NBC show that just got syndicated on Netflix, but my cord-cutting had blinded me from that, and Netflix originals have just gotten so good and plentiful that I just assumed that I was watching a Netflix show. So that mistake-

• 5:59David Rosenthal?

  What foreshadowing for Part 2.

• 6:02Ben Gilbert?

  I know. The other one is that we discussed that Blockbuster had an incredible business model where they only had to pay rack rate for DVDs and then they could rent them as many times as they would like. Thanks to, on Twitter, Jim underscore Brown, we have a correction. It's difficult actually to track down the exact number. It's sort of buried in some academic papers and I think it came out in some court case filings that I gave up on trying to actually find it out, but it's somewhere between $50 and $100 that they actually had to pay for every DVD rather than just getting to sort of buy them at store price in sort of a special deal that they'd orchestrated so that they could generate the sort of high rental revenues that they got from each one of those DVDs.

• 6:45Ben Gilbert?

  So, good to know there and thank you to Jim for correcting us. And the third one is, we had an anonymous listener send us some amazing facts about Redbox after we briefly touched on it in the last episode. So, Redbox, as you know from the last episode, was actually originally a project at Netflix that an executive quit to go and work on full-time. So, Outerwall, which was Redbox's once-parent company, was acquired for over $1 billion in 2016 by the private equity firm Apollo Global Management. And Redbox is now a standalone company inside of Apollo. Turns out it's wildly profitable. They're actually working on starting a streaming service of their own, standing up a second attempt of that.

• 7:29Ben Gilbert?

  But looking at their core business, like, it's not hard to figure out why they're wildly profitable. It turns out, running a retail footprint of 6 feet by 6 feet that rarely requires human intervention can be wildly profitable. No surprise there. They have like the, you know, if you think about sort of like the dollars per square foot per month at retail establishments, like-

• 7:49David Rosenthal?

  One way, people always focus on improving the numerator there, but you could also lower the denominator.

• 7:55Ben Gilbert?

  Yeah, they've sort of gained the system on that metric. But here's another crazy thing about Redbox right now. So, in Disney's attempt to build their own relationship with customers through the, in my opinion, very dumbly-named Disney Plus, they do not have a distribution agreement with Redbox. So, what does Redbox do to get the Disney titles on their machines? Well, we heard a great story. It is official company policy to send employees store-to-store when new Disney movies come out to buy retail copies of the DVDs, I guess Blu-rays, and bring them back to stock the machines. This is, this is actually how Redbox acquires Disney movies to put onto their, their platform.

• 8:33David Rosenthal?

  Wow. Which I got to imagine are some of the most popular titles on, on Redbox machines.

• 8:39Ben Gilbert?

  I just think in general, I think we, we sold the company short last episode. They deserve some of the credit also for destroying Blockbuster because while Netflix was hard at work hammering them on the online front, Redbox was also doing for $1 what they used to do for $3 and in many ways easier because they sort of had more endpoints at more stores. Blockbuster's main business was sort of under, under attack there as well. So lots of kudos to, to Redbox for being a major player in this industry.

• 9:03David Rosenthal?

  Indeed, indeed.

• 9:05Ben Gilbert?

  All right. So David, can you take us in to what year 2007? Rewind a little bit and, and start with, with streaming or are you going to like find some way to go to like the early 30s?

• 9:17David Rosenthal?

  Not that far back this time, but we will pick up the story in part two. As listeners remember, in part one, we covered the story of Quickster, I mean Netflix, from founding to 2009. Once again, also in part two, want to shout out the really excellent book Netflixed by Gina Keating, which provides a lot of the history and facts. And really for anyone who's more deeply interested in this company and this history, can't recommend enough that you go read it. So we ended last time in 2009. Netflix, not yet, Quickster, had basically, you know, snatched victory from the, the jaws of Blockbuster.

• 9:55Ben Gilbert?

  Do you keep calling it Quickster because like their whole business basically was?

• 9:58David Rosenthal?

  Yes, this was Quickster. Yeah. Everything we discussed in the last episode was Quickster. They just reached 10 million subscribers. It's 2009. They're, the recession has beset the US and, and the world recently. And Netflix is one of the few companies that is thriving during the recession. They're basically on top of the world, but the waves are shifting. Streaming is coming. And like any good, you know, sea captains at sea, Reed Hastings and the Netflix management team, they see this and they know that they're going to have to adapt and they're going to have to embrace this, this new title wave of, of streaming that, that they see coming.

• 10:37David Rosenthal?

  So to rewind a little bit, how did streaming kind of come about? So really, I mean, I think you can point to, this was our first episode? It was our first acquired episode, right? Disney Pixar?

• 10:48Ben Gilbert?

  Yeah, first or the second. I can't remember Instagram or Pixar was one of our first.

• 10:52David Rosenthal?

  Yeah, those were one and two. But anyway, Disney in 2006 had acquired Pixar. And that, of course, brought Steve Jobs, became the largest single shareholder in Disney. And Steve Jobs joined the Disney board. And after that happened, in the couple of years following, Disney made a pretty unprecedented move. They brought all of their video content to the iTunes Store. And so for the first time, all of a sudden, I remember doing this in college and right after, you could buy digital copies of Disney movies and ABC TV shows. I remember doing this with Lost, and you could buy a whole season at a time. Now, this was not streaming. This was downloading.

• 11:33David Rosenthal?

  You would buy it on iTunes, download the entire file to your computer. In the beginning, there wasn't even a video iPod.

• 11:40Ben Gilbert?

  I like the disdain that you say for computer. It's some like archaic device.

• 11:45David Rosenthal?

  It is, it is. I say as I'm talking into one, but I'm rapidly trying to move everything to iPad. But, and so that really kind of started to open the industry's eyes. This was the first, like, this was real content, mainstream content that now could be available digitally. The other thing that happened right around this time is US broadband penetration finally passed, you know, 50% and then kept growing and became really ubiquitous. You know, this, this whole business, whether downloads or streaming would have been impossible in the, in the dial-up days. Burbaudban finally enables it. So Netflix, of course, and Reed Hastings and the management team, they see all this happening. And they know they need to do something.

• 12:27David Rosenthal?

  So in 2007, they make a pretty key hire onto the team. They hire a man named Anthony Wood. Now, Anthony had been the founder of a successful DVR company. So you know, those like set-top boxes that were like TiVo's? So he had founded a competitor to TiVo called Replay TV that had been successful. And so they hire him to come and be a VP at Netflix and to work on what they're calling the Netflix Box. And the idea is that this would be a set-top box made by Netflix that people would, would buy and put in their homes next to their DVD players. And initially, the vision was it would have a hard drive in it.

• 13:08David Rosenthal?

  And just like when you would download a Disney movie via iTunes on your computer, you would download a movie from Netflix onto this box and it would play it off the hard drive hooked up to your TV.

• 13:20Ben Gilbert?

  I think I glazed over that at the research, like before streaming, it really was like, it was basically a NAS, like a network store, you know, I just keep a bunch of stuff at at home.

• 13:30David Rosenthal?

  Well, it was, it was a replay TV. It was a DVR. That's what it was. It was a hard drive. They realized though, that, that actually with broadband, like, you know, you have to wait to download the movie when you're in this old paradigm that actually just streaming, they had the technology to do that and that would be better. So they pivot the project into that. The, the box is, is coming along, but Reed and the management team, they started to get worried though. Uh, this is late 2007. They, they worried that if they release their own box, they see that there's fights coming in this new paradigm. They're going to have to fight with the cable companies. They're going to have to fight with the content companies. And they realized that if they release their own box, they're also going to have to fight with the consumer electronics manufacturers.

• 14:14Ben Gilbert?

  And Reed's like, one of his main jobs at this point is sort of going door to door with Xbox and with, I think PlayStation and like really lining up these partnerships saying, hey, we think streaming is going to be a thing. We're working on a way to get that delivered through the browser on computers, but we know that a lot of people are going to be reticent to, you know, when we do this, watch on computers. So they, they probably want to do on TVs. You guys are plugged into TVs. And, and he's realizing like, boy, these negotiations are, are not going to go well.

• 14:44David Rosenthal?

  If I have my competitive device to you guys. What does he do? We've seen this before. He tells Anthony, yeah, we're going to have to cancel the project, just like they did with Redbox. And, and he says, oh, okay. Well, you know, we've basically built this thing. How about we do something a little bit different?

• 14:58Ben Gilbert?

  I think they're two weeks from shipping. For people who, who know sort of how this process works, they're in the third phase. So it's DVT design and validation testing, verification testing. Like the whole team has been over in China, like manufacturing these things. They've did, done several revs. They're coming off the line. They, I think they have a hundred or 50. It's made that are done and perfect and they're taking those on the roadshow to like show sort of demos.

• 15:24David Rosenthal?

  Retailers.

• 15:25Ben Gilbert?

  Potential partners. Yeah. Of like, you know, this thing's baked.

• 15:29David Rosenthal?

  It's baked. Yep. And in a classic, you know, Netflix management team, Reed Hastings Boob, it's, you know, nope, we're changing our mind, as we will see. But Wood convinces them, okay, rather than killing the whole project, how about we spin this out as a separate company? We've already built this device. It will behoove you Netflix to have this device out there to be the initial, you know, device streaming partner for this Netflix streaming service. You know, we can have a win-win here and I get to run, you know, my own company here. Well, they talk it over. They decide, okay, they spin the company out and they name it Roku.

• 16:02Ben Gilbert?

  Bum, bum, bum.

• 16:03David Rosenthal?

  Bum, bum, bum. Roku actually was a name. So Wood had had essentially a shell company after the, after selling Replay TV and, or moving on from Replay TV, it started a company called Roku, which I believe in Japanese means six is the number six. And it was that this was his sixth company that he had started, something like that.

• 16:23Ben Gilbert?

  Yep, exactly that.

• 16:24David Rosenthal?

  And, and so he essentially restarts this company, leaves Netflix and takes this box that they've built within Netflix and rebrands it as Roku and launches it in early 2008. And it is, you know, it goes on to great success and is now its own public company IPO'd earlier this year. But they are the first device streaming partner for this Netflix streaming service. And just like Netflix wanted, following this, this is sort of the proof of concept, they sign up Microsoft and Xbox as a device partner. Streaming comes that summer to Xbox 360 Netflix streaming. And then they start, you know, going to PlayStation, they go to all these connected devices. Knocking them down. Knocking them down one by one.

• 17:02Ben Gilbert?

  Can we just pause and reflect for a moment? What an unbelievably gutsy management decision that is. Like you have this whole like arm of your company. For, for listeners who are interested, we'll put a link in the show notes. The team, like a month before Canningit, or maybe a couple of weeks before Canningit, did an all hands where a group of employees did a parody video of the Dharma Initiative from Lost, which was huge at the time, of, of the sort of like secret project to build, I can't remember what they called, what the sort of secret project name was.

• 17:35David Rosenthal?

  All I remember about Lost is that it was, it's like such a period beast now.

• 17:40Ben Gilbert?

  Oh, the codename was Griffin. So it was like the Darm Initiative logo with Griffin in the middle. But this video is amazing because it was shown at the all hands. It's got everyone from, you know, people who worked on it to the manufacturing team in China to Reed Hastings, like as part of this video. And they're showing it to everyone at the all hands as like a hype video for get excited about this like new strategic direction the company is going to take. We're doing hardware, baby. Like, we're doing our own video codex. Like, we're going from silicon all the way up to the cloud and we're going to own the whole thing. And then just like on a dime, boom, it's its own company that goes on to be wildly successful.

• 18:17David Rosenthal?

  I mean, it's really amazing. Like, I don't know if this says more about me and me living under a rock, or just that like, this history of Netflix is not told that both Redbox and Roku come out of Netflix. Like, it's incredible.

• 18:29Ben Gilbert?

  It's crazy.

• 18:30David Rosenthal?

  They've had more spinoffs than they have their own acquisitions. I think they've only ever acquired one company.

• 18:36Ben Gilbert?

  I know what their first was. I don't know if there were other ones after that. And their first was quite recent. But the Roku thing, just one more note on this. I tried to do a bunch of research to figure out when they spun it out, what did the ownership structure look like? You're totally not living under a rock because I looked through the entire Roku S1. And a couple times, it mentions Netflix as, obviously, they have a large dependency on Netflix's business. It mentions in two places, a lease, like that they shared with Netflix in the sort of early days. But it doesn't mention anything about like Netflix is part of the founding story of the company. Reed Hastings nor Netflix appears on the cap table when they're going public of sort of major shareholders.

• 19:15David Rosenthal?

  Which is interesting because Netflix invested $6 million when they spun it off. But I wonder if they'd just been diluted so much.

• 19:22Ben Gilbert?

  Well, one other thing, that $6 million, I tried to find more information on that to figure out like if there was a valuation on the company, if they, what it looked like. There's a Form D filed on Edgar, which is the SEC's website that you can go to that shows an investment. It doesn't name Netflix, it just names Reed Hastings. So maybe it was some kind of proxy thing, because I assume it was Netflix. And it's scanned improperly. So like, you get to read half the previous page and half of the next page while you're looking at this document and scrolling through it. And none of it's in a digital format. So it's like, one of these things that's like, you really have to scour to find anything. And then you can't find that much, other than the fact that it was killed and spun out.

• 20:01David Rosenthal?

  Amazing. And this is now a, you know, billion and a half dollar market cap public company. Crazy. So that's the story of the genesis of the one half of the streaming business for Netflix, which is the distribution, getting, getting, you know, content into people's homes. But, but it turns out the other half of the streaming business, the content side, quite frankly, proves to be the harder half over the coming years, or at least the more capital intensive half. So unlike DVD rental that Ben was addressing in the follow-up in the beginning of the show, at the top of the episode, unlike DVD rental, there's no first sale doctrine here. So to stream content, be it, you know, shows or films to people via service,

• 20:46David Rosenthal?

  you have to negotiate with the rights holders of that content and you have to buy those rights from them. Now, in the early, very, very early days, the 2008, 2009, when they're just getting started here, the content companies don't really see the future as clearly as Netflix sees it here. You know, these are the days when cable network content deals are like still huge and the vast, vast, vast majority of these content companies revenues. So they view streaming as just kind of like a nice add-on. So the first deal that, content deal for streaming that Netflix actually does is with Starz, the pay-TV cable network. This is a total steal. So they do a two-year

• 21:26David Rosenthal?

  deal in October 2008 with Starz to get all of their content for $25 million. So this is TV shows, movies, their back catalog, everything that they have the rights to.

• 21:40David Rosenthal?

  Starz quickly comes to regret that, but it's only a two-year term.

• 21:43Ben Gilbert?

  Wait, does Starz, does Starz actually own the rights to all those movies that they're putting on their sort of like high hundreds cable channels?

• 21:50David Rosenthal?

  Yeah. So I believe the way this works, this is, I'm mostly conjecturing here, but I'm recalling my old days as a media TMT investment banker around this time. I believe the way it works is that Starz had negotiated with the, with the content production company, Disney, Fox, you know, whoever, NBC, who had originally made the movies and TV shows. They had acquired the rights to show them on cable. And I believe it also included streaming, or whatever the It wasn't really something that was contemplated then, but they had the right to then resell those rights.

• 22:21Ben Gilbert?

  That's a theme between music and movies. Really all media is like you, since you don't know what the next frontier is going to be, sometimes people can sort of slip it into the contracts. Like if, if it's like, oh yeah, we'll just bundle in forward looking like the VR rights to this thing. And you're like, yeah, yeah, whatever. But like, you don't know what's going to end up being huge and what's not.

• 22:40David Rosenthal?

  Yep, totally. This happened and Netflix also does a deal in 2008 with NBC Universal for streaming access to some of their content, including Saturday Night Live. I believe streaming the day after on Sunday. Once again, just like we saw with Netflix in part one, this is like instant product market fit. So, you know, everybody who has any inkling of watching video on a, you know, computer or mobile devices are emerging at any screen at this point. So, you know, mostly millennials and younger, but, but lots of other people too. I mean, YouTube has been around for several years at this point. They just go nuts. And, and this is drives tons of signups for Netflix even during the recession.

• 23:25David Rosenthal?

  It's a way better product. I mean, like, why would you, the old paradigm is you only want to video when it's on TV. You know, when you, what you want is on versus you can watch it whenever you want, wherever you want. Like, that's a no brainer customer value prop there.

• 23:39Ben Gilbert?

  And I remember in the summer of 2008, previous to that, I wasn't able to do Netflix's, what did they call it? Like instant watch or watch now feature?

• 23:50David Rosenthal?

  I think it was instant queue. You had your regular Netflix queue for DVDs and then the instant queue was your queue of what you wanted to watch, you know, lined up via streaming.

• 23:59Ben Gilbert?

  You're so right. Yeah. And, and you could only, it only worked on Windows because like they just hadn't, they hadn't gotten around to building the sort of Mac client for it yet. And then when they did, you had to like use, I can't remember what browser it was, but it only worked in one browser and you needed Silverlight. So like, think about sort of the-

• 24:16David Rosenthal?

  I remember this. Oh my goodness.

• 24:17Ben Gilbert?

  The way that this works today and the way that it, it used to work, it was just the kluge-est way that you could imagine trying to like, it would take 15 minutes to get the video sort of set up on your computer so you could watch it.

• 24:28David Rosenthal?

  This was the only reason I had Silverlight installed on my computers. Wow, how quickly we forget.

• 24:33Ben Gilbert?

  Yeah.

• 24:34David Rosenthal?

  This is, you know, 2009, 2010 Netflix is just, they've beaten Blockbuster at this point. Yes, they're competing with Redbox, but like, they're the only game in town when it comes to streaming. They are having a bonanza, just adding subscribers like there's no tomorrow. And so much so that by 2010, Ben gave the stat that today Netflix is still 15% of all US internet traffic. Back then in 2010, they were 20% of all US internet traffic.

• 25:01Ben Gilbert?

  Oh, wow. Internet grew.

• 25:03David Rosenthal?

  Yeah, I assume. Well, think about how much more streaming video there is now versus in 2010.

• 25:09Ben Gilbert?

  Right. Yeah, it probably wasn't 68% of the internet or 58% of the internet then.

• 25:15David Rosenthal?

  Yeah. Of course, there was YouTube, much smaller than it was today, but you know, there was no, there was no Amazon Prime streaming, there was no Facebook video, there was no, you know, Snapchat, there was no Instagram, nothing.

• 25:26Ben Gilbert?

  Infrastructure wise, there also wasn't gigabit to the home then.

• 25:29David Rosenthal?

  Yep. Yep. Yep. And Netflix already knew this was the future. This is like, not just the future, this is now. So they, they realized they need to sign up as much content as possible and just keep this, keep this train running. So they're willing, the content companies are also seeing this and saying, oh, wow, we can extract a lot of dollars out of Netflix. Netflix says, we're happy to pay dollars. We've got subscribers coming out the wazoo. They sign in 2010, a, remember their, their first deal with Starz was $25 million. They sign an $800 million deal, five-year deal with Epix, E-P-I-X. Now, Epix was a joint venture between Paramount, which is part of Viacom, Lionsgate, Paramount was the, the

• 26:11David Rosenthal?

  film studio of Viacom, Lionsgate, independent, and MGM, which were the two remaining major independent film studios. So they get all of their content, all the back catalog, all the new content that's coming out. And MGM at the time, I remember I was working on Wall Street, they were facing bankruptcy and so they desperately needed this cash. And it was this Netflix deal that, between Epix, like really keeps a lot of these companies alive through the recession. Everyone else sees this and they start coming back to Starz and NBC come back, they demand much more money. And Netflix realizes they need to get really smart. So they spin up a whole content acquisition department and they start spending a lot of money acquiring all this content.

• 26:49Ben Gilbert?

  So there's foreshadowing there. Netflix spending a lot of money on content. Okay.

• 26:55David Rosenthal?

  It's coming back. But a quick, real quick detour about the media industry. So all of these content production companies, the media industry has been around for 100 years in the US. There has been tons of consolidation. They are either under the same parent company, in the case of like Time Warner, or very closely tied to the cable companies, to the distribution. Like content and distribution are all within the same house. If not directly, then at least they're in bed together. Also going on as a result of this, cord cutting starts becoming a thing. Consumers are saying like, man, I'm getting so much great content from Netflix, from YouTube, from streaming, and it's the recession and, you know, cash is tight. Do I really need to be paying 100 bucks a month for my cable subscription?

• 27:39Ben Gilbert?

  So you've got the content side of the house, then you're saying is like very incentivized to do these deals, but the distribution side of the house is like,

• 27:47David Rosenthal?

  Wait a minute.

• 27:48Ben Gilbert?

  This is the thing accelerating our death. Can we have a conversation for a minute?

• 27:52David Rosenthal?

  Yeah, exactly. So the distribution side of the house, the cable companies, they start getting very protective versus Netflix. Now, what do the cable companies also own most of in the US? They own the broadband pipes to people's homes. Most people in the US at this point in time, and really still to this day, I would assume, are getting their internet connections in their homes that they're using to stream from their cable company, from Time Warner Cable, from Comcast, from whatever, from the cable modem.

• 28:20Ben Gilbert?

  Quick side note, do you know about fast.com?

• 28:23David Rosenthal?

  Vaguely, but.

• 28:24Ben Gilbert?

  So forever I use speedtest.net to test my sort of upload and download. Netflix was having all these issues through all the net neutrality stuff where, as you're about to suggest, the pipes did not like them because they were taking up most of the bandwidth, but not paying anything special to be on them. So Netflix was getting throttled. So what did they do? They created fast.com and put it on the same IP block and on the same CDNs as their content. So then they were, they ran a big campaign and encouraged users. By the way, fast.com is a great way to check your upload and download. It is far sort of like simpler and lighter than Speedtest.

• 29:00Ben Gilbert?

  They encourage consumers, hey, if you ever feel like, gosh, it might, why is my Netflix slow? Go to fast.com and compare that against however fast you think your internet should be. And you'll get a reading of, you know, what your ISP is actually treating us as in terms of upload and download speed.

• 29:15David Rosenthal?

  Interesting. Well, of course, Ben, what you are referencing here is throttling. The cable companies, the ISPs, they start throttling Netflix because it's a competitive threat to their whole business model. So what does Netflix do? Reed Hastings is like, I can play politics. I know how this works. Remember back to part one and his days on the California Board of Education. He starts a PAC, a political action committee, called, not to support a particular political candidate. It's called Flix PAC, and it's to lobby the FCC to set up net neutrality rules. So if you, we all go back in the time machine a little bit here and start remembering, when did net neutrality start becoming a thing?

• 29:57David Rosenthal?

  When did we first start hearing about this? It was in 2010, and it was because of this. And it was because of Netflix that really, remember all these campaigns about like, you know, net neutrality and stop SOPA and all this stuff? Like, who's behind it?

• 30:11Ben Gilbert?

  David, some of us, some of us wrote a big 40-page thesis paper on network neutrality in 2007. So like, you know, hipster net neutrality.

• 30:21David Rosenthal?

  You were just ahead of the curve.

• 30:22Ben Gilbert?

  I was. It's the only time in my life I can ever claim that.

• 30:26David Rosenthal?

  And I remember these huge, huge fights. And then finally, at the end of, end of 2010, Netflix wins and the FCC approves rules essentially preventing ISPs from, from blocking content. That's under attack again today. I don't know actually the details of the latest FCC ruling. This year or last year, in the Trump administration, I believe reversed a lot of this.

• 30:46Ben Gilbert?

  This is one of those things I followed, and then the rest of the world's news got so insane that I lost the thread.

• 30:52David Rosenthal?

  Yeah, yeah, me too.

• 30:53Ben Gilbert?

  So I cannot speak authoritatively on this anymore.

• 30:56David Rosenthal?

  Anyway, so 2010, basically goes really well for Netflix. They're spending a lot of money, but they're, they're growing hugely. 2011 also starts on a very positive note. They finally launch international expansion. Now, international- It's hard to do with the DVD rental business because you needed, you know, basically cooperation of the National Post Office and all this infrastructure and everything. But streaming, you know, it's just, it's just bits, it's not atoms. And turns out a lot of the world speaks English too and watches US-made Hollywood video content. So first, they expand first in Canada, naturally, and then before the end of the year in Mexico and Latin America. And this becomes a huge, huge growth driver for them over, you know, the subsequent, throughout the 2010s.

• 31:38David Rosenthal?

  Now, international is a bigger business for Netflix than their, than their US business. So all going well, they're, you know, still kind of on the top of the world here.

• 31:47Ben Gilbert?

  And this is 2011?

• 31:48David Rosenthal?

  2011, yep.

• 31:49Ben Gilbert?

  I don't think, we talked about the Chaos Monkey on the last show, correct?

• 31:53David Rosenthal?

  No, I don't know, we didn't.

• 31:54Ben Gilbert?

  Have you heard me talk about the Chaos Monkey?

• 31:55David Rosenthal?

  No, go for it.

• 31:55Ben Gilbert?

  Alright, so this is the, the time that Netflix decides we're fully now an internet company in a bigger way, you know, that we're a streaming company. And so we need to be world-class at technology. And anybody that has, that watches Netflix today sort of knows like, it is remarkably bulletproof. Like that it kind of always works. And how is that? Well, Netflix invented something that you can find on GitHub now that's part of a larger suite of software. It's open source in 2011 called the Chaos Monkey. And what the Chaos Monkey in its original incarnation did was it was a software package that you would turn on, on the server, sort of on your, on your whole infrastructure. And it would just start pinging around all the different, you know, internals of your system

• 32:39Ben Gilbert?

  and just kill random processes at will.

• 32:42David Rosenthal?

  It was literally a Chaos Monkey.

• 32:44Ben Gilbert?

  Yeah, and, and what it would do, and the, the philosophy behind the whole thing was, what better way to prevent failure than to always be failing and be able to construct systems that are extremely resilient and sort of fail gracefully instead of failing in a catastrophic manner? And so some of the original things that they did were the experience could degrade where the resolution would get worse. Or where your recommendations weren't available, or your profile wasn't available. But you could always do the number one thing that people want to watch on Netflix, which is search for a thing and then watch it. And it's just crazy impressive mentality that, you know, back in 2011, they're pioneering sort of like a, it's actually, it's used in a ton of companies now.

• 33:28Ben Gilbert?

  There's that book famously named Chaos Monkeys about Silicon Valley in general. It's sort of a brilliant infrastructure decision and just showed the, the sort of level of talent in the engineering department there. They still run it now like nine to five or something. So they don't have to wake people up in the middle of the night because the chaos monkey tipped something over that, that, you know, was still sensitive.

• 33:48David Rosenthal?

  It's very humane. It's a humane chaos monkey now.

• 33:53David Rosenthal?

  Well, an apt analogy for what's about to happen here. I feel like this is also the story of the business side of the Netflix house, which is like, there's a chaos monkey running a monk and they keep shooting themselves in various body parts, but managed to persevere and are very, very robust as a business. So summer 2011 now, this is when the dominoes start to tip the other way. They make an announcement. So again, we're now a couple of years into this streaming business. It's again, instant product market fit. People love it. It's 20% of the internet. They know this is the future. So up until this point, everybody who was a Netflix subscriber to the DVD rental business

• 34:36David Rosenthal?

  just got the streaming baked into it. Like you just subscribed to Netflix. It's just one product.

• 34:40Ben Gilbert?

  It's like Prime. We're just going to throw stuff in to sweeten the offering.

• 34:43David Rosenthal?

  Exactly. Summer 2011, they change the pricing structure. They, they issue a press release and there are a couple, there are a few things in this press release. What gets all the attention is they come out, they build this as a price cut. It's anything but in reality.

• 35:00Ben Gilbert?

  Come on, don't, don't bury the lead. Like PR rule number one. If you're about to announce something that consumers hate, do not make the title, you're gonna love this.

• 35:08David Rosenthal?

  I thought you were accusing me of burying the lead. No, the lead comes later.

• 35:11Ben Gilbert?

  No, no.

• 35:11David Rosenthal?

  Separate press release, but yes. Yeah, no.

• 35:14Ben Gilbert?

  No, no, I'm saying, yeah, that Netflix, that press release hardcore burying the lead.

• 35:17David Rosenthal?

  This is gunshot wound, self inflicted, number one. So what did they do? They, they changed the pricing, their pricing tiers to, so they, they now have three options. You. You can subscribe to just DVD rentals and they bill that as a price cut. So cheaper than what just subscribing to Netflix was before. You can subscribe to.

• 35:36Ben Gilbert?

  Meanwhile, they know the greater usage is on the streaming side.

• 35:38David Rosenthal?

  Yeah, right. You can subscribe to just streaming for also cheaper than the price of the old bundled Netflix plan. Or you can have the bundle. You can have both and that goes up, I think like 20% of price or 20 or 25% or something like that. People react very negatively to this quote unquote price cut. So negatively, they lose a million subscribers, basically instantly. Now they've grown a lot, so it's not like, you know, losing a million subscribers back in part one was like losing, you know, 20% of their business. But still like it's the stock price takes a beating.

• 36:10Ben Gilbert?

  Yeah.

• 36:10David Rosenthal?

  Still very significant. People, people are very upset.

• 36:12Ben Gilbert?

  My father was one of them and I don't know if he still listens to the show, but I distinctly remember him like boycotted Netflix for a year or two before he signed back up. And he was furious about this.

• 36:23David Rosenthal?

  Again, this is the recession, like it's just so tone deaf, like people loved Netflix. Like people were losing their jobs and cutting the cord on their cable company, but keeping Netflix. Because this was like their, you know, their happiness. Like it was like one of the most high, whatever the, you know, those brand ratings that they do. Netflix was like up there with Apple and Amazon and like the very, very best, best brands in America. And this just did huge damage. People felt betrayed.

• 36:49Ben Gilbert?

  Their stock plummeted too. I mean, I think Netflix has always sort of been valued on their subscriber growth. And actually more recently, really on sort of what their projected subscriber growth will be next quarter. And this was to, to have a down quarter where they actually lost subscribers. It was like, what?

• 37:08David Rosenthal?

  The only time this had happened in the past is what we saw in part one, when, when Blockbuster launched Total Access. So what are they going to do? Hastings has a plan, of course. Now we should know, I forgot to mention earlier. At the end of 2010, also something, you know, a long time coming foreshadowed that we knew happened, but sad for Netflix. Their great hero Barry McCarthy retires and leaves the company.

• 37:30Ben Gilbert?

  He decided not to leave his friends in the knife fight against Blockbuster, or I'm sorry, against Amazon. When they thought that Amazon was coming in and so, uh, now, now they're safe, so he can leave.

• 37:40David Rosenthal?

  He, he leaves and he takes some time. He becomes an investor with TCV and then does his short stint at Clinkle. And then joined Spotify, uh, as, as we talked about in that episode, but back to Netflix. So there's no, no Barry McCarthy. Read, you know, he has a plan to address this issue. He thinks that the way to do it is, you know, he knows the future. It's the public that doesn't get it. They don't get that streaming is the future. He is going to open their eyes to this. He just needs to push harder. In that first press release, they about the price cut, quote unquote, that got so much negative reaction, kind of at the end, he said, you know, and this is a precursor to we are going to spin off the DVD rental as a separate business eventually. He decides that the way to fix all of this is explain that this is really part of the

• 38:25David Rosenthal?

  bigger strategy and to do this spin off and execute it and show America like the path forward. So he decides the way he's going to do this. So, so the plan is that they're spinning off the DVD rental business into Quickster and a longtime Netflix executive who we didn't talk about in the last episode, Andy Rendich, who, who ran, I believe ran all DVD operations. He's going to be the CEO now, now of Quickster.

• 38:52Ben Gilbert?

  Yeah, and he'd been there for like 12 years or something.

• 38:54David Rosenthal?

  He'd been there for a long, long, long time. How are they going to do this? They're going to do what, you know, all the hip kids are doing these days. They're going to make a, a video and they're going to post it on YouTube and it'll go viral and everybody will understand, you know, the vision.

• 39:07Ben Gilbert?

  Great.

• 39:08David Rosenthal?

  It's gonna be, this is like the, the 7-Eleven dude at Blockbuster coming back and be like, the kids, they're going to come, they're going to eat pizza at the Blockbuster stores.

• 39:15Ben Gilbert?

  Was it, was it Party on the Block?

• 39:17David Rosenthal?

  Uh, Rock the Block, Rock the.

• 39:19Ben Gilbert?

  Rock the Block.

• 39:19David Rosenthal?

  This is the Rock the Block moment for Netflix. They're going to post a viral video on YouTube. Well, they make a video. Reed and, and, and Andy, they, they make a video and it does go viral in September 2011.

• 39:35Ben Gilbert?

  Hashtag winning.

• 39:35David Rosenthal?

  Hashtag winning, but it goes viral for the wrong reasons. We will link to this video in the show notes. It is still on the Netflix YouTube channel. I think this might be the most painful thing I've ever. Yep, it's still there. I, so I, I thought it would be, you know, on YouTube, somebody else, and many people have mirrored it and, you know, copied it on, on their accounts. It's still on the Netflix account. This is amazing.

• 39:58Ben Gilbert?

  They're proud.

• 39:58David Rosenthal?

  They're proud. Oh, my God. This is the one of the most painful videos I've ever watched in my life. Imagine the least like, cool, most fake like corporate like dad thing you could ever imagine and then multiply by 10. That's this. It's so bad. And it's a three and a half minute video. The two of them, basically, like, it's like scripted. So like, they're trying to be hip and cool. They're on like patio furniture outside the Netflix headquarters and Reed is wearing like a like a teal like shirt. He's got his goatee and like, most people have never seen Reed in person at this point.

• 40:32Ben Gilbert?

  Listeners, if if if this is ever us and like, we are, we become like tone deaf, like, well, maybe we are already. Please write us emails. Please. [email protected].

• 40:43David Rosenthal?

  Oh, don't worry. If we do something like this, I wouldn't be worried about getting feedback because within like, days of this getting posted, Reed on his personal blog, he gets 30,000 comments on his blog, basically just trashing him for like, how bad this is. So Saturday Night Live, they it's so this goes so viral. They parody the video on Saturday Night Live. They've Fred Armisen, the, you know, the Portlandia guy. He's Andy, I think, and I forget who does does Reed. We'll link to this in the show notes, too. And it's just like, it's so funny. You know, the stock price got crushed the first press release. This time, it gets crushed even for like Netflix and Quikster basically become the laughing

• 41:28David Rosenthal?

  stock of the internet.

• 41:30Ben Gilbert?

  Hey, a lot of their big bets pay off. A lot of them don't, but they take big bets.

• 41:34David Rosenthal?

  They take they take big bets. This is one they really should have thought through a little more. Before the July press release, they were trading at $305 a share. After the Quikster announcement, they're down to $65 a share. So they lose like, what is that? 80% of their value as a company in like, a couple of months here. And the Quikster thing itself, like, part of it is, a big part is the way they announced this and how this went down. It's also just like, it's half baked. Like, this is not a good product. This is not well executed. This is not well thought through. So customers, when they So spin off and do it. You have to have a separate account on Quickster and Netflix, separate billing, separate queues that you manage, separate customer service.

• 42:16Ben Gilbert?

  Separate company, man. What do you expect?

• 42:17David Rosenthal?

  Yeah, talk about like a terrible experience. This is, this is like the kicker here. Netflix didn't even grab the Quickster Twitter handle. So there was some dude out there who had the Quickster Twitter handle and fairly he was like a pot smoking like soccer player guy and he's like, just starts trolling Netflix and is like publicly extorting them and

• 42:43David Rosenthal?

  so bad, so bad. What is the net of this? What all happens? Within one month, it was September when they do this ill-advised YouTube video announcing Quickster. Within a month, they cancel Quickster. They completely unwind the whole company. Andy Rendich, you know, the 12 year next Netflix veteran who'd been tapped as CEO, like he's gone. He resigns, he leaves the company. Everybody, you know, like half the people who'd gone over to Quickster, they get laid off, they're gone. Like they just completely like, I mean, this is one thing about Netflix and Reed is like, they make big decisions, they make them confidently. And, you know, if they're the wrong thing, then they pull the plug. So they, they pull the plug on Quickster.

• 43:24Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 43:38David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks are real.

• 43:52Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

• 44:02David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 44:19Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 44:35David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 44:52Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 45:01David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. Another bad thing for Netflix, well, bad thing at the time, I think good thing in the long term, happens for them in 2011. Amazon, they didn't launch the Netflix competitor in the DVD streaming, in the DVD rental era. They launched the Netflix streaming competitor, Amazon Instant Video, and they get into the streaming game. And then early in 2012, they also do a deal with Epix, the joint venture that Netflix had done a deal with, spend, I think, about the same amount of money, about a billion dollars, get all the same content. And so now, not only has Netflix just shot themselves in multiple body parts with this

• 45:46David Rosenthal?

  Quikster thing, now they have Amazon out there, which is offering Amazon Instant Video bundled with Prime, if you're a Prime subscriber already. Netflix is like, oh, yeah, yeah, you were paying for Netflix? Now I'm going to make you pay twice for this. Amazon's like, oh, great.

• 46:00Ben Gilbert?

  Oh, yeah. You want this entire company's value prop for free? Yeah, yeah, yeah. Sweetens our offering a little bit.

• 46:05David Rosenthal?

  Yeah, here you go. So the net result of this is 2012 is a tough, tough year for Netflix. I didn't go back and verify every quarter, but I believe they missed their subscriber targets every quarter of the year. The stock price is totally languishing, still around the $60 a share.

• 46:22Ben Gilbert?

  You know, one thing they do start in 2012, though, that is a name no one will recognize, but foreshadows everything to come, is Netflix produced their very first show called Lilyhammer.

• 46:33David Rosenthal?

  Yes, they do, which was a Sopranos clone. I don't think it does very, I mean, I don't, I've never seen it.

• 46:40Ben Gilbert?

  Never watched it, yeah.

• 46:41David Rosenthal?

  Yeah, but harbinger of good things to come, but one more bad thing in 2012.

• 46:47Ben Gilbert?

  Wait, wait, wait, let's go back to the bad parts.

• 46:49David Rosenthal?

  Go back to the bad stuff. Let's keep ripping on Netflix. It'll just make their rise so much better. This was another unbelievable thing that, again, I didn't know about the first part in part one, and I didn't know about the second part here. You cannot make this stuff up, even if you did a Netflix special. Carl Iken, who comes in to, you know, the stock price is languishing by the end of 2012. Who returns but acquired supervillain? He's like Barry McCarthy's gone, great.

• 47:17Ben Gilbert?

  Take another go at this one.

• 47:18David Rosenthal?

  Take another go at this one. He is back in the movie business game. He announces that he has accumulated a 10% equity stake in Netflix on the public markets. I believe this is October 2012. And, you know, he's going to start getting involved.

• 47:33Ben Gilbert?

  I love how this happens, too. Like, in, in public companies, you can just slowly buy and buy and buy and buy. And then, you know, you don't want to announce that you're buying, because it'll move the stock price. And then, like, suddenly you just say, hey, guys, you may not know this, but through various sources, I have a 10th of your company.

• 47:48David Rosenthal?

  Yeah, incredible. You know, he thinks that, that really what Netflix should do, you know, they've been so much mismanagement here, you know, the, but it's, there's so much value in streaming is the future. They represent strategic value. They should sell themselves to a media company or, or to another tech company.

• 48:03Ben Gilbert?

  Do you know if he held? Like, is he still a major Netflix shareholder?

• 48:07David Rosenthal?

  He held until 2015 and then he announced in 2015 that he had liquidated his whole stake. I believe it was about halfway through 2015. He made a ton of money, a ton of money. But the only, I guess, good thing for people who dislike Carl Icahn or if you're, if you're on the superhero side of the house here is he misses out on like a ton of gains still. And like, he believed in 2015 that like, Amazon was going to crush them. And well, that hasn't happened. So he missed out on the majority of gains that he could have had. But 2012, despite all this bad stuff that happens, Netflix now, like they're, they've really been the only player in this huge new market of streaming for the last, you know,

• 48:51David Rosenthal?

  at this point, three plus years. They start figuring a couple of things out that nobody else has figured out yet. And this is really what, what saves the company. They realize that they start seeing the data for the, how people are streaming. They're doing two things that were not obvious. One, they're binge watching. So like, when somebody sits down to start streaming Netflix, they stream for a long time. And if they're watching like a TV series or something, they watch just episode after episode. And up until this point, the media content industry operated on this assumption, I remember this, of like appointment viewing, you know, like, you know, people tuned in at 8:00 PM on, you know, Wednesday to watch the latest episode of Mad Men or whatever. And like that was-

• 49:35Ben Gilbert?

  With linear television, that is still what works. All the top shows on linear TV are still exactly that. And actually, most of them are alive.

• 49:42David Rosenthal?

  It's just all set around these like standalone, like half an hour, one hour, like get your fix and then tune in next week. And, and they realized that that's not what people want. They want to watch the whole thing all at once. And related to that, the other thing that they figure out is unlike the DVD rental business, the content that really works in streaming is television shows, not films, not, not these self-contained, you know, two to three hour films, but like really, really long form episodic content that people can binge watch. Television at this point, this, they're kind of like the, you know, the little sibling of the, of the media world. Like it was the big blockbuster movies that everybody wanted to make.

• 50:21Ben Gilbert?

  Yeah, so this brings back in interesting and classic acquired fashion, jumping forward to tech themes, and we'll pull it back. But this brings back something that I think we talked about in the Marvel episode. That is, there's been a trend, I'm gonna get the numbers wrong, but if you look at like, in 1985, out of the top 25 movies, the number that were sequels, it was like, three. And if in 2015, it was the exact opposite, like, 22 were either sequels or some form of unoriginal IP. So you have this trend going on where Hollywood is spending more and more money on films. So because they're spending $100 million plus on every single production, they're taking less risk. So they want more sort of sure things. So they're reusing IP

• 51:06Ben Gilbert?

  from, you know, children's stories, or bringing back movies from the 80s and 90s. So the experimentation needs to go somewhere. It's kind of the same thing as like startups, like the sort of the lean startup, where do you sort of prototype whether IP is good or not? So it sort of opens up the opportunity for this golden era of television, or golden era of TV shows, that attracts really top-notch, both writers, directors, actors, and it really blows the doors wide open for some of the best people in the business who don't want to be part of Aquaman 7, to go and do something creative and original. And Netflix is sort of the place where you could actually facilitate that format.

• 51:46David Rosenthal?

  Ben, you referenced Lilyhammer in 2012, you know, the one, probably in and of itself, wasn't that much of a bright spot, but that was what, you know, the sign that Netflix had finally kind of figured this out. What they'd learned from their customers was, hey, we need to pump more episodic, series-based, quote-unquote, "television" content into this streaming platform. So they make Lilyhammer, they released it in 2012, and then in 2013, they do two things. One, they bring back, I remember when this happened, even though I wasn't a fan of the show, but it was just such a big deal, they bring back Arrested Development.

• 52:22Ben Gilbert?

  Yeah. It was worse, but better. Like it was more complex and crazy than the original Earth's Development, but like somehow it just, it didn't quite have the magic, but it was good enough that like you got your fix of, of what you felt like you'd been missing.

• 52:35David Rosenthal?

  Well, it's such a good example of giving people what they want, you know, for this new platform. And then the other thing they do, they, they debut in early 2013, is their first real big swing at content, House of Cards. And this was just such a seminal moment.

• 52:50Ben Gilbert?

  I did some research on this because I remember at the time, I binge watched the whole first and second seasons pretty aggressively and was, it was a huge fan of the show. I remember at the time, reading about it and just thinking like, wow, this is so special. This company spent a hundred million dollars across these first two seasons. And I remember looking it up at the time and I just sort of went back now to double check all of that and see like what a big bet that was. So this is in early 2013. In 2012, the company had $290 million of cash on hand and they had committed a hundred million to creating just this two seasons of this one show. A few more stats on this. So like the, even the total current assets, including their

• 53:34Ben Gilbert?

  entire content library, prepaid content, short-term investments, all of that was just over $2 billion. So like what a colossal bet for the company. Now, if you go to today, like they have $3 billion in cash alone, close to $9 billion in total assets. You know, you can sort of see how they're investing so much in content, but like they created a cultural moment around, oh my God, Kevin Spacey and this incredibly high production value thing just dropped on Netflix.

• 54:01David Rosenthal?

  Yeah. Well, and it's crazy. Like they, I mean, one, as we've seen time and time again with this company, when they swing, they swing hard. But this was one, unlike the Quickster debacle, like this was so informed. Like of course they couldn't know what was going to happen with House of Cards, but it was informed by all the advantages they had. So they knew, you know, Kevin Spacey, obviously we've learned a lot more about Kevin Spacey since 2013. But at the time, he was this like actor that everybody kind of knew about him, but nobody, he wasn't like a box office draw. Like there wasn't, if you had a blockbuster movie coming out, you didn't want to cast-

• 54:34Ben Gilbert?

  Dude, what are you talking about? K-Pax.

• 54:37David Rosenthal?

  Case in point. You don't want to cast Kevin Spacey. You know, he's not Leonardo DiCaprio here.

• 54:41Ben Gilbert?

  K-Pax was great.

• 54:44Ben Gilbert?

  Don't hate on it. Maybe there was less of us that that loved it, but it was great.

• 54:49David Rosenthal?

  Well, he didn't have mass appeal to the traditional Hollywood movie studios. However, Netflix saw that people, because they had all the data on what people were watching, that once people watched a Kevin Spacey, streamed a Kevin Spacey movie, they tended to go find all the other movies that he had been in.

• 55:05Ben Gilbert?

  That's so powerful.

• 55:06David Rosenthal?

  And watch them. And they're like, okay, there's something going on here. And then House of Cards had been a British show that they readapted to the US. And the British show was on Netflix and they were like, man, nobody knows about this thing. But like, people love it. When people start watching it, they get totally hooked and then they binge it. So what do they do when they release House of Cards? They release, I believe this was the first time this had ever happened. They release all 13 episodes of the season all at once. People in the content industry are like, why are you doing this? You're completely upending the model. Like, you know, you're not gonna like, you're gonna miss the ability to draw out this whole thing over a period of time. Like, completely, like, huge win for Netflix.

• 55:45Ben Gilbert?

  It was David Fincher too, right? He directed it or wrote it?

• 55:49David Rosenthal?

  Yeah, I think so.

• 55:50Ben Gilbert?

  Something like that. And this, he was, he was super hot at the time because he had just done The Social Network and The Girl with the Dragon Tattoo.

• 55:56David Rosenthal?

  Yep, that's right. That's right. Huge win with House of Cards in early 2013. Subscriptions pour in because again, this is the first time there's like this water cooler moment. Everybody in America is talking about House of Cards and you can get the whole season and binge watch it all at once. And people are doing this and like, the only way you can do that is if you subscribe to Netflix. So subscriptions pour in, the stock goes back up for the first time over $200. Remember, it was $300 before the whole Quickster debacle. So they're finally like getting back up and then they followed, they realized this is gonna work. So then this is the beginning of going all in on this content acquisition and production strategy. Later in the year, they do a deal with Marvel, before Marvel gets acquired by Disney, to create episodic TV content around Marvel superheroes.

• 56:37David Rosenthal?

  This is like Daredevil and was it Luke Cage and all the stuff you see on Netflix. This is where all this comes from. In 2014, they realized, man, we've got this like, this, this flywheel effect here, where the more great.

• 56:54David Rosenthal?

  Original content that we have, original and exclusive content, that leads to more subscribers. The more subscribers that we get, the more financial ability we have to invest in original and acquired exclusive content. How can we start accelerating this flywheel even more? We can do this with debt capital. Like this is, we have a very predictable subscription-based business. If we can forecast our subscriber growth accurately, and Ben, you alluded to this about subscriber growth becoming the big thing for Netflix, we should be able to raise debt ahead of this and use that debt to invest in content, which we will know will drive subscriptions. So 2014, they basically changed their whole capital market strategy. They'd been, you know, like most tech companies at this point, no debt, completely equity financed

• 57:38David Rosenthal?

  and cash flow positive. They start raising debt and investing it into content. It's the point where now, today, they have over $8 billion in debt.

• 57:45Ben Gilbert?

  And for folks that sort of don't deal in the equity versus debt world, this is the perfect thing to take debt for. You as a company like it because it's non-dilutive capital, so nobody's equity is getting pushed down. The people who are issuing you debt are very happy to give it because you can provide them incredibly high certainty about what your ability to repeatedly sort of generate cash on cash returns from you investing that.

• 58:13David Rosenthal?

  Again, the magic of subscription-based businesses that we've talked about on acquired, like you know what your revenues and cash flows are going to be.

• 58:21Ben Gilbert?

  Yeah. And to like way oversimplify it, I mean, if you know that you have a 10% interest rate on that debt, but you know that by spending that to accelerate your flywheel, you can get 20% per year, it's like, how, how much debt can we have? You know?

• 58:37David Rosenthal?

  Yeah. So they start slowly. They do, I believe, a $400 million bond deal in 2014. And then they start getting bigger and bigger to the point where their most recent bond deal that I think they did this month in October 2018 was $2 billion. And, and they have $8 billion in total debt outstanding, you know, which is a huge amount for a tech company. But, but again, Based on the cash flow dynamics and the subscription dynamics of this business, as long as they can accurately forecast subscriber growth.

• 59:05Ben Gilbert?

  Yeah.

• 59:05David Rosenthal?

  It can work.

• 59:06Ben Gilbert?

  Yeah, I mean, unless there's some, if there's some competitive thing, I mean, as we saw with Tesla, like if there's something that materially changes, David, to go back to your thing from the LP show, the going sideways and sort of explaining what that is. When you rack up a lot of debt with a belief that you're going to have very predictable cash flows, and then there's something structural that changes in the industry, that's when you can open yourself up to a world of hurt. So that's sort of the only reason why you wouldn't want to just keep stacking it.

• 59:31David Rosenthal?

  Yep, I mean, that's the danger of debt. So far, though, it's worked really, really well. So, you know, to wrap things up and get us to today, summer of 2014, as they're investing heavily into this strategy, they passed 50 million global subscribers, 36 million in the US, 14 million internationally. Then in 2016, in January, they make a big announcement at CES that they are launching worldwide in 150 countries. I believe literally every country except mainland China, North Korea, and one or two others.

• 1:00:09Ben Gilbert?

  Crimea. Crimea and Syria.

• 1:00:12David Rosenthal?

  Yeah, and of course, it's all, you know, English-based. They haven't actually translated Netflix into all these languages yet, although they started that project, and now I believe they have translated into many of these languages. They passed 75 million subscribers globally. During the year in 2016, they released 126 original films and TV shows, series, more than any other content company out there, period. Any other cable channel or network. Now, actually, I don't know if that includes like the, I believe it's less than the big conglomerates, like Disney as a whole, or Viacom as a whole. But if any one like division, like Netflix is the largest single content production company. And then the irony of ironies is in 2016, they actually do finally successfully execute the spinoff with Quickster.

• 1:00:58David Rosenthal?

  They just don't call it Quickster. DVD.com, if you go to DVD.com, that is the DVD rental business for Netflix. So you can no longer subscribe to the online DVD rental via Netflix. You now have to go to this separate company, separate login, DVD.com.

• 1:01:13Ben Gilbert?

  But is it a separate company? Like it's different shareholders?

• 1:01:16David Rosenthal?

  Uh, it is a, it is a DVD.com, quote, a Netflix company. So I believe it is 100% owned by Netflix and wholly owned subsidiary. And it has something like, they do like 120 million in revenue a year and like 60 million in profit or like, you know, cash flow. So nice, you know, but.

• 1:01:31Ben Gilbert?

  You know, classic growth stock.

• 1:01:34David Rosenthal?

  Yeah, right. Value stock, value stock.

• 1:01:39David Rosenthal?

  And, and you know, things just keep going from there. So this year in 2018, they passed $100 billion market cap. There've been several stock splits over the last few years. So the stock price isn't, isn't quite the same. But now, you know, in October 2018, um, you know, they just announced earnings and they now have just under 60 million US subscribers. So if you go on a household basis, uh, assume there are a hundred-ish million US households. That's 60% of the US market, larger than any cable company in America. Comcast, Time Warner, you know, uh, what have you, Charter, in 137 million subscribers worldwide, uh, which is just incredible.

• 1:02:18Ben Gilbert?

  If you look at that sort of third quarter announcement and sort of play forward what it's going to be by the end of the year, they're going to do close to $15 billion in revenue this year and over a billion in net income or profit. And I think this will be their first year that they, that they do a billion dollars in net, net income.

• 1:02:35David Rosenthal?

  Yeah.

• 1:02:35Ben Gilbert?

  One of my other favorite stats on catching us up to today. In the first half of 2018, the stock doubled. So I think that was something like $70 billion of market cap were created. Like $70 billion market cap companies don't double in six months. Not that, uh, stock price is necessarily exactly value creation, but, um, Yeah, it's pretty impressive.

• 1:03:02David Rosenthal?

  Well, and this is, you know, maybe something to get into here in tech themes. It's probably the right moment to transition into it. You know, for years, people have been talking about the FAANG stocks and lumping Netflix in with, with Facebook, with Amazon, with Google. But Netflix is actually much, for most of the last few years and even today, much, much smaller than those companies. And, you know, I think that's how you can get such, you know, a doubling in market cap is, you know, they're only, quote unquote, I think about $130 billion market cap company. You know, compare that to the, you know, 500 billion to trillion dollar market caps of the other FAANG companies.

• 1:03:39Ben Gilbert?

  Another interesting data point about them being smaller. I was surprised to learn they only had 5,500 employees. Where if you look at someone like an Amazon, who has 8x the market cap, but they have 100x the employees. Compared to the other FAANG stocks, they have remarkably few employees for their valuation. Because you look at Microsoft, that has 130, Amazon has over 600,000, Apple has 132,000, including retail. You know, even Facebook's over 30,000, Google at 85. I mean, there's no one that's down in this sort of like sub 10,000 employee category. I sort of wonder two things. One, is it because their product offering is so simple? That most of the sort of product and engineering work that you would, you know, typically have big teams on is a lot of sort of infrastructure?

• 1:04:25Ben Gilbert?

  And that they've really pared down the product line to be pretty streamlined? But I also wonder, a lot of these people that are working on these productions, I mean, those aren't employees. You sort of staff up those productions and staff them down on sort of a contract basis. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora. The agentic operating system that is redefining how the world's best legal teams work.

• 1:04:52David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:05:09Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:05:24David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Ligora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:05:48Ben Gilbert?

  And they recently launched Ligora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:06:07David Rosenthal?

  And Ligora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Ligora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Ligora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:06:37Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at ligora.com/acquired and just tell them that Ben and David sent you. Are we like ankles deep into, into the water of tech themes now?

• 1:07:06David Rosenthal?

  Let's do it.

• 1:07:06Ben Gilbert?

  Doing this? All right.

• 1:07:08David Rosenthal?

  I mean, at this point, we're two and a half hours into history of Netflix. I think we can get into tech with themes.

• 1:07:14Ben Gilbert?

  There's a great tweet a while ago. It was from one of John Gruber's like three and a half hour podcasts on the talk show that was like, I can't remember the last time I wasn't listening to the talk show. It's like, we hope to not quite get there, but we do actually have a pretty good meaty tech themes part because I think whereas the last episode was really more narrative, this one, there's a lot of good analysis to be done on Netflix. And so I'll start with some of the more sort of like, things that are interesting to point out, but not crazy analytical. So one of them is there's a great Business Insider page, and we'll, we'll link to this in the show notes, that shows the evolution of the homepage over the years. I was thinking about it. It seems very obvious to go to Netflix now and just start watching. Like, that's what you do. You go to Netflix, you start watching. But they had to do a ton of

• 1:07:59Ben Gilbert?

  education over the years, both on the sort of innovative DVD model, and then on this crazy idea that you could stream movies over the internet on your computer. And for many years there, in the awkward middle, the homepage was like this cluttered mess to explain how to do all this. So there was like, one half of it was like, one, two, three, like, we will mail you a DVD, you will watch it, you will put it in this envelope, you will mail it back. And these like infographics of how to do that, because that was confusing. And then on top, it was like, or, instant, like, click here, then download Silverlight. And I mean, it's this big hairy explanation to consumers to tell people what they did. And today, you go to Netflix.com, you don't have any options. Like, they've done a tremendous job, number one, doing what they needed to do to be sort of really messy, to educate

• 1:08:44Ben Gilbert?

  people on what are these paradigms that we're basing our company around. But then also, once they've sort of hit critical mass and this, this tipping point where now they can be incredibly simple. And there's a bunch of stuff that they've cut over time that has been really like, it's crazy looking at the Netflix today and thinking about the Netflix that, that was. So the things that they've done that have been less over time, you know, DVDs are this subsidiary. They spun out the set-top box. They said no to vending machines. They deprecated a lot of these things that were brands. So like, search on their site used to be Flix Finder, and their algorithm used to be Cinamatch. And they like, they were, it was all about having all these like branded things that they We're telling you about themselves. They in 2013 or something launched this very advanced

• 1:09:29Ben Gilbert?

  social feature where you would connect your Facebook and then it would make recommendations based on things that your friends liked. They've completely cut that and the only thing you can do with Facebook anymore is log in with Facebook. I mean, it really reminds me of the time the the Steve Jobs coming back to Apple and pointing out the product matrix and saying like, we're getting rid of three quarters of this. Netflix never really changed leaderships, but sort of spiritually, they had this moment where the public now knew what they did and they could sort of drop all of the posturing and all of the education and just be, we deliver this thing that has an incredible value prop and perfect product market fit and that's all we do.

• 1:10:06David Rosenthal?

  Hmm. The one that that just sparked was, um, we didn't really talk about Amazon and the history and facts, other than mention that, you know, they launched what instant video that became Prime Video. I think all that that really did, everybody was so terrified of it. And in 2012, that was part of, you know, why it was such a bad year for Netflix and the stock price. In a market that is growing so big and growing so fast at streaming, you know, like the streaming market is displacing the cable, all of video content consumption, uh, you know, in America. That is a way bigger market than the DVD rental business. So like in a smaller market, like still very large, yet smaller market like the DVD rental business, Blockbuster and Netflix fighting

• 1:10:51David Rosenthal?

  it out, like eventually became like a, you know, a fight to the death. But still, even though these companies are so big, Amazon Video, Amazon's video division and Netflix, like the market is so big, they are just helping one another. Amazon launching even like an essentially free version of Netflix is just helping Netflix grow right now, I think. And likewise, Netflix is just helping Amazon Video grow because they're each adding like their own exclusive content. Uh, and people are like, well, you know, I really want to like, I want to watch Man in the High Castle and I want to watch House of Cards. So like, I'm just going to subscribe to both. And like they're educating the market, you know, both ways.

• 1:11:27Ben Gilbert?

  So interesting to think about myself in that situation. Like I'm subscribed to Netflix because that's where I go to watch stuff. I'm subscribed to Amazon because of course I'm going to subscribe to Prime. Other than like the exclusives, I really just haven't gone there to watch stuff. And I don't know, I think lots of our listeners probably are like, I watch all my stuff there. But for whatever reason, like Netflix is the default for me. And it's only when I hit the wall of I can't find anything, do I go over to Amazon. I'm not sure I would pay for Amazon if it wasn't bundled into my Prime subscription. Well, it'll be interesting to see. I mean, we're gonna hit, people have been forecasting this, but it hasn't seemed to happen yet. Hit subscription fatigue, where it's like, look, I'm not gonna do my HBO Now and Netflix and Amazon and Disney effing plus. Like, you know, I think we'll have to see.

• 1:12:12David Rosenthal?

  Yeah, we'll have to see.

• 1:12:13Ben Gilbert?

  See where that lands and see what people's comfort number is.

• 1:12:16David Rosenthal?

  Yeah. But it's interesting, like, to this point, like, it hasn't, I don't think any of these companies have hurt one another.

• 1:12:21Ben Gilbert?

  Amazon is definitely behind in subscribers. I think that in the same research report that said that Amazon, that Netflix was 15% of internet traffic, the amount that you can attribute to Prime video, I think is like, or Amazon video at all, is like, less than a third of that.

• 1:12:38David Rosenthal?

  Interesting. The other quick tech theme that we talk about all the time on this show, but that this highlighted for me, which Dan Hill on the latest LP episode talked about, if you make something that people love, it can kind of overcome all sins, right? Like Netflix kept screwing up so many times about, you know, product wise, all the stuff you were just talking about, like the whole Quikster thing. But like, at the end of the day, like, people loved the fact that they could, you know, binge watch all 13 episodes of House of Cards. Like, how amazing is that? Of course, they're gonna tell their friends. And if you can make something that people love, that they will tell their friends about, like, that is a recipe for success, you know, despite many other failures along the way.

• 1:13:17Ben Gilbert?

  All right, drifting toward business model, the magic of zero distribution costs, and particularly when you don't have a rev share in place, is worth talking about here. This is, if you compare Netflix to like a Spotify, for example, Netflix licenses all of this content upfront or creates it, so they don't even have any licensing fee. They just sort of create it and take all the risk or spend to create all that risk. So then all the marginal revenue goes to them. But they have high capital costs, high operational costs, very high fixed costs to create this content, but like little marginal costs. So then the game for them becomes like, okay, how much can we blow it out? Once we have this thing, how can we get the maximum utilization out of that asset? This kind of dives into two points

• 1:14:02Ben Gilbert?

  that Ben Thompson of Strategery talks about these, and they're fantastic points. And I'd say he talks about them so often and makes them so well that we would be remiss not to sort of credit him with this thinking when we talk about it. Now that Netflix has this huge subscriber base, as I sort of mentioned, how big can we blow it out? They can dump 100 million into things like House of Cards without batting an eyelash, since the cost of producing a show is spread across a massive amount of subscribers. So their strategy to produce a broad set of shows for a broad audience is the winning strategy in this market. And compare that against what HBO was thinking a few years ago, and some others have done this too, of we want to produce amazingly well-produced content that really hits home for a narrow audience. You just can't amortize the cost of that

• 1:14:46Ben Gilbert?

  across nearly as many people. And so, over time, like you just can't afford to spend to create the best content because you just don't have as many people to deliver it to. You can find yourself between a rock and a hard place if you're not thinking about the same thing that Netflix is thinking about, which is more subscribers to sort of reduce the per-person cost of producing expensive content.

• 1:15:09David Rosenthal?

  For sure, that is a winning strategy. They've also done both, right? Like, there's tons of niche, like Netflix produced niche content on Netflix. They just don't spend that much money on it. Like, I feel like they're really good analytically at understanding, like, what is the ROI in terms of either new subscriber growth or subscriber retention that we're going to get for this piece of content? And for something like House of Cards, that's going to be so broad-based in reach, like, they can spend $100 million for something like a documentary on, there's actually a pretty good documentary on, like, The Roots of Hip-Hop on Netflix that I watched on a plane once. And like, you know, great, lots of people should watch it, right? But it's not like, it's clearly low budget, you know? Like, they did the math on how much they could invest in that.

• 1:15:54Ben Gilbert?

  There's also a pretty bad documentary on Vince Carter called The Carter Effect. They make all kinds of, might have watched that late one night. Well, okay, so I'll throw out a little counterargument to that. So the thing that drives new subscriber growth for them is hit shows. So when they have a quarter that tons and tons and tons of people come and sign up for Netflix, it's because they have an Orange is the New Black that draws in all the people. You know, Netflix's strategy has been to stay away from sports and live and things like that that are not evergreen content. Even though they want to create evergreen content and they amass this really rich catalog, there is a little devil in the details that is, people that sign up that quarter are probably signing

• 1:16:36Ben Gilbert?

  up because they have this new hit piece of content that everybody's coming for. And so I think your point still stands, that they'll spend a bunch of money on the big splashy thing, and then they'll spend a little bit of money producing sort of the long tail of niche-based stuff to make sure they satisfy all the different niches on their platform. But I felt it would be a failure not to point that out. Okay, I have another one that I've been like, almost talking about that I want to, I want to actually hit. And this is another good stratechery thing. So Netflix is flywheel. So they focus on this content that's relatively evergreen, staying away from live. So the more capital that they amass, either through debt or equity or earnings, the more content they can license or produce, which then makes the

• 1:17:18Ben Gilbert?

  Product better for users, so more users come to pay and then kind of feeds back into that cycle of the more capital they amass. So then theoretically, they have this thing going on where the product actually gets better because the catalog gets richer. So either they can charge more money over time, or they can keep their prices the same and reduce marketing costs to reach people that would have been reticent to pay for a worse product. But now that the product is amazing because it has all this content, we can actually start to like really saturate the far edges while keeping the price point the same for people that previously wouldn't have wanted it that bad. A lot of things about how they've structurally set up the business

• 1:18:00Ben Gilbert?

  enable them to create this virtuous cycle and succeed more as they scale instead of less as they scale. Because I think for a lot of businesses, like, cost of acquiring a customer goes up over time because you've already hit all your best customers and gotten them and then you have to spend more. But they just have this amazing characteristic where the product gets better.

• 1:18:19David Rosenthal?

  It's funny, I hadn't quite thought about this, but it's a little bit like Uber, right? Like, there are a few of these businesses out there that are truly special, where you actually have a period in your growth curve where your customer acquisition cost goes down. Now, I don't know, I haven't done the analysis or math to know if this, what you're saying is true about Netflix, but it makes sense, at least intellectually. Like Uber got to a point, I believe it's now probably their incremental cost of customer acquisition at this point is probably going up. But there was a point where it went down massively because the service improved so much with density and ubiquity of adoption.

• 1:19:00Ben Gilbert?

  Dude, I think it's a tipping point. Like, if you think about Uber, it's like, it needs to get sufficiently good so that there's a ride within three minutes. And then I kind of don't care how many drivers are on the platform after that. But Netflix may not have this sort of point of inversion where it's like, literally always more content is better.

• 1:19:16David Rosenthal?

  Interesting.

• 1:19:18David Rosenthal?

  Yeah.

• 1:19:19Ben Gilbert?

  But there's probably diminishing returns on that, too. Actually, that's a pretty interesting framework to think about marketplace or aggregator or platform businesses. When is it that they don't have that good enough sort of like point where the more you operate, the more valuable you get indefinitely instead of with diminishing returns? One more point to make here, which is kind of just an interesting thing to know about the company. Over the last three years, Netflix has grown its subscriber base by 30% year over year, give or take like 1%. Basically, every year, they're they're growing 30%. Interestingly, they're they're basically the the company is extremely data driven about

• 1:20:02Ben Gilbert?

  when to do marketing spend and sort of when they feel it's a good idea to go and spend on customers. So I think a lot of this stuff we're we're sort of talking about is is true in the abstract, like the product getting more valuable over time, new big hits drawing people in. But Netflix, based on their earnings reports, appears to care about growing 30% year over the year and then flexing different levers to get there. So sometimes they spend more money on content, which for other companies, you can sort of think about as product investment.

• 1:20:32David Rosenthal?

  Yeah, it is their product.

• 1:20:33Ben Gilbert?

  And sometimes they, yeah, and sometimes they spend more money on marketing. And I think it's probably, I would imagine the way that it kind of works is like when they feel like they have an opportunity to create a superstar show, they go hard into it. If it works and they're going to hit their 30% growth and they don't need to do an enormous amount of marketing spend, if it doesn't, then they need to do more marketing spend to bring people onto the platform. It's just kind of an interesting way to think about driving the business. And since that's been so constant, it's sort of clear what levers they're moving to accomplish what end.

• 1:21:06David Rosenthal?

  I'm so glad we took like all of this time to dive into Netflix. Like, I at least did not understand this company or its history at all before diving in here, despite how nominally ubiquitous it is in Silicon Valley.

• 1:21:19Ben Gilbert?

  One last thing, I also assumed before really like diving in and looking at market caps, that they were much bigger than they are because people talk about them in as a FAANG stock and like, what are the FAANG stocks? There's this great, yet another thing we'll link to in the show notes, a great tweet today by Benedict Evans at Andreessen Horowitz, with a graph showing on the x-axis revenue, on the y-axis revenue growth and sort of plotting all these companies, like, Apple, Amazon, Google, Facebook, they're sort of understandably, at least way far to the right in terms of total revenue and also growing pretty quickly. Netflix is like, way smaller in terms of revenue than than these other companies. And also not like, they have less growth, revenue growth than Facebook does,

• 1:22:02Ben Gilbert?

  less than Amazon does. Like, we talk about them like they're this, you know, they're one of those five, but it's kind of arbitrary. And that's, that's the point Ben is making.

• 1:22:14David Rosenthal?

  I think, again, if I were to put my old media TMT investment banker hat back on, I think maybe the justification with that is that, is back to just like, the stability and predictability of subscription-based businesses. Like, the thing about Netflix is like, they know, you know, they know what their revenue is gonna be, to the extent that they understand their churn rates and their grossed subscriber ads churn, and then thus net subscriber, you know, growth or losses well, and can forecast that accurately. Like, that is an incredibly stable and predictable business. And that has value in terms of valuation versus like, a, you know, an Amazon, well, Prime is a little part of it, but like, you're just buying stuff on Amazon, like, you may buy more, you may buy less, you know,

• 1:22:58David Rosenthal?

  like, or, you know, Facebook advertisers may advertise more, may advertise less. Same for Google, or Apple may create a hit product, may not. You know, there's just a more inherent unpredictability there.

• 1:23:08Ben Gilbert?

  Yeah, still feels arbitrary.

• 1:23:12David Rosenthal?

  True. Well, that's why we're no longer investment bankers.

• 1:23:16Ben Gilbert?

  Is there something worth grading in here?

• 1:23:18David Rosenthal?

  So we talked about grading the spinoff of the DVD business just to have something to grade. I think it's worth it to just do it quickly. I mean, like,

• 1:23:26Ben Gilbert?

  It's really like, what if they didn't?

• 1:23:27David Rosenthal?

  Yeah, what if they didn't? I mean, of course, it was the right thing to do. The future was streaming, the DVD rental business, online DVD rental business was going to go the way of the offline DVD rental business of Blockbuster. Like that market is, it still exists, but was shrinking. Of course, they had to transition the company. They just executed it terribly the first time and then executed it the right way the second time where they just didn't talk about it. I would say like, um, A for strategy, F for execution, like F minus for execution. But, uh, I don't know. What's, what's your take?

• 1:24:00Ben Gilbert?

  Yeah, I'm with you. The only thing that I have on sort of execution is like, do you group timing into execution? Because I think they couldn't, they couldn't have done it quietly when they did it. And the question is, should they have done it a different way at the time? Probably, but how much better could you have done it? Or, you know, was it, was it pressing? Did it need to be done then? Or could it wait three years?

• 1:24:20David Rosenthal?

  Yeah, no, there's no reason to do it then, other than Reed Hastings feeling like he, you know, wanted to be, you know, push America and the public into his vision of the future, which was correct. It was just, you know, he just sort of waited a couple of years.

• 1:24:32Ben Gilbert?

  Which gets into, and I know we're past tech themes, but like Steve Jobs and Apple do this all the time and they take shit for it and then it's fine. Like they pulled the floppy drive out of the iMac and they pulled the headphone jack off the phone. And like, you know, you could argue that was a little too early, but.

• 1:24:48David Rosenthal?

  Apple usually gets these things right though. Like when they pulled the headphone jack, like they released AirPods, you know, it's like, here's a better alternative. The thing is when, when the quickster, when they did quickster, streaming wasn't better. It was better on some dimensions, but a lot of the content wasn't available, you know? And so like, it wasn't quite there that it was just obviously better on all dimensions to go to the new thing. And Apple toes this line for sure, but like, but they present you with the like, here, if you buy this, if you buy the AirPods, they're amazing. They're way better.

• 1:25:19Ben Gilbert?

  Yeah, that's a good point. Carvouts?

• 1:25:22David Rosenthal?

  Carvouts. Mine real quick. I believe on the Zappos episode with Alfred Lin, we did a carve out of Justin O'Beirne's Google versus Apple Maps, deep analysis.

• 1:25:34Ben Gilbert?

  You're remembering what carve outs were on what episodes?

• 1:25:37David Rosenthal?

  Yeah, man, we go deep.

• 1:25:38Ben Gilbert?

  Next level.

• 1:25:40David Rosenthal?

  He did an awesome follow up this month on the new Apple Maps and is it, is it now better than Google Maps? Spoiler alert, no.

• 1:25:49Ben Gilbert?

  In some ways, if you're interested in forests.

• 1:25:52David Rosenthal?

  Yeah, in some ways, but yeah, well worth the whole read. Amazing work, as was the last one.

• 1:26:01Ben Gilbert?

  I've got a podcast to recommend. It is from the very first person that I followed on Twitter. I discovered this the other day when taking a deep dive down the Twitter rat hole, Kevin Rose. I used to be like a really big Dignation fan. I think I watched every episode of Dignation.

• 1:26:15David Rosenthal?

  Yeah, when he was on Tech TV, the screensavers.

• 1:26:18Ben Gilbert?

  And then G4.

• 1:26:20David Rosenthal?

  G4? Oh, yeah. Oh, I used to watch that in high school. It was, that was actually, that show was like a big part about me wanting to like get into tech.

• 1:26:29Ben Gilbert?

  And it was a cable channel like that. Like that was on TV.

• 1:26:33David Rosenthal?

  Long tail content, cable channels, good businesses.

• 1:26:36Ben Gilbert?

  I think this probably had a good amount to do with me getting into the tech industry too. I mean, I think, who would have thought that by watching Kevin and Alex drink beers on their couch, talking about tech news, that one day we could grow up to do the same thing, David?

• 1:26:53David Rosenthal?

  The more things change.

• 1:26:55Ben Gilbert?

  Yeah. Well, he's got this great podcast episode where Kevin's very into sort of like quantified self type things. I know we don't use that phrase anymore because of the way of his sort of passe and, and you know, now it's digital health or whatever, but he's got this sleep PhD researcher on from UC Berkeley who's starting a company. It's absolutely fascinating learning facts about sleep. I think sleep is going to be the thing 20, 30, 50 years from now. I don't know when, but lack of sleep will be treated like smoking. Some of the facts that he's throwing out on there about the results of even depriving yourself of a few hours of sleep from one night. In your body's ability to repair cells before they can start to become cancerous,

• 1:27:37Ben Gilbert?

  for example, there's just a tremendous amount that sleep helps us repair. And there's another, one specific thing he mentions that was fascinating was when you take sleeping pills, you're not, you're not actually sleeping. Like you're not conscious, but like, he's like, I wouldn't call that sleep and you're, you're not doing your body, you're not putting your body into the state that it really needs to accomplish a lot of the sort of healing and repair and sort of regulatory things that it does. So well worth the hour or whatever it is to, to listen to it. And actually has sparked sort of a new area of interest and set of sort of companies and ideas that I'm starting to look into.

• 1:28:14David Rosenthal?

  Awesome. All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 1:28:22Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:28:32David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:28:53Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:29:05David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:29:16Ben Gilbert?

  Well, listeners, thank you for joining us. If you like the show and you want to hear more, maybe like a week from now, but you're, you know, Acquired's not out yet and you're jonesing for it, we would love you to support the show and become a limited partner. It's at kimberlite.fm/acquired. You can click the link in the show notes or go there. Thank you so much for, for listening as always. I think that is all the things that I have to say.

• 1:29:38David Rosenthal?

  Yeah, we'll see you next time for our season finale.

• 1:29:41Ben Gilbert?

  All right. See ya.

• 1:29:42David Rosenthal?

  Later.