Netflix Co-CEO Ted Sarandos on The David Rubenstein Show

This is my kitchen table and also my filing system. Over much of the past three decades, I've been an investor. The highest calling of mankind I've often thought was private equity. And then I started interviewing. While I watch your interviews, I know how to do some interviews. I've learned in doing my interviews how leaders make it to the top. I asked him how much he wanted. He said $250. I said fine. I didn't negotiate with him. I did no due diligence. I have something I'd like to sell and how they stay there. You don't feel inadequate now because being only the second wealthiest man in the world, is that right? One of the most valuable entertainment companies in the world and one of the most popular entertainment companies in the world is Netflix. It currently has more than 275 million subscribers. I recently had a chance in Washington D.C. to sit down with the co-CEO of that company, Ted Sarandos, and ask him how he got started in this company from a very modest background and how he now sees the future of Netflix. So when you joined Netflix in 2000, the company was about three years old, but relatively small. Did you ever in your wildest dreams imagine the company would be one of the most valuable companies in the world and you would have today a market value of over $300 billion? The short answer to that question is no. I think when we joined, we had a couple hundred people, including the people who were stuffing DVD envelopes back then. Blockbuster was the biggest entertainment brand in the world with a market cap of about $8 billion. They were definitely the biggest in terms of global footprint. I mean, most people watch their movies renting a DVD from Blockbuster. And at $8 billion, that seemed almost unattainable. When we went public in 2002, we were about $250 million. So for people who are too young to remember this, Blockbuster was a place where you could go to buy something called a DVD and you went there, you rented them, and then you put them back on your VCR. And then after a couple of days, like a library book, you bring it back and so forth. The novelty that Netflix had when it first started in 1997, as I recall, was that you didn't have to go to a Blockbuster. You could order something, I guess, online, and then you would have it sent to you by a FedEx or equivalent kind of company. By US mail, by USPS. So who came up with the idea of saying, well, FedEx is a little old and mailing is old and we ought to go to streaming? Who was the brilliant person that came up with that idea? You know, the company was always conceived to be a digital company. Reed Hastings, when he came up with this idea, he was thinking about it very much so when he named the company even. He called it Netflix, not DVDflix. And this idea, when I met Reed in 1999, he describes Netflix pretty much like it is right now. And this was at a time when no, literally no entertainment was coming into the home on the Internet. And he described a world where all home entertainment would come in on the Internet. So when streaming came along, the theory was that people would be willing to pay, let's say, a monthly subscribing rate, right? And that they would see programming they couldn't otherwise easily get. But the idea of doing your own programming was relatively novel. Now, you are seen as the person who came up with the idea of not just taking stuff that's already out there, the 100,000 things that might already be available, but producing your own programming for Netflix. So where did you get the idea from? So in the very beginning, we didn't really think much about doing original programming because that wasn't the problem we were trying to solve. The problem was really distribution and the consumer relationship with how to watch a movie. You go to the video store, you rent it, you return it, you pay a late fee if you're late. It was a very clunky way to distribute things. And this way, the subscription model gave the people the ability not to ever have a late fee. They could kind of pick and choose however they wanted things. So we were solving a distribution problem, one. And the other one was maybe a bigger problem, which was marketing. It's incredibly inefficient to market movies and TV shows to people because tastes are so diverse and so eclectic that in order for me to tell you about a movie that I think you might like, I probably have to take out an ad in the newspaper and tell the whole city about it and hope that you see it. So the industry lore is that you got this off the ground by agreeing to pay $100 million to a new show that had not actually showed. It was House of Cards. Plow is a lot like real estate. It's all about location, location, location. And it had not produced a single anything yet, but it was a concept. When you told Reed Hastings, guess what, I just spent $100 million to buy something that doesn't exist yet. Did he say, great idea? No, he was a little surprised. But when I explained it to him, he was very supportive of it immediately. You have to remember, Reed created this company culture that enabled me to take a big swing like that. And for me, I looked at it as a kind of classic risk reward. Yes, this is a lot of money. If this doesn't work, we will have dramatically overpaid for a show, which we kind of are at risk of doing all the time. But if it does work, we could fundamentally change the course of the business. If it didn't work, did you think you might be out of a job? I prepared my wife that it was a possibility. She said, will you get fired if this doesn't work? I said, well, it's fireable. It's fireable. There's another idea that you were credited with, I think correctly with coming up with, which is called binge watching. I guess I would call it. I don't know if you like that word. It didn't initially. OK, so as I understand binge watching, this historically when there was a TV series on, you watched the series episode one week. The next week you watch the second one, the next week, so on. You came up with the idea of having the ability to watch everything right at once, more or less binge watching, as they call it. Did you come up with that idea or did it evolve some way or how did it come about? It was pretty heavily informed by what people were doing back in the back in the earliest days on DVD. I noticed that we had discs that would have four episodes of a show on it, and they would turn very fast because people were turning through the show as quick as they could. And then when we started streaming, we were licensing shows that had already aired on television. So we got them a year later. But we got the whole season and we just put it all up. So I noticed when you're watching, some people watch two episodes at a time. Some people watch three. Nobody watched one. So when we came to House of Cards, we had to decide how to release it. And I said, why don't we just put it like the other thousands of things on Netflix and do it all at once and see what happens. Now, sometimes in the business world, particularly the technology world, somebody might have a great idea, and they have an advance on somebody for maybe two years or so. And then everybody else figures out what they should be doing, and they catch up. And sometimes they have more resources. They beat the original person who came up with the concept. Were you worried that programmers or companies like Disney would figure out streaming and then wipe you out? Or you never were worried about that? No, always worried about that. We couldn't believe it took so long for them to catch up to it. In fact, one of the motivators to make our own content was I was pretty sure that if we were right, that all these people who were supplying us their old shows would never sell to us. When you started producing shows and making your own shows, did you become the most popular person in Hollywood? Because all of a sudden, somebody has somebody who can green light something. And so could you go out to dinner or lunch without having people descend upon you with scripts and so forth? How did you deal with all that? Yeah, it was heavy because we're a new buyer is very popular in town. So and I would say that it was never limited just to business hours. So if you're out at a restaurant with my wife and someone would come in and just start pitching away at the table, somebody tells these people in film school, if you ever see a buyer anywhere, sell to them. Does that ever work that way? No, it never works. Nobody came up at lunch with an idea that you actually. I can't think of one. You know, there's been a lot of consolidation in recent years in the entertainment world. You know, Time Warner was sold in effect. And then you've got Paramount now being sold. Is all of this good for you because there's consolidation and then you have fewer people to compete with? Or is it not so good because you have more powerful people that can compete against you? Yeah, a little bit of both. So I think it's competition's been very good. And people usually don't talk about other people's shows publicly. But like people have someone asked me recently, what's a show that's not on Netflix that you like? And I said The Bear. And the reason I talk about the show is because I think it raises the bar for everybody. So I think you have one competition out there to keep you put to keep pushing you. But the consolidation won't occur by your buying one of these major studios because that's not in your house of cards kind of thing. It's not in our DNA. We're mostly builders. We had done a few, a handful of small IP acquisitions over the years. And that may change in the next few years. But for now, what we're trying to do is without the, I would say a big library of IP can be a really nice benefit. For us, it's really been a benefit not to have it because it's pushed us to make really original creative things and not to stay corralled into one pool of IP. And we're spending about $17 billion on our programming. And as our revenue grows, that number will keep growing because we do think that there's an incredible appetite for more movies and more TV shows that people love. Now, a few years ago, there was a writer's strike in Hollywood. And one of the issues before it got resolved is how you deal with artificial intelligence. How do you prevent artificial intelligence from taking over what writers do? And how do you compensate them when artificial intelligence does something that adds to what they've already done? So is artificial intelligence an important part of your business now? And how do you use AI in deciding what to produce and how to produce it? For me, I really mostly think of AI as a creator's tool, not a creative tool. So I think creators will use it to tell better stories. We're not using it to tell stories instead of them. And I don't think we'd be very effective at it or AI would be very effective at doing that instead of people. So when you put something on Netflix, you can analyze within an hour or so or maybe 10 minutes whether people are watching it. And do you get those kind of data algorithms that show you exactly how much people like it? And do you actually change things after you see what people like? Or how do you deal with the instant feedback you get? What I'm really looking for is if they watch episode one, do they roll into episode two? And if they do two, do they get to three? And how much time are they spending? We're in a really unique place in entertainment history right now where every time you release a new movie or a new TV show, you used to only compete with three other shows on three other networks. Today, you compete with every single thing ever made. And one click away, you could just switch to something else. So you want to watch these things. If you push play, do you stick around? That, to me, is the biggest indicator of do we do it right? So let's talk about today where Netflix is. Today, you have how many subscribers? 277 million subscribers. So you figure a couple of people per household watching. You've got about a viewership now of over 500 million people. So 277 million subscribers are more than half in the United States? About 70% from outside the United States. 70% outside. What is the second biggest country other than the United States? Well, we report by territory, by region. So EMEA is the second largest outside of the United States. But we're very big in the U.K. and Brazil. So for 20-plus years or so, your subscriber numbers went up every month, it seems, without fail. And then one month, I think you announced on a quarterly earnings that actually subscribers went down a little bit. All of a sudden, the world took a large part of your market capitalization away. Were you shocked that people were so upset about the fact that you lost a few subscribers compared to where they thought you should be? Probably the magnitude of it was shocking because we knew the fundamentals of the business were intact and fine. You had a whipsaw effect from COVID. There were a lot of things that were happening that we're still trying to figure out, but it was kind of a temporary blip. But it was a hard thud. But your market cap has come way back and higher than it's ever been, right? Currently, yeah. And so that blip was not a big problem, I guess. But one of the things you did that also upset people for a while was you said you can't use your passcode to give it to somebody else. Historically, as I understand it, somebody could say to his friend, I have a passcode for Netflix. Why don't you use it? And I assume that was taking revenue away from you. And how did you figure out how big that problem was? And how did you have the courage to say, you know more of that and not worry that people were going to get rid of their Netflix subscription? Well, we had a couple of problems. One was revenue. But the other part of it was this personalization, helping you find something to watch, works better if you don't have five or six different people using your account. So for us, it was a way to really hone in with the personalization technology, but also a way to kind of test the value proposition. Our average members are watching about two hours of Netflix every day. So basically, when you go back out to people and say, hey, you know that thing that you're using for two hours a day and not paying for, we'd like you to get your own account. And what's turned out nicely about that is most people say, yeah, that's well worth it for me to do that. Now, when I had my company and I was the co-CEO of it, I had a co-CEO who I started the company with. So we got along well. We had different responsibilities and it worked out reasonably well. You have a co-CEO. I do. Let me talk about initially, the company was started by Reed Hastings and he asked you to be the co-CEO. Were you surprised that a founder of a company took somebody who had been an employee and made him the co-CEO? Was that a surprise to you? It was a surprise. It would be a shock if I didn't know Reed that well at the time because back to my first time I met Reed in 99, he did talk about this desire to build a company that would be around decades and centuries after him. So he foresaw some kind of succession already. So I believe that Reed saw this succession that we just went through recently 15 years ago and started acting on it 12 years ago, which is very unusual, I think, as you point out for a founder. But for somebody who really is thinking about the company first and the longevity of a company first, he's been amazing about that. So he stepped back. He's executive chairman now, not involved in day to day. But when he stepped back, did you say, well, now I should be the sole CEO or did you say I want a co-CEO in addition to my own responsibilities? I think in classic Reed fashion, he modeled something that really worked and we did it together for a few years. So I really got the sense of how well it works. I think Greg, Greg and I, Reed and I worked together for more than 20 years and Greg and I worked together for about 15 years. So we had the same, very similar shorthand. We had complementary skill sets, I believe, and we push each other in a really in a healthy way. And what's cool about having a co-CEO, you know, this saying, you know, usually sayings are rooted in reality. It's lonely at the top. I think there's something to that. And having somebody to be able to kick around hard problems with that isn't an employee or a board member is is really helpful. Tell us about your background. Where were you born? I was born in Long Branch, New Jersey. I was there for a few years and my family moved to Phoenix, Arizona. I was raised in Phoenix. That's on those days. Was that unusual to go from New Jersey to Arizona? Why did they move to Arizona? It's a it's a great story. My grandfather, who was a Greek immigrant, grew up reading cowboy novels. All we when he actually when he came to America, he came to be a trail cook. He thought that was a real job in America. And he ended up being a cook cook. And but he loved the American West. And he always talked about it. And he took one vacation in his life and it was to Arizona. And he saw a rodeo and he wore a bolo tie every day till the day he died and talked about rodeo in Arizona. So when he passed away, all eight of his kids moved to Arizona. Really? Yeah. So how old were you when you moved to Arizona? I think six years old. And did you say we're going to watch the Cowboys? We're going to be living in the Cowboys. Why? Yeah. Think about that. Yeah, I did. We didn't see any cowboys when we got there either. It was a pretty small town back then, Arizona. What did your family, your parents do? My father passed away recently, but he was a union electrician. And my mom was a stay-at-home mom. She took care of myself and three older sisters and a younger brother I just recently lost. So when you were a boy, what were you interested? Did you want to be an athlete? Did you want to be an artist? Or what did you want to be? I wanted to be from the earliest I remember actually thinking about what I wanted to do. I wanted to be a journalist. From probably 10 years old or so. But loved movies and television. My parents were young. The house was pretty chaotic. I kind of liked order, and I kind of liked the order that I saw on television. I liked those families that sat down for dinner on TV. We did not do that with my growing up. And the schedule of television, I found it to be very appealing. But I really fell in love with movies and television at a pretty young age. And through that, I saw journalists as heroes. And I just wanted to be a journalist. So you graduated from high school. Then what did you do? I was the editor of the school newspaper in high school. And I went to community college because I couldn't afford a university at the time. And was editing the community college newspaper at Glendale Community College. There I met a lot of really incredible people. Probably one of the more influential ones was Ed Asner. Who kind of made this connection for me between entertainment and politics. And just opened my mind to a different world to do. Now, I also had an epiphany about that time that I wasn't a very good writer. So likely I was not going to be a professional journalist. So eventually you got a job at a video store. That was my part-time job when I was going to Glendale Community College. And then when I realized I wasn't going to pursue that degree, I kind of dropped out. And it was meant to be a year, but it turned out to be a permanent move to business. So I understand that you became so knowledgeable about videos. That when people come in and say, what should I rent? You actually had actually seen a lot of these videos. And you could make recommendations. People came in because they liked your recommendations. They wanted to see what you were going to recommend. It's true. Again, for no reason, my mother, when we did not have the money for it, my mom bought a VCR at the early time. I didn't know anyone else who had a VCR. And serendipitously, the second video store in the state of Arizona opened up a few blocks from my house. So I started devouring movies by renting them. And then I got a job at that store. And the stores are empty all day, so you can watch movies all day. I watched everything in the store. And I had a pretty good memory for it back then. And I could remember what people liked when they brought something back. And I remember that that was like this, and this was like that. And sometimes the store would get so busy, but people would wait for me so they could ask me what to watch tonight. So did you go to the owner of the store and say, I should be the manager of the store, I'm so popular here? Or how did you think you were going to advance your career by being knowledgeable about these videos? Well, it wasn't a plan. He came to me and said, hey, we love what you do here. And my wife's had a couple of kids since you've been here. And the business has been growing. It grew to several store chain. And he goes, I never see my wife, and I need to take some time off. And would you take things over? And he gave me the keys to a video rental chain. And it was an MBA course in film school all wrapped into one for me. How did you go from there to Netflix? Well, in between, I went to Home Video Distribution, so the companies that sold the VHS and DVDs to the video stores. And while I was there, I did a pretty unique deal with Warner Brothers and Sony to revenue share DVDs, which just hadn't been done before. And Reed Hastings, it got written about in a trade magazine, and Reed read it and said, this is what we need. And so a mutual friend introduced us. But if that article hadn't been in that trade press, you'd still be at that DVD store, you think? No. There is still one. By the way, it's still open. That first store, that one store is still open there. I feel like one approach that we put into Netflix and into the programming to our films and TV and our games is that we put the audience first and think about how are they going to love it first. We'll build a business model around it first, but think about how are you pleasing the audience first. What is the last thing you've watched on Netflix? And if I say all of a sudden, I want to watch one thing on Netflix, what do you think I should watch? The first part of that is, the thing I like to watch the most on Netflix is the things that my wife and I can watch together. We do not have similar taste in movies and television. Every once in a while, you find something that you really love to watch together. And for us, that was the new season of Emily in Paris that we just binged through in two sittings, and she loved it, and it was great fun for me too. And for you, we have a new show coming in, just starting this week, called Monsters, the Eric and Lyle Menendez story. Ryan Murphy, who created Dahmer, and it's a phenomenal drama. Let's talk about your future. You're now in the company for how many years? 25, Nick, so coming up on 25 years. 25 years, and you are how old? 60 years old. Okay, well, that's a teenager to me. So you're very young. So do you have any interest in ever, let's say, going to government, public service, running for office, being an ambassador or anything? I would love to do something in public service. I can't see myself running for office, but I would love to be of service to the country at some point. So at some point, you might do that? Yeah, at some point. Did your parents live to see your success, and did they ever tell you how proud they were of you? My dad passed away two years ago, and he did see the success. And I don't think he totally understood what I did, but he knew that it was pretty cool. And he knew because people would tell him, that's pretty cool what your son does. And my mom, unfortunately, passed away before Netflix became what it is today. But at the beginning, when we first started House of Cards days, it was a show up on all the award shows. My mom liked to watch a lot of television, and so she would always love to see me on television at an award show. And she would call me every once in a while and say, hey, I'm watching this award show, are you there? And I go, no, that's the ESPYs, Mom, I'm not part of the ESPYs. But she really got a kick out of it all. So yeah, but they didn't get to see all of it, but they got a sense of it. And did they have a Netflix subscription? Did you buy them one, or they already had one? I bought them one. And what would you like to see as your legacy to the world of entertainment? What do you think your legacy should be or will be? I hope it is, or will be, or however you want to phrase it, will be the guy who put the audience first. Tony Bennett was a great friend of mine, and he was my hero, and he said it best, he said, the audience is the most important member of the band. And I feel like one approach that we've put into Netflix and into the programming to our films and TV and our games is that we put the audience first and think about how are they going to love it first. We'll build a business model around it first, but think about how are you pleasing the audience first.