Ted Sarandos

One of the most valuable entertainment companies in the world and one of the most popular entertainment companies in the world is Netflix. It currently has more than two hundred and seventy five million subscribers.

I recently had a chance in Washington, d C.

To sit down with the co CEO of that company, Ted Surrandos, and ask him how he got started this company from a very modest background, and how he now sees the future of Netflix. So, when you joined Netflix in two thousand, the company was about three years old but relatively small. Did you ever in your wildest dreams imagine the company would be one of the most valuable companies in the world and you would have today a market value of over three hundred billion dollars.

The short answer to that question is no. I think when we joined we had a couple hundred people, including the people who are stuffing DVD envelopes. Back then, Blockbuster was the biggest entertainment brand in the world, with a market gap of about eight billion dollars. They were definitely

So for people who were too young to remember, this, Blockbuster was a place where you go to buy something called a DVD, yes, and you went there, you rented them, and then you put them back on your VCR, and then you after a couple of days, like a library book, you bring it back and so forth. The novelty that Netflix had when it first started in nineteen ninety seven, as I recall, was that you didn't have to go

Right through the US mail okay ESPs.

So who came up with the idea of saying, well, FedEx is a little old and mailing is old, and we want to go to streaming. Who was the brilliant person that came up with that idea?

You know, the company was always conceived to be a digital company, read Hastings. When he came up with this idea, he was thinking about it very much. So when he named the company even he called it Netflix, not DVD Flix, and this idea. When I met Reid in nineteen ninety nine. He describes Netflix pretty much like it is right now.

So when streaming came along, the theory was that people would be willing to pay let's say a monthly subscribing rate, right and that they would see programming they couldn't otherwise easily get. But the idea of doing your own program it was relatively novel. Now you are seen as the person who came up with the idea of not just taking stuff that's already out there, the one hundred thousand things that might already be available, but producing your own programming for Netflix.

So where'd you get that idea from?

So in the very beginning, we didn't really think much about doing original programming because it wasn't the problem we were trying to solve. The problem was really distribution and how to you in the consumer relationship with how to watch a movie? You go to the video store, you rent it, you return it, you pay a light fee if you're late, and it was a very clunky way to distribute things in this way, the subscription revenue, the subscription model gave the people the ability not to ever

So the industry lore is that you got this off the ground by agreeing to pay one hundred million dollars to a new show that had not actually showed.

There was House of Cards, Plow. It was 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 read Hastings, I guess what, I just spent one hundred million dollars to buy something and exists.

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, recreated this company culture that enabled me to take a big swing like that, and for me, I looked at it as a kind of classic risk reward. Yes, this is a lot of money. If this doesn't work, we will have dramatically overpaid for a show, which we kind of 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 and you think you might be out of a job.

I told I prepared my wife that it was a possibility. She said, she said, will you get fired to this? Other one guy said, well, it's fireable, it's firerable.

There's another idea that you were credited with and I think correctly with coming up with, which is called binge watching.

I guess I could call it. I don't know if you like that word.

Didn't initially, Okay, So I understand binge watching. And this historically, when there was a TV series on, you watched a series episode one week, the next week, you watch the second one next week. So on you came up with the idea of having are the ability to watch everything right at once, more or less binge watching, as they call it. Did you come up with that idea or 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'd have disc that would have four episodes of a show on it, and they would turn very fast because people were churning through the show as

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 than they beat the original person who came up with the concept. Were you worried that programmers like our companies had programming like Disney would figure out streaming and then wipe you out?

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, as one of the motivators to make our own content was I was pretty sure that if we were right, that all of these people who are supplying us their old shows would never sell to us.

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 were a new buyer is very popular in town so and I would say that it was never limited just to business hours. So if you're out at a restaurant with my wife and someone would come in and start pitching away at the table. Somebody tells these people in film school, if you ever see a buyer anywhere, sell to them?

Does that ever work there? But you ever never went to nobody came up and lunch. But an idea that you're 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 Powamount.

Now being sold.

Is all of this good for you because there's consolidation and then you have fewer people to compete it with. Or is it not so good because you have more powerful people that can compete against you.

Yeah, a little bit of both. So I think it's competition has been very good people. I usually don't talk about other people's shows publicly, but like people. As someone asked me recently, what's the show that's not on Netflix that you like? And I said The Bear. And the reason I talk about the show is because I think it raises the bar for everybody. So I think you have one competition out there to keep you push, to keep pushing you.

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.

This is not in our DNA because they were most mostly builders. We had done a few a handful of small IP inquisitions over the years, and that may change over the next in the next few years, but for now we're trying to without the I would say a big library of IP can be a really nice benefit for us. That's really been a benefit not to have it, because it's got it's pushed us to make really original, creative things and not to stay corralled into one pool

A few years ago, there was a writer's strike in Hollywood, and one of the issues before it got resolved is how you deal with artificial intelligence. How do you prevent artificial intelligence from taking over what writers do, and how do you compensate them when artificial intelligence does something that adds to what they've already done. So is artificial intelligence important part of your business now? And how do you use AI and deciding what to produce and how to produce it?

For me, I really mostly think of AI as a create wars tool, not a creative tool. So I think creators will use it to make to tell better stories. We're not using it to tell stories instead of them, And I don't think and I don't think we'd be very effective at it, or AI would be very effective at doing that instead of people.

So when you put something on Netflix, you can analyze within an hour or so or maybe ten minutes, whether people are watching it. And do you get those kind of data algorithms that show you exactly how much people like it? And do you actually change things after you see what people like, or how do you deal with the instant feedback you get?

What I'm really looking for is if they watch episode one, do they roll in episode two? And if they do two, do they get to three? And how much time are they spending. We're in a really unique place in entertainment history right now where every time you release a new movie or a new TV show, you are used to only compete with three other shows on three other networks today you compete with every single thing ever made, and one click away you could just switch to something else.

So let's talk about today where Netflix says today you have how many subscribers.

Two hundred and seventy seven million subscribers, So you figure a couple of people per household watching, You've got about a viewership now over five hundred million people.

So two hundred and seventy seven million subscribers are more than half in the United States, or.

About seventy percent from outside the United.

States, seventy percent outside What is the second biggest country out of the United States.

Well, we report by territory, by regions, so Amia is the second largest outside of the United States, but we're very big in the UK and Brazil.

So for twenty plus years or so, your subscriber numbers went up every month, it seems, without fail. And then one month, I think you announced in a quarterly earnings that actually subscribers went down a little bit. All of a sudden, the world took a large part of your market capitalization away. Were you shocked that people were so upset about the fact that you lost a few subscribers compared to where they thought you should be.

Probably the magnitude of it was shocking, because we knew the fundamentals of the business were intact and fine. It just you had a whip saw effect from covid. There are a lot of things that were happening that we're still trying to figure out. But it was a kind of a temporary blip, but it was it was. It was a hard thud.

But your market cap has come way back and higher than it's ever been right currently, and so that blip was not a big problem, I guess. But one of the things you did that also upset people for a while was you said you can't use your past code to give it to somebody else, and not historically, as I understand it, somebody could say to his friend, I have a pass code for Netflix, why don't you use it? And I assume I was taking revenue away from you.

Well, we had it was a couple of times. One was revenue, but the other part of it was this personalization helping you find something to watch works better if you don't have five or six different people using your account. So for us, it was a really a way to really hone in with the personalization technology, but also a way to kind of test the value proposition. If you've got our average members are watching about two hours in

Now, when I had my company and I was the co CEO of it, I had a co co who I started the company with, so we got along well, we had different responsibilities and it worked out reasonably. Well, you have a co CEO, let me talk about initially you are the company was started by Reid Hastings and he asked you to be the co co Were you surprised that a founder of a company took somebody who had been employee and made him the co CO was out a surprise to you.

It was a surprise. It would be a shock if I didn't know Read that well at the time, because I back to my first time I met Read in ninety nine. He did talk about this desire to build a company that would be around decades and centuries after him, so he foresaw some kind of succession already. So I believe that Reid saw this succession that we just went through recently fifteen years ago, and started acting on it

So he stepped back. He's executive chairman now, not involved day to day. But when he stepped back, did you say, well, now I should be the sole CEO, or did you say I want to co CEO? In addition to what you know my own responsibile I.

Think in classic Read fashion, he modeled something that really worked, and we did it together for a few years, so I really got the sense of how well it works. I think Greg Greg and I read and I worked together for more than twenty years, and Greg and I worked together for about fifteen years. So we had the same, very similar shorthand we had complimentary skill sets, I believe, and we push each other in a healthy way. And

Tell us about your background. Where were you born.

I was born in Long Branch, New Jersey. Was there for a few years and my family moved to Phoenix, Arizona. I was raised in Phoenix.

That's what in those days was out on usual ago from New Jersey to Arizona. Why do they move to Arizona.

It's a great story. My grandfather, who was a Greek immigrant, grew up reading cowboy novels. When he actually when he came to America, he came to be a trail cook. He thought that was a real job in America, and he ended up being a cook cook. But he loved the American West and he always talked about it. And he took one vacation in his life and it was to Arizona, and he saw a rodeo and he wore a bolo tie every day till the day he died,

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 at the cowboys or what you think about that?

Yeah? I didn't. We didn't see any cowboys and we got there either. It's an I was pretty developed. It was a pretty small town back then, Arizona.

What did your family, your parents do?

My father passed away recently, but he is He was a union electrician and my mom was to stay home mom. She took care of myself and I had three older sisters and a younger brother who I just recently lost him.

So when you were a boy, what were you interested? You want to be an athlete? Did you want to be an artist or what did you want to be?

I wanted to be from the earliest I remember actually thinking about what I wanted to do. I wanted to be a journalist from probably ten years old or so, but loved movies and television. I we had my parents were young, We were you know, with the couse was pretty chaotic. I kind of like order, and I kind of liked the order that I saw on television, Like those families that sat down for dinner on TV. We did not do that my growing up. And the schedule

So you graduate from high school, then what did you do?

I did. I was the editor of the school newspaper in high school, and I went to community college because I couldn't afford a university at the time, and was editing the college paper, the community college newspaper, Glendale Community College. There I met a lot of really incredible people. Probably one of the more influential ones was Ed Asner, who kind of made this connection for me between entertainment and politics and just opened my mind to a different world

So okay, So eventually you got a job at a video store.

That's what I was. That was my part time job when I was going to Glendall Community College, and then when I realized I wasn't going to pursue that degree, I kind of dropped out and it was meant to be a year, but it turned out to be a permanent move to business.

So I understand that you became so knowledgeable about videos that when people come in and say what should I rent, you actually had actually seen a lot of these videos, and you could make recommendations. People came in because they liked your recommendations. I wanted to see what you're going to recommend.

It's true. I again, for no reason, my mother, when we did not have the money for it, my mom bought a VCR. The early time, I didn't know anyone else who had a VCR, and serendipitously, the second video store in the state of Arizona opened up a few blocks from my house, so I started you know, devouring movies by rent renting them. And then I get a job at that store and the stores are empty all day,

So did you go to the owner of the store and say I should be the manager of the store. I'm so popular here, or how did you think you were an advance your career by being knowledgeable about these videos?

Well, it wasn't a plan. He came to me and said, hey, we love what you do here, and my wife's had a couple of kids since you've been here, and the business has been growing. It grew to several store chain and he goes, I never seen my wife and I need to take some time off, and would you take things over? And he gave me the keys to a video rental chain. And it was an MBA course in 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 read Hastings It got written about it in a trade magazine and read 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 could still be at that DVD story.

You think there is still one by the way, it's still open that first store, that one store is still open there.

The company is extremely successful. The problems you may have had you seem to be behind you. So what is the future of Netflix? Do you think you can keep growing the subscriber base or how do you view your future success? What is your goal to be in the future.

To do well, I think we've got plenty of room to grow both the subscriber base and revenue. For a lot with a long runway, two hundred and seventy seven million sounds like a lot of folks, But you know you could double that and still not be halfway to what the pay television universe was. And this is a much better product economically and choice and control and all

You are always being pitched on new projects that you're going to presumably do in the future. There are other areas. You're in sports now, you're in games. I guess you'd say you're you're into you know, the traditional content you have.

Are you going to do news at some point?

It's a pretty well served market. There's a lot of choices of how to get to news. So it hasn't been an expertise of ours yet, so we're not really looking at that.

Hey, the most important thing I think people really want is interview shows. Yeah, you have enough interview shows on your yours.

I have a feeling this would be a good pilot for ya.

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?

For the first part of that is the thing I like to watch the most on Netflix is the thing that my wife and I can watch together. We do not have similar taste in movies and television that everyone's in all you find something that you really love to watch together. And for us, that was the new season of Emily in Paris that we just binged through in two sittings and she loved it and it was a great,

Let's talk about your future. Yeah, you're now in the company for how many years?

I'll be twenty five, nicks to carp.

So twenty five years and you were how sixty 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 I would love to do something in public service that I can't see myself running for office, but I would love just to be of service to the country.

So at some point you might do that.

Y 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 we first started, you know, House of Cards Days was a show up on all the award shows.

And did they have a Netflix subscription to do? Buy them one or they already had one?

They I bought them one.

And what would you like to see as your legacy to the world of entertainment? What do you think legacy should be or will be?

You know, I hope it has been that or is or will be or how every want to praise it will be the guy who put the audience first. Tony Bennett was a great friend of mine and he was my hero, and he said it bestie said, the audience is the most important member of the band. And I feel like what I want approach that we put into Netflix and into the programming, into our films and TV and our games, is that we put the audience first and think about how are they going to love it?

First?

We'll build a business model around it for but think about how will you please in the audience first?

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