Good morning,

I am pleased to welcome Netflix Co-CEO Greg Peters for a Stratechery Interview. Peters was named the co-CEO of Netflix (alongside Ted Sarandos) last year upon the retirement of founder Reed Hastings; before that Peters was the Chief Operating Officer and Chief Product Officer. Peters joined Netflix in 2008 from TiVo, and drove Netflix’s partnership strategy in the consumer electronics space and other go-to-market channels.

In this interview we discuss Peters’ career path and some of the interesting strategic decisions Netflix made over the years. We then get into the differences between strategy and execution, and how Peters and Netflix have evolved in terms of content, gaming, and ads. We also cover this week’s news about Netflix’s partnership with the WWE, and why Netflix may not be renting any more sports, at least for now.

To listen to this interview as a podcast, click the link at the top of this email to add Stratechery to your podcast player.

On to the interview:

An Interview with Netflix co-CEO Greg Peters About Strategy and Execution

This interview is lightly edited for clarity.

Background and TiVo

Greg Peters, welcome to Stratechery.

Greg Peters: Thanks for having me here. It’s a pleasure.

I always like to open these interviews by learning about the background of the folks I’m talking with. But with CEOs, there’s usually a long list of profiles that cover most of the basics, it seems though there are a dearth of Greg Peters’ profiles, so you have to tell me who are you and how did you end up at the top of Netflix?

GP: Yeah, I guess it’s always a tough question to try and figure out how you got from point A to point B, and probably a lot of luck and randomness is involved, but maybe the two factors or components that may be most relevant here, one is my mom worked as a computer programmer, they called it an analyst back in those days working for IBM, one of the earliest women in this space, and taught me how to code basically as soon as I could spell. So I’ve been working with computers and leveraging computers in all sorts of ways for fun through my academic career from the get-go, but I think I was born with a computer attached kind of thing, so that’s part of it.

Then maybe the other big part of it is just before high school, I was living in Kansas — I lived all over the United States, but I lived in Kansas at that point in time — the biggest thing I found to do for fun in Kansas was go to the one independent movie theater in the town that I was in. And through that experience, and then through doing it in college and a little bit after, I just got exposed to so many amazing stories. I remember being introduced to independent directors like Lars von Trier and Jim Jarmusch, Wong Kar-wai, Wim Wenders and classic folks like Ozu and Kurosawa, Bergman, Hitchcock, all those guys. So the greats were basically that were starting their career off, whether it’s like Kubrick or Ridley Scott, the Coen Brothers, Coppola.

(laughing) But enough name-dropping!

GP: No, no, they meant a lot to my formative years. And I did it, I went to those theaters all the time until I realized that there was this company out there called Netflix that would send me these DVDs by mail and I could do it all at home, which is where I got exposed to actually TV and I thought I was a film guy, but then I saw The Wire. I don’t know if you’ve ever seen The Wire.

I have.

GP: It was amazing. I was like, “Oh my God, this is incredible storytelling.” So anyway, maybe those are relevant factors to how I got from there to here. Then the other stuff was doing a bunch of startups, some of which were better successes than others. Nothing great though until I did a startup before Netflix, which was how to connect consumer electronic devices, things like TVs as well as things like we called them digital media appliances back then.

I’m actually interested in that, so the startup you’re talking about is TiVo basically, I think they had a bunch of names through the years. How relevant was that experience to Netflix? I mean, was it actually concretely relevant or is just a general idea of customers want to watch content on their time? What lessons did you learn there?

GP: Well, I think there was some technical relevance in the sense that the work that we were doing, the product and the engineering work we were doing, it was consistent with the early years of what we were doing in Netflix. So this was, “How do you integrate software onto these different clients?”, it’s a lot of embedded engineering, it’s hard work to go to decoders and what chips are you working with, so there’s some of that which was directly relevant to the early years. But the core theory or thesis behind the company was these devices are going to eventually get content from the Internet, and that’s a much more effective way to deliver and to give users a better experience. In the abstract sense in that way, it was super relevant.

Now, in the early days when I joined, this was pre-YouTube, the infrastructure of the Internet wasn’t really ready for this and quite frankly, the infrastructure of all these chip manufacturers, device manufacturers, they weren’t ready for it either. So it was premature in that sense, but it definitely was a practice round, you might call it, at what I do for Netflix.

That’s a really good insight. TiVo had to work with what was there, which was basically TV that came over the wire that solved the bandwidth problem, and then they had to build a fully integrated device to have the capability of even capturing and delivering a good user experience. All of those, it really is a classic Clayton Christensen example of an integrated experience that comes first and it’s completely swallowed up by a completely different, more modular experience, but they had to work with what they had. I’m just agreeing with your answer, but it makes a lot of sense.

GP: Yeah and it’s an interesting idea, this too, is how do you think about how TiVo could have taken that position that they were in before and then realized as things were going to get modularized and the value chain was going to get shook up, how could they have made relevant?

It’s hard when you’re selling hardware.

GP: It’s exactly right. I mean, all the things, the anchors that are hanging off your neck trying to make those transitions are what make them super hard.

Hardware Ubiquity and Owning the Customer

The hardware point is sort of interesting. You joined Netflix in 2008, focused on global partnerships with consumer electronics companies, ISPs and MVPDs, I’m quoting Wikipedia because like I said, there are no profiles out there, but that was the same year that Netflix spun out Roku. Was your hiring part of that decision, which was famously to avoid channel conflict in the hardware space, and instead put the Netflix app everywhere? Was bringing you on part of that pivot?

GP: That’s right, yeah, and I can flesh out the details there, that decision was made before I joined. Essentially, they were looking for somebody that could take, consistent with the new strategy at that point, which is pivot off of an owned hardware integrated approach like the TiVo model, and pivot off of that into a model which is, “Let’s leverage all these other device manufacturers around the world and let’s essentially develop software, an SDK, that we would integrate with all those folks”, and so that was what I was hired to go do, and that’s really what I spent the first handful of years at Netflix doing.

That strikes me as a very pivotal moment. It’s been a part of Netflix’s ethos to be on every hardware platform and we’ll get into other stuff as far as the go-to-market and billing and things along those lines. I do have to ask though, if that’s part of your ethos, you’re on all kinds of random stuff, everywhere — there’s always a Netflix button or a Netflix app — but no Netflix app on the Vision Pro at launch.

GP: (Laughing) You got to a good one really quick there already. Not by any unwillingness or lack of desire to do that, but even when you note we look at as close to ubiquity on devices perspective, the decisions that lead to that are we try and be very rigorous about, “What’s the effort to integrate on any given set of devices and what’s the benefit for the members that we serve?”. We have to be careful about making sure that we’re not investing in places that are not really yielding a return, and I would say we’ll see where things go with Vision Pro. Certainly we’re always in discussions with Apple to try and figure that out but right now, the device is so subscale that it’s not really particularly relevant to most of our members.

And I imagine there are ways that Apple could change the big picture strategic calculus for Netflix.

GP: Always. And that’s something that’s been — we’ve worked together for a long time, we’ve always had active discussions to how we could help each other out. Sometimes we find a great space of overlap. We can move very, very quickly. Sometimes it takes a little bit longer.

To go back to that device evolution, and I hinted at this a moment ago, but one of the more interesting decisions was when Netflix wasn’t just available on a plethora of devices, but could also be sold by other vendors, like the cable companies. For nerds like me that are very interested in these aspects of business, that was a big decision. What made you decide that you could own the customer without owning the billing relationship? Was that a controversial decision? Or is owning the customer the wrong way to think about that?

GP: No, I think people talk about owning the customer and there are many dimensions of what that “ownership” means, right? What I’d like to say is just like, “What’s the relationship you have and what does the customer expect from you?”.

There was some controversy in that because I would say we had a very good organic growth channel where we were signing up many millions of subscribers every quarter and we felt good about that. But what we realized, and really it’s an extension of the strategy, the core ubiquity strategy, which is we found with every pocket of new devices that we added — and it started with the game consoles, which were this really large deploy base that was already connected to the Internet and connected to the TVs — we unlocked those and we had a super rush of growth, and we saw it through TV, smart TVs, et cetera. But a bunch of people were spending their time watching entertainment on their cable set top box as an example. The basic theory is we could unlock a same accelerant to growth by being there and that while to your point, there’s some aspect of that customer relationship we would have to give up in that mode, that quite frankly the most important part in what we negotiated for and fought for in those deals was that when people came to be entertained, they were using the Netflix experience basically.

Right. So owning the customer from a Netflix perspective is about the discovery experience, the actual interaction. We saw this, to go back to Apple, you never joined the Apple TV experience because that was the aspect that was important to you.

GP: That’s right, and that’s where we think we can add differential value. And quite frankly, we deferred to partners who add differential value in other ways, like billing. A big component of how we solve payments around the world, which is quite complicated and quite difficult, is we rely on their expertise. They’re so much better at trying to integrate with local payment systems and local payment culture and practices.

Strategy, Execution, and Culture

I want to get into some of the recent news, but we had a chance to talk offline a couple of weeks ago. You had a critique, which I completely agree with, that it’s one thing to be in my position and talk about high level strategy and industry structure — I think I’ve big picture gotten the entertainment industry mostly right, although I think I made many more mistakes than I think maybe in tech, but it’s a very different thing to consider the operational decisions that go into getting from here to there.

Your career started “over there” — I think when you joined, DVDs were still a huge part of the Netflix business, streaming was just getting started — and I think you’re pretty close to being “over here”, which is Netflix as one of the big winners, streaming as the dominant distribution method for video. What were some of the critical things that you needed to do, particularly from an operational perspective, to make that journey that people like me that are just super high level are likely to overlook?

GP: Yeah, it’s one thing to step back and see the structural strategic landscape and say, “Ah, if you had A, B and C, then that’s a strong strategic position.” But actually building A, B and C is a complicated and sometimes fraught with peril kind of exercise. Maybe just to give you a couple examples of that, you could have a strong strategic position and the ability to fund an initiative, but actually by funding it too much, you can actually screw up the execution and the growth of the capabilities to get there.

Interesting. What’s an example of that?

GP: One place that I think that we did that was animation. So we said, “Ah, this is smack dab in our sweet spot. We’ve been licensing animation, it’s been doing well for us on our service, we would like to be able to control the development of some of that offering just like we did in other spaces.” And we went from I’d say 0 to 100 in saying, “Oh yeah, we’re going to build a tech stack for it. We’re going to build our own studio, we’re going to build all this stuff.” Quite frankly, we went more slowly because we tried to go so quickly at the beginning.

I’ll offer a counter example to that, which is games. Really because we had seen the mistakes that we’d made in animation in that regard and have since recalibrated on I think, in games, we said, “Let’s make a big investment enough to really get going and be in it to win it, but also really moderate the growth of that until we actually demonstrate to ourselves that we have built institutional capabilities to do these things.”

I think that there’s this — especially from a strategy wonk perspective, you think about what are these defensive moats and stuff like that and expertise is one that we always say like, “Oh, you just hire the experts.” You just go in and you pay more than the next biggest bidder, you get that expertise in-house and you’re ready to go, but that’s just the start of the process really. Once you’ve got that expertise in-house, you actually have to build the institutional capabilities. How does the institution understand how to execute well in a certain space? What’s the culture that enables that to happen? And those are all multi-year hard initiatives to a good space? And so that’s an example where in games we’re really taking it step-by-step and I think in a thoughtful way that’ll get us to a better place over a five to ten year perspective.

I definitely have a couple more game questions, but with that expertise and execution capability, you mentioned culture. There was that famous Netflix culture deck, Reed Hastings wrote a book about that. To what extent do you think that that still holds as a differentiator for Netflix? I’m sure you’ll say a massive one, but I’m curious when you talk about the expertise and execution bit and needing to do it, I’m reading maybe into a little bit like The Netflix Way, is there an aspect where Netflix only works if you do it slowly, precisely because it has to be done? Could another company that has a little more loosey goosey have pulled that off? Or would they just fail but fail worse?

GP: I’m sure you’ve put your finger on something which is maybe the most important part about culture is a common set of norms that people can buy into and that form how you operate together. Those different sets of norms probably mean that there’s different strengths and weaknesses, so I don’t know.

Content Strategy

I mean, I tend to have thought like, if you think about how we ramped up original programming, we went really, really quickly. We went from essentially zero to one of the biggest content producers on the planet in ten years. Our goal was, “go as fast as we can until the wheels are wobbling off the car and then moderate a little bit from there”. I don’t know if that’s going slow, I wouldn’t characterize it as going slowly, but definitely it was a determinism in the sense that we try to be pretty choosy about what new things we go do and then do them with determination in the sense that we’re going to do it iteratively until we learn how to be good at it and succeed. That means sometimes starting from a place of zero expertise, zero competence, and then building up over time — whereas other companies have different approaches and they shotgun stuff out there and figure out what sticks and kill stuff that doesn’t. It’s just not our model.

Not to get too esoteric about the philosophy of leadership or whatever, but is there a bit where it’s easier to pull off a cultural transformation and to learn quickly when you feel a certain sense of desperation? I mean, it strikes me that games, for example — that is a growth avenue. That’s something you can add on, but if you didn’t do games, Netflix would be fine. Whereas, if you go back to when you started original content, I think that there was increasing trepidation in Hollywood about, “we just licensed all our stuff to this upstart, they have way bigger multiples than we do”, and knowing that pullback was coming, so, “we have to get good at this very quickly”.

GP: Well, I think that nothing motivates like a crisis and no crisis should be wasted. There’s definitely a component of that, which can push companies to move more quickly and be all-in on initiative. I would actually put ads, quite frankly, as maybe a better example for us in that category and we can talk about that. But if you go back to Originals, really, when we got into Originals, there was years of very rich licensing that happened past that. This moment of concern that restricted our supply in that regard was actually years later.

Was it years later, more later than you thought?

GP: Yeah. This is, I think, one of these fun back to the perfect world, what I call the physics world, where there’s no friction and stuff like that versus the reality and oftentimes where these things work is that they take much longer to happen than you might expect, but then happen much more quickly than you would expect.

That sentence is the perfect encapsulation of Hollywood and cord-cutting and all this stuff is everyone was talking about it for years and years and years and years and then nothing happened and then, “Boom!”, it all happened in 18 months.

GP: Totally, exactly. We had been talking about this for, really, a decade. We’re like, “These competitors are going to cover us at some point and they’re going to be all in on streaming.” It took way longer than we expected, but then it all happened in an almost 18-month period, really, it seems.

When you think about that transition to go back to the “easy analyst big picture” view, mine has always been that actually in the very long run, the most compelling position for Netflix is as a licensure of content. I think that’s something you’ve gotten much more explicit about in your letters to shareholders, for example. There was one a couple quarters ago, leading with Suits and this idea that, “we can take content, and we can not only make it more popular but dramatically increase the value of it”, and at some point, they’ll pull Suits from you and sell it to someone else, it’ll be worth much more than it was.

To my mind, it always felt like Originals is something Netflix needed to do, but was not going to be your long-term differentiator. Do you think you’ve gotten to the point where, “Actually, no, we can also do that as well,” or do you see a transition where may maybe licensing is going to be a comeback to be a bigger strategy as these other companies realize their differentiation is not distribution, their differentiation is not churn management, which I think no one knew what turn churn was in Hollywood until about 18 months ago, but, “we’re good at creating content, that’s what we should do”.

GP: I definitely agree with you that I anticipate that some of our current distributor competitors really came from the content creation side will decide that content creation is a great business to be in and just like Sony decided early, and I give them credit for making this call, that they’ll go back to that and they’ll have a great business making content for us and other distributor competitors.

Having said that, I don’t think that our future is one of only licensing. Production, being in our own development allows us to get access to stories that we wouldn’t otherwise have access to. One might be because of competitor considerations, although those are relaxing to some degree, but there are other reasons. I mean, we are able to invest in some kinds of storytelling that others are not immediately disposed or well suited to produce, and I think that’s going to be a rich area for us to continue to explore.

What’s an example of that?

GP: Well, if you look at what we’ve done globally, there’s a bunch of things that I would say where we’ve invested in stuff where a local producer — let’s say like Casa de Papel or Money Heist, it was originally on a Spanish broadcast, had pretty modest success there and then we pick it up and we can make it a global show.

Again, we can talk about the various forms of what — there’s all sorts of different forms of development and production, whether it’s completely ourselves, with a partner, or a license — it’s on a spectrum and I admit that. But maybe One Piece is another great example, right? Storied anime, beloved, and it’s a very treacherous place to go in and say, “I’m going to do an English language live action adaptation of this anime.” You’ve got basically all the targets on your back when you go do that, but it’s the kind of thing where we’re like, “No, we believe we’ve got the right expertise between the folks we’ve got in Japan, here in the United States, folks in Korea that helped out, believe it or not.” We think we can do this in a way that other production companies can’t.

I think it’s always going to be a portfolio that’s going to be a blend. We’re going to want to access amazing production companies that we licensed from, that we do partner productions with, and stuff that we do wholly on our own.

With this international experience, I think one of the real strong bull cases for Netflix was this idea of an international market, the core of the entertainment business and the reason why it’s adjacent to tech. I dabble in it a bit is this idea of zero marginal cost. You create something once, you try to spread it over this massive market — Netflix had that big release where you went from 30 markets to 200-some markets or whatever it was. But it did, from a bear perspective, it felt like, “Oh wait, maybe the international content doesn’t extend as well as we thought it might be. Maybe people actually just really do value what’s local and that reduces some of the leverage maybe Netflix is getting on their spend.” Which side is right or has it ended up in the middle?

GP: It’s in the middle. This is maybe an unexciting answer, but we see a spectrum and you see titles that have incredible international leverage. I mentioned Casa de Papel before. Squid Game is, obviously, probably the most —

Peak example.

GP: Yeah, the peak example of that. Then you’ve got stuff where we say, “We’ve got to produce a show that is amazing for the local audience.” We really focus on that. Sometimes, those shows do really, really well locally and don’t travel much.

But I will say this: every show that we make is watched by someone in every country that we operate in so there is some leverage there at pretty much everything that we do. As you pointed out, there’s the leverage on the content, there’s also leverage, remember, on all the fixed-cost investment we do in all the technology and product work, right?

Right. And owning that discovery relationship of the customer.

GP: Exactly. Very much like a tech company in that regard. We’ve got that leverage in the fact that the work that we do on — if we make our recommendations algorithms better for one country, they’re better for the world.

The similar question of the bear-bull idea applies to your content library in general and this idea of how much of spend on new content is actually better categorized as marketing spend to the extent that it acquires new users or mitigates churn, whatever it might be, and what percent is cost of goods sold spend? I certainly had the thesis that that differentiation should be more, a lot should be on the marketing side, but maybe that wasn’t so much the case. It feels like people want to watch new stuff, or how has your thinking shifted around that as far as the evergreen nature and value of content?

GP: Yeah, it’s a complicated question, but I think a couple of general thoughts. One is, as we have created what I think is the world’s most amazing entertainment system where literally thousands of titles are available at a click of a button, what we realized is you free up the friction in terms of what people want to watch, that you do get a little bit of this, I think, extra weight towards new, because there’s a social conversation happening on it, you have access to that content, and you get that effect. Having said that, much like the previous conversation we had, the reality is in the middle. Again, every show that we’ve ever launched gets some viewing every week, and so you’re getting some leverage off of those shows.

You mentioned marketing versus cost of goods sold. I get the sense in which you mean it, and there is some reality to it in the sense that having a big hit show brings more people in who then get satisfied by the library of titles that we have. There’s that phenomena, but I think when it comes down to it, and it’s something you, I think, as a subscription business owner and operator understand deeply, oftentimes you’re not just getting paid for what you’re delivering today. What you’re getting paid for is the trust and the confidence that you’ve built that next month you’re going to have something amazing to watch. That’s why subscribers stick around and pay you because they’re saying like, “Yep, that was great, and if I hit play and something great happens eight times in a row in a month, I’m going to stick around next month, too.”

I’m trying to keep a still face, but I’m grinning on the inside. That is the core aspect of my thesis of subscriptions on the Internet is what you are selling is a promise. You’re not selling your current content, your current content is evidence for your promise, it’s not actually what you’re selling.

GP: That’s exactly right. That’s why, I think, back to your question around how you think about leverage around these things, if we do our job well and we deliver on those moments enough, then we transcend these specific title by title, whether on consumption or marketing, into much more. What we’re establishing is a sense that a belief that every month you’re going to be able to watch something amazing and that’s why you stay as a subscriber.

WWE and Sports

I have to say I’m just very grateful for you for announcing this WWE deal before we did this interview.

GP: (laughing) Timed just for you, Ben.

What’s so interesting about that is it feels like WWE is, quote-unquote “sports”. I don’t want to make anyone mad, but it also strikes me as just a remarkably well-suited product for subscriptions, particularly the cadence. Every week, there’s this storytelling aspect. Is that the correct way to think about it, that you view this as more an extension of what you already do, or is this also dipping the toe — you’re actually going to start renting rights, to use a disparaging term?

GP: We love this deal for a whole variety of reasons. One is that the one you mentioned, which we think that this is quite close to what we do. We think we are in the business of telling dramatic stories around sports. You’ve seen it with Drive to Survive or Break Point, Full Swing.

Oh, don’t worry, I have a Drive to Survive question.

GP: We feel that’s a space that we’ve earned the right to play and an expectation to deliver value to consumers, and we feel like this is in that zone.

We also love it, because as you mentioned, this is 52 weeks of entertainment. This is always on entertainment, sports entertainment, and it fits really well within our model. We think it’s synergistic with what we’re doing on ads, and we like it from that perspective.

What we believe is that there’s a real opportunity for growing the fan base for this set of content globally. We think it’s been under-distributed, we think it’s been under-leveraged. There’s good signs that there’s fans out there, but we think we can grow that. We think about it as the inverse to Drive to Survive to F1. We could actually grow the international audience in a way that is material. We’ve organized the deal so that it’s a big long-term deal. In other words, there’s a little bit of risk insulation into the renting concerns that you mentioned before.

You have an option for ten years, but you can bail after five. That long-term aspect is in your favor.

GP: Yeah. Again, I think it’s part of recognition that we brought a lot of value and potential value to it. We were able to negotiate reasonable optionality in that regard, which we like, because it gives us a little bit of room to learn and also to extend if we like where it’s going. And then, to your point about renting, we love sports. I mean, sports is some of the most compelling content out there, but in the same reason that it’s compelling, it’s also poorly substitutable, that means that you’re de-leveraged relative to the rights holder. There’s a spectrum of those things. I would say WWE is more towards the substitutable spectrum than, let’s say, NFL or NBA or things like that, but Friends is relatively non-substitutable as well. It probably sits somewhere in the same space.

But Friends, people watch a million times in a row. It has that evergreen content aspect.

GP: Yeah and there’s a dynamic of that, which is different, but I also think that what’s great about WWE is that every week you got new content to watch and the soap opera continues and people engage very, very consistently.

You talk about coming out every week as a value. One of my ongoing questions about Netflix is there’s a cultural aspect to shows, particularly that’s a bias towards new, for example. Yet, by and large, and maybe with some small exceptions, maybe that’s part of the answer, Netflix has stuck to the sort of release-all-at-once strategy. Do you feel you’ve missed out on not having shows be on that sort of weekly dynamic of people talking about it, people writing about it, which happens to say some of your competitors’ shows? Or are you locked into what you’re going to do and that’s just the way it’s going to be?

GP: There are probably a small handful or two handfuls’ worth of shows that get to that same cultural weight, where the water cooler effect, the every week, the talking about it, the writing about it has relevance and you could reasonably make the case that for one of those, you could extend some subscribers’ membership over extra months because of it. But really, at the end of the day, we hope to do that anyway and we hope to do it anyway for the reasons we just talked about, which is this idea that we’re building more of a sense that every month you’re going to get something amazing to watch.

We want to lean into the pro-consumer side of things and I certainly hear all the time, I hear from my kids, quite frankly all the time when they’re watching a show on a different service where they have to wait week-to-week, what a pain in the butt it is. And so, we want to mostly give our members that kind of experience where they can have, we call a bingeable moment, a satisfying ability to work through a show at the pace that they want to and their control and we think that’s pretty important to the promise that we’ve got.

Ads

Tell me about the ad story. You mentioned it before, that was actually a case maybe of desperation. How did Netflix finally start selling ads? I mean, my perception is you were a big advocate and maybe some past leadership was more opposed. Is that a good read of things?

GP: Yeah, I’d say that there was a strong legacy of an anti-ads position in the company that we were working through and I’m not sure it was a moment of desperation, but once we realized that there was a real opportunity there, and this was coming off of a period in time where the business had accelerated very, very rapidly through COVID and then we went into a period of much slower growth and we’re trying to figure out, “Okay, there’s a bunch of things we need to do to get back onto the path that we want to be on, and ads is one of them.” And as soon as we did that, it was like, “Let’s go super quick.” That urgency and that sort of fire — I was connecting back to your point about, “Let’s not waste the crisis” and we went from basically zero, we never do ads to we had launched this thing in six months.

Yeah, which I thought was remarkable in and of itself, but also very encouraging with regards to Netflix. I mean Netflix is a pretty old company at this point, but to be able to pivot and build something like that so quickly to me was a great sign.

GP: Well, and I’ll tell you partly what I wanted to do with ads was actually to push ourselves to remember how to do that kind of initiative because you alluded to it, you get big, quite frankly, things get more complicated. Every piece of something touches another piece of something and if you really want to dot all the I’s and cross all the T’s, it just takes a long time to do all this stuff. There’s places that that’s really appropriate, because there’s high degree of risk or connection with the consumer experience we want to be careful on. Paid sharing might be a really good example of a much more deliberate kind of approach.

Yeah, very slowly.

GP: But there are places where you’re like, “No, let’s just go super fast. Let’s ignore 90% of the things that actually are probably not going to be super material, at least for the initial launch and we’ll build our way into that.” Ads was an example to try and remember that more startup-y kind of way of moving, organize the initiative on that way and then really deliver on that speed and I’m pretty proud that we did.

How are you thinking about the ad tier going forward and the question of scale? I mean, Amazon, for example is introducing ads in their offering. They’re defaulting everyone in and you have to actually pay to get out of that. Netflix has not done that to date. What’s the long-term payoff? Is it more a matter of you think you can get this ad tier to massive scale or is it that it really just gives you much more latitude to raise prices and increase average revenue in that direction?

GP: Well, first of all, I think what we could do and what Amazon could do are different things, and there’s a variety of reasons. One is the legacy that we’ve had with bringing members along without ads for a long time is part of it. Part of it too is when people come to Netflix, they are coming to us for essentially one thing, which is the entertainment. When they’re going to Amazon, they’re getting a bunch of different stuff.

Right. For most people, Prime Video’s a toss in. It’s not the reason they signed up.

GP: Exactly, so I think they have a lot more latitude to think about what they do with that experience, but we felt strongly that the right thing to do for our members is to lead with the carrot essentially, which is the benefits of the ad experience, making the ad experience as great as we could, and then really having folks realize the benefit of being able to access all this entertainment at a low price. And I would say, again, just think about this, in the United States, $6.99 gets you our entire Netflix entertainment offering. You can barely get a coffee at Starbucks for $6.99 at this point, so that’s a pretty darn good value.

So we thought, “Look, the right way to do is to show people the positives, let them opt in if they are excited about it, and not if they’re not.” We give consumers choice, that’s always been a big part of our values around how we deliver it and we’re growing, again, we want to grow more. I mean, don’t get me wrong, we’ve got higher aspirations on scale, but we’re growing very, very quickly at this point in time. So, I think that’s working for us

So what’s the point of ads? What’s the payoff? For me, the most important thing is thinking about this as extending our range of accessibility for customers, and what I love about it is you can bring this lower consumer-facing price point. It’s got lots of leverage in terms of how different go-to-market channels, how you do bundling, all these kinds of different things.

Yeah, you mentioned that on the earnings call or the letter today, which I thought was very compelling. I mean, one of my points is I think long-term, this is the easy sort of analyst position, is long-term on the Internet, it’s either subscription or it’s free with ads, and you see everyone converging on the same model. I’m sure for lots of reasons, which you should tell me, you can’t quite get to free, but you have so much more latitude with bundling, for example, where it’s maybe de-facto free, but there’s still something along those lines.

GP: That’s right, and I think you can get much closer to that between the lower price and the bundle effect, and so you sort of want to practically approximate that. I think the answer to your question about free/not free might be market-by-market but I do believe under the current model we’re in in the United States, for example, I think we can get to 80%, 85% penetration in the model we’re in and then when you think about the ultimate goal is long-term revenue optimization, going to free probably isn’t the best way to get there. Now, that may not be the case in every country around the world and there’s countries that have very strong free-to-air and/or ad-based entertainment models and it may be that in a Japan or Germany, something along those lines might get you there. But I’d say it’s a complex model to think about the trade-offs between cannibalization on subscription and how do you make all that math work? But that’s the kind of stuff that we do every day and we’ll keep doing.

Was it a coincidence, maybe a happy coincidence or sort of intentional, that the ads programs launched in the same general timeframe as the password crackdown that you talked about? I think when I wrote that Netflix Should Sell Ads, which was very fortunately timed, I was in quarantine, that was my unlucky break being in quarantine, my lucky break was writing this Article. But it felt like having a landing spot for people that were getting kicked off their parents’ plans was super important. Was that all intentional or, again, did it just sort of happen at the same time?

GP: No, I mean there were separate initiatives, but one of the factors for feeling a sense of urgency to get ads quickly was to land these things at roughly the same time because to your point, we’re like, “It’d be great to have a lower price point to land people that are borrowers who maybe aren’t watching as much, maybe see the value hasn’t quite gotten high enough for them yet,” but at that price point and with ads, they’d be like, “Yeah, I’ll sign up for that.”

Should I crack down on email sharing?

GP: I don’t think so, and here’s my rationale for that. I think that folks that have a consistent sense of value from the insights that you bring are going to be a subscriber to you ultimately and I think there’s going to be some amount of lossage, but not much, and I think that actually sharing for you worked probably like sharing for us for a long period of time.

Yeah, huge benefit for sure.

GP: It’s the greatest marketing you’ve got, essentially.

I did want to bring up Drive to Survive. I’ve become a pretty big Formula 1 fan. Although, speaking of quarantine, I actually came at Driver to Survive backwards. I was in quarantine, there was a race on, I had literally nothing better to do, and I’m like, “This is amazing”, and then I went back and watched a bunch of the DTSs. But Drive to Survive’s impact on Formula 1 is pretty well-documented, you referenced it earlier. It’s taken an international sport that was very small in America and made it much larger. What was the effect on Netflix though? I mean, do you feel you ended up giving away so much value to Liberty Media that you wanted to keep it more in the future, or was this just a door opener? How did that change the way you thought about this area?

GP: Well, I would say that Drive to Survive in and of itself is great storytelling for us. So, our members love it and it works for us, and we’re very happy to have it. We say half jokingly, in hindsight that if we knew what Drive to Survive was —

You would’ve acquired Liberty!

GP: Yeah, exactly. That would’ve been the thing to go do, and then we would’ve participated in that upside as well. It’s obviously linked to how we thought about general sports rights, de-leveraging and things like that but it turns out there’s not many of those opportunities to acquire a fully-fledged sport out there. They’re not sitting on the trees for you to pluck.

Yeah, it’s one of those examples where, “How many lessons can you actually learn from this situation?”, because so many things were perfectly placed for it to happen.

GP: That’s right. So I think the biggest lesson we learned is like, “Wow, this is a powerful content category for us, we should do more of them.” You might’ve noticed that we’re doing it in every major sports category that exists, and our members love it. And then, I think with WWE, we’re working to try and figure out, “Okay, how do we step a little bit in that direction and figure out how can we make this more powerful?” And you should fully expect that you’ll get a Drive to Survive-like shoulder content around WWE as well and we hope that that’s massively successful and helps us grow the sport, grow viewership, and everyone will be happy.

I mean, you said even in this interview — “Look, WWE, it’s a storytelling sport, and that makes it sort of unique and sort of a better fit with us”. I would also argue WWE has gone it alone, they were fairly successful, but they realized being part of a larger bundle, having access to a broader audience was important to them. You now bring to the table a worldwide audience, and I think a very valid proposition that look, “Hey, in ten years when this deal is up, you may be massively more valuable because of our investment.” But you add in these other pieces, you’re bringing on an ad component, which everyone knows ads with live sports can make a ton of sense. You’re having this bit about, “Well, evergreen content is good, but people do have a bias towards new.” This question of being in the cultural conversation, is there maybe a little bit of sandbagging about the sports thing? Maybe there is more to come, and if so, has there been a genuine shift there?

GP: I would say that we still see the structural problem of rights de-leveraging in sports, so there’s not any brilliant insight that we’ve come around on that. But having said that, we want to try and understand this better, and I think WWE is a step off of the space that we’ve operated. It’s more in that direction and we’re going to learn a lot from it. Maybe we can sort of figure out, “Hey, can we bring enough value to the situation where we can negotiate really good long-term deals that might make sense?” We’ll see. There’s certainly nothing that we’re going after right now, or even thinking about hard.

But you’ll maybe be more opportunistic than you were in the past?

GP: We try to be learning, and part of that means that when you get new data, you change your opinion and you try and do it without being anchored too much in your historical perspectives. But maybe just at the risk of mis-setting any expectations of any league owners out there around the world, we’re not really actively going after traditional sports.

You have just disappointed so many commissioners, they could really use you as a stalking horse.

GP: (laughing) Definitely.

Gaming

Tell me about games. You mentioned it earlier and you’ve taken a more slow-roll approach. But just back up, give me the big picture, why in the world is Netflix even into games?

GP: Yeah. Let’s go back to the friction-free, perfect strategic world. I would say short-term and long-term rationales there — one is we think that the ability to find players, player acquisition, which is the hugest cost in games right now, that we have the ability to develop over a period of time, just like we do with film and TV series right now. A sense that consumers come to us to find a great game to play, and we can be a very efficient player acquisition, game player connection mechanism, so discovery benefit.

We also feel like by doing this in ways that are connected to the IP that we are serving, we get to make that connection more efficient and we get to take the fandom that we have around the content that we’re doing and deepen it in different ways.

We would then like to over a medium to long-term perspective, start to explore what we think is going to be an iterative convergence, both on the production side of things and also on the enjoyment or play consumption side of things and that’s where some of the creation will be done in a common way, in a digital environment where you’ll be thinking about universe creation, characters, storylines, et cetera, and those might manifest themselves in both the interactive and non-interactive modes. Then ultimately, players are probably going to have a sense of, do they want more interactive? Do they want less interactive? Do they want to express some intentionality about what part of the universe or storyline or characters that they want to explore? Now, I don’t know if that’s 10 years off —

Right, that sounded a little like your animation bet to an extent. And yet to your point, you put gaming as a contrast to that and you mentioned today on the earnings call, most of your success and your focus has been on licensing content that already exists, Grand Theft Auto, for example, has been a big success in that regard.

GP: Yeah, well first on a previous point, I think there’s a big difference in having an aspirational North Star that’s way out there, and then also making sure that your trajectory on finding your way towards that is disciplined and adjusted to the capabilities that you’ve built so far. So, I think I’d draw a distinction there.

Then to your point, yeah, you’re right, we’ve done almost entirely licensing so far, and that’s because it takes time to build games. It literally takes two, three, four years, and sometimes longer and so what you’re seeing is that as we got into the initiative and started to onboard internal capacity to develop those games and then actually kicked off those initiatives, there’s a latency by time when you do that and then when those things show up. So, you start to see the earliest versions of our own internal games deployed this year, in 2024.

We still haven’t really gotten to, though you mentioned the IP stuff and things along those lines, but you mentioned customer acquisition — is that really just at the end of the day on the Internet, that is the challenge, and Netflix has a lot of customers and the natural long-term step is to just increase the bundle and leverage your customer base to other areas?

GP: Look, I think that’s a core premise. I believe that there are places that you can do it where it’s much more natural to do that and there are places that feel much harder to do and I do think that the IP connection, the ability to extend fandom across these things, that’s part of why I think we’ll be successful in doing that versus if we took a completely separate product that might fit the same structural model, but I don’t think we’d be as successful in leveraging that demand aggregation and connection capability.

Well, I guess also I think customer acquisition or churn mitigation — in some respects they are the same thing, but which do you think matters more for this initiative?

GP: Well, we think at the end of the day, those are the two primary metrics that drive the business. At the end of the day, it’s what you need to go do. What I see, this is likely a shift in balance over time. Right now, the majority of the benefit, which is still small just to be clear, on the business from games, is in retention and it’s what you’d expect if you play a bunch of games on Netflix, guess what? You’re more likely to retain next month. Until Grand Theft Auto, we hadn’t seen what I would say as a measurable acquisition benefit. We saw it there, we saw players who came clearly just to play GTA and have that benefit, we’ll see how they retain.

There’s a whole bunch of stuff that you learn over multiple months with these cohorts as they come in. So, there’s tons more to learn. But I would say that we’re mostly going to be in the retention augmentation phase, I think for years to come and then our goal is that at some point in time we’re launching big noisy games just like we do with series and film today and then people join and sign up for Netflix because of that.

Does the business model stay subscription or are there possible opportunities to branch out beyond subscription? I guess now ads, but there’s lots of ways to monetize games.

GP: There are lots of ways to monetize games, and I think we should remain open to understanding that over time, but I think we’ve seen great power in the subscription bundle. It’s pretty amazing to be able to say, “I’m going to make one purchase decision, and then just enjoy and be sort of unfettered in that,” and so that’s our current theory. I’d say before you get to getting creative on other potential forms of monetization and opening up the aperture, you’ve got to have games that actually are driving enough material engagement to make that even relevant.

Bundles and Big Tech

You’re executing the bundle strategy for the Netflix bundle by adding games to it, the variety of content that you have, and I think one of the bits about making your content is you get to create, frankly crappy junk content that just fills time that meets people’s needs for whatever it might be. Is there also a top level customer acquisition angle to a bundle? Would you ever be amenable to being sold with other streaming services or with other folks, or are you pretty insistent on going it alone?

GP: Well, we’re bundled right now with other products: we bundle with Internet, we bundle with mobile, we bundle with pay TV, we bundle with utilities in some countries around the world. So in Japan and Australia, you can literally buy your electricity and you get Netflix with that. So, pay TV is an example — we’re bundled with entertainment in pay TV. Some of our operator bundles are multi-service bundles, so it’s Netflix and somebody else. So, that’s probably pretty adjacent.

Our general approaches on these go-to market kind of things, we’ll do anything that makes sense and at the end of the day, does somebody have the opportunity to get Netflix under a reasonable approach and then do we have the ability to give them an amazing Netflix discovery experience?

You talk about competitors in a whole host of ways, competitors for time, time is the only scarce resource on the Internet, but at the end of the day we mentioned Amazon in passing, they have a different approach to this. You have Google, they’re extending into, YouTube is obviously a monster, and then the YouTube Marketplace. Apple, who knows what they’re doing, but they have a whole bunch of money. Are the tech companies at the end of the day always the biggest looming threat?

GP: Well, they certainly have amazing amounts of capability in terms of cash to spend first and foremost, and then other businesses which they can potentially leverage. So, that makes them formidable competitors for certain, but also, some of those competitors aren’t great at content creation in the content space. I think I should have called you on this when you mentioned it, but you said we can create a bunch of, I don’t know what you said, but it wasn’t very nice about the quality of content.

No, I know it came across wrong, I mean this as a compliment. You mentioned The Wire earlier, right?

GP: Yeah.

It’s very easy to get indexed on prestige TV, what’s talked about. But at the end of the day, if people have their TVs on seven to eight hours a day or whatever it is, there’s a lot of what I call “filler TV”. Again, that sounds derogatory, but there’s massive power and why I think Netflix is well placed is Netflix is there’s the whole debate on set top boxes — who’s going to own Input One? Everyone’s got to own Input One, and I think there’s an aspect where Netflix is Input One for the vast majority of people, and they have Netflix and another service, and a necessary part of that is just having a lot of stuff.

GP: And to be your point, definitely, we call it the first stop on your entertainment journey — we want to be the place where people show up first, so I’d agree with that, but I think it’s roughly consistent with what you’re saying. But those other shows, and you call them filler and there’s certain roles that certain shows play like lean-in roles where you really want to be engaged, and there’s other shows that are more like lean-back shows.

Look, my favorite show in the world is Top Chef. I’m not casting aspersions in any way.

GP: There you go. I think that quality is in the eye of the beholder, and we’ve got to remember that I love The Wire and I’m sure a bunch of elites and other folks love that too, but some other folks, that’s just not a great show for them and they watch other stuff.

But the reason you reminded me of that was when you get to Amazon, they spent a lot of money on content, and I think it’s been their lack of capability in the space has been clear, and so I think when they’re moving more into sports and things like that, I think it’s actually a smart move for them because it de-risks the creative execution component of things. You talked about marketing versus what role is the content playing? I think for them it’s much more marketing really at the end of the day, and so that’s a smart move for them.

YouTube is a different beast entirely, although I’ll note that it plays a different role in the consumer’s mind and I often think that there’s four things you got to put together and they all have to work together — it’s the content class and the content that works for certain members, it’s the actual user experience that’s right for that content to make that connection happen, it’s a business model that fits around it and is appropriate for that and maximizes the value of that, and it’s a brand which tells consumers around the world that that’s what you go do. YouTube has done that, and has done it incredibly well, but in a totally different space. That’s why when they do Cobra Kai, it doesn’t work for them, and then we pick it up, and it’s a hit.

You mentioned the entertainment capability, and you’ve had this co-CEO approach for a while, is that just a very explicit manifestation of that reality? You need the tech folks in Los Gatos, you need the entertainment folks in Hollywood. Is that the way it needs to be organized?

GP: I think “needs to be” would be a strong way to say it, but I would say that the complexity of the business that we run — and if you’ll allow me for a second, if we step back and think about this, we have got to be good at content production, not in Hollywood that you mentioned, not just in Hollywood, but we have to do it thirty, forty countries around the world simultaneously, all these different languages with all these different creative communities that operate in different ways, and we have to be connected to them. We have to know how to market that content to folks in different countries and virtual tribes of people that love that content around the world. We have to be able to have product experiences which do that well across these countries, payments that operate in all these different countries, partnerships, customer care, and that’s a massive range of activities that really have never been assembled in one company before.

Everyone trying to ramp up a streaming services is learning this the hard way.

GP: Exactly. So does it need to be a co-CEO model? I don’t think it needs to be, but I think it’s fair to say that there’s not really a career path that assembles deep expertise in all of those different things. What we really find is that what works in the co-CEO model for us is that there’s these two very deep, very important centers of expertise, and we get to have a CEO who’s hopefully, I’ll say with a little bit of humility, good at both of those. And that’s a powerful position to be in.

There was one CEO for a long time, Reed Hastings, and tremendously visionary. It’s one of those things you can look backwards, the Steve Jobs quote and see all the paths that led here. I think Reed was saying the path that he was walking down ahead of time and executed that to a great extent. What are some of the biggest lessons you learned from him, beyond the obvious things like, “Streaming is going to take over TV,” just working with him for fifteen years?

GP: Yeah, I would say some of my biggest takeaways and ones that when I look at my previous career and say, “Oh, this is why this didn’t go as well as I would’ve hoped or whatever”. One is just focus, and we talked earlier about, what kind of company are we? Are we the shotgun stuff out there and see what sticks, or where we’re at, which is be very thoughtful and determined about what strategic extensions you do.

Right. To our point about the operational stuff, what is fun for me about Netflix is it feels like a deeply strategic company.

GP: I think of it as that for sure, and Reed really instilled that value in that sense that you want to be very considerate about what you go do, you want to only go do the things that really will lead to a gigantic revenue and profit pool. We have this thing we call the lemonade stand in front of the gold mine, which is don’t get distracted building lemonade stands in front of the gold mine — you want to find the gold mines and that’s what you really want to work on. So that discipline, that focus, I think is important.

The other one that really I take away with me is probably the under-recognized benefits of being extremely disciplined about having top talent in all your positions and this goes a little bit back to that strategic mindset versus what it looks like in practical operations, and having great people everywhere just means you can get tons of stuff done.

Well, we will have to assume, I’ll say it for you, you seem to be a great person for the job, but I would say that to anyone that comes in and does an interview with me. Greg Peters, it was great to talk to you, and now that we’ve covered all the background, I would love to have you on some time to see more where you’re going. It feels like this is the year. Last year I wrote about basically streaming and AI, as it felt like it’s all coming to the final resolution.

GP: Yeah, and as is always the case, there’s always going to be something more past this, so I think there’ll be exciting things to talk about, but this will be a fun year for sure. Appreciate you having me, and I’d be happy to come back anytime you want.

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