Reed Hastings on Disney+ vs. HBO Max, streamer bundles, and why drug companies are a threat

Published Wed, Sep 9 20201:27 PM EDTUpdated Wed, Sep 9 20202:09 PM EDT

Alex Sherman @in/alex-sherman @sherman4949

Key Points

Netflix CEO Reed Hastings explains why his aversion to working from home could ultimately be a boon for finding talent for Netflix.
Hastings explains why Netflix isn't a media company or a technology company.
Hastings says Netflix's biggest long-term threats are substitutions to movies and TV series, such as augmented reality or drugs offered by pharmaceutical companies.

A View from the Top is a Q & A series exclusively available on CNBC Pro . Alex Sherman will regularly speak with a business leader about decision-making, investing and industry news. Reed Hastings, Netflix's co-founder and co-CEO, is a scholar of business strategy. He's decided to pass along his unique views on business culture in his new book, "No Rules Rules," co-written with business professor Erin Meyer. Hastings used to bring Netflix employees together to discuss "The Innovator's Dilemma," the 1997 business strategy book by Harvard Business School professor Clayton Christensen. Now, he hopes his own book will be used by future executives as a foundational discussion starter. Hastings explains why Netflix thinks of itself more like a sports team than a family and shares his thoughts on bundling, HBO Max, TikTok, retirement and much more. Here's the full Q & A: (This interview has been lightly edited for length and clarity.) Alex Sherman, CNBC: One question I have for you right off the top relates to the pandemic. During the quarantines, you must have employees who are working with four kids at home, some who have maybe a sick relative or whatever may be going on. And then you've got others who are single and they have no distractions. In that analogy you use in your book about how Netflix is a sports team and not a family — have you had to relax that to some degree during the pandemic because the rules are no longer the same for everybody? Well, we never judged people before by the short term, by what they did last week anyway. So back to your sports team analogy — if a bunch of the players catch the flu and they're not very good for a couple of weeks, you don't really factor that in because you know they're going to get better. We know Covid is going to be over. So we really try to think about it as in the long term and not factor in those short term stresses as as you mentioned, so that even that goes beyond the pandemic. I remember there was that one line in there about how there was a woman who was giving a presentation, and she only had 4.5 hours of sleep that day based on her Fitbit that day. And I'm thinking to myself, I have a three month old. I get four hours and 30 minutes of sleep every day, and I have for the past three months. But there's an understanding there with my bosses. They know that. And so are you saying that's factored in with all these culture rules at Netflix? And again, and it's consistent with that pro athlete model, too — if you're long term about the relationships, and we are, you bridge people through things like having kids and other things, and you try to look at your guess of the underlying performance over the next couple of years. That's how you get people to commit, to be willing to invest. You talk at length about how important transparency is. But I know content creators have long complained to me and others about how they feel Netflix is particularly opaque about letting them know how many people are watching their shows, who was watching, etc. How do you square that? You know, we're doing a better job nowadays of sharing all of the data for their show with them. So I think if you check in with them now, you'd see that. But the culture we're describing is really the 8,000 employees, where we share all the data of all the shows. We're very broad. But that is unique to within the envelope of the Netflix corporate employees. I saw that in your Wall Street Journal interview, you said that there you saw no positives in working from home. But you also talk about how important work life balance is in the book to your overall production. So I'm curious, don't you think that eliminating commute times and allowing parents to pick up their kids from school or do a load of laundry, isn't that ultimately a huge plus? I've worked from home my whole life on nights and weekends. So I'm not against working from home. The real question is, what about a pure virtual life where you never have in-person meetings? And that, I don't think is very effective. So your answer was more in reference to working completely virtual? Correct. I mean, again, working from home, I've done now every night and a lot of weekends. That's fine and fluid as opposed to the office. The real question is, it's the question of, well, can you live in Wyoming, you know, and do your job for the next five years? That's that dream. But except for some specialty functions, that's pretty hard. Is it possible, though, that if other companies that compete with you are offering more flexible work-from-home plans than Netflix, that maybe you're no longer able to get the best of the best? Well, if you take that some in-person interaction is really important, I think that would help us because we'd have more of the people who want other human interaction. If you don't think human in-person interaction is important, you're right. But in my experience, it's...you don't have to have in-person interaction 40 hours a week. So I think we may see some evolution there as I talked about in the Wall Street Journal article. If I could easily see that there's four days a week that we have meetings, the rest of the time, it's more flexible. You talk about high talent density in the book, and a lot of that is based on making the right hiring decisions. I think the example in the book was about a software developer, where quantitatively, it was fairly easy to tell that this person is much better than everybody else and therefore we should pay them a lot more. How do you do this with other jobs in the organization that have softer skills or traits where it's harder to tell who is the best? You have to use judgment. And again, there is some quantitative, in which shows get commissioned and how popular they are. That forms an information point on marketing campaigns because the best marketers are vastly better than the typical marketers. So that principle is general. Think about H.R. and hiring. But ultimately, you're right, there's no purely objective lens. This is really about leadership judgment. Again, not to overuse the sports analogy, but just like it is for the coach — they're influenced by the data, but then there's a lot of other factors that they use in trying to assemble a championship team. To some degree, there's a leap of faith that's going on here, though, right? Like you're putting a lot of faith in the people that are ultimately having the ability to hire and fire where you're saying, well, we trust you to sort of be the best here and we're going to cross our fingers that the whole system doesn't really fall apart because we've made a wrong decision up top. Well, and sometimes, like we talk about the Qwikster episode where I made a terrible decision 10 years ago and a stock went down 75%. I mean, it was really pretty catastrophic. So that can happen. And then what we put in place is this model of farming for dissent where we're really active and getting opposing ideas. Is there a lot of arguing that happens at Netflix? Yeah, I mean, we call it a discussion, but, you know, we want to get out all the different viewpoints and we try not to talk over each other. We try not to yell. We try to really listen and be thoughtful and tease out each other's arguments. So more like Supreme Court justices than, say, prosecutor defense, where they're taking multiple sides of the issues. You guys have successfully disrupted DVDs and then the traditional cable bundle. In many ways, Netflix is held up as sort of the gold standard of disruption. I'm curious, in your mind, what do you feel is next to be disrupted? You know, it's always hard to tell in advance. We talked about TikTok and YouTube and gaming, and then, does augmented reality do stuff? Eventually, do pharmaceutical companies provide products that provide a substitute to entertainment today? There's lots of things that could make movies and TV shows seem relatively elite and exotic, kind of like the opera is today. The big threats are what ultimately are the substitution threats to movies and series. You mentioned TikTok, there's a lot going on with TikTok right now, obviously. There was a report Netflix was approached to gauge your interest in being a potential buyer of the U.S. business. Were you at all interested in TikTok? Is that a unique asset that has suddenly come to market at a unique time? I'm a great fan of TikTok as a person, as a consumer. You know, when I have a few minutes, it's just so light and friendly. But it'll be fascinating to see what the lessons are out of this very challenging time in US-China relations. I'm not privy to any of the discussions to know what's happening. But it just shows there's room for innovation. I mean, here's a company that was nothing a couple of years ago that now is the leader in short form entertainment, along with YouTube. But there was no there was no real interest from Netflix's standpoint about getting in on part of one of these acquisition bids? We're focused on on series and films. We don't do advertising. We're mostly TV-centric. That's the heart of what we do. I've heard you glowingly praise the amazing job Disney has done with Disney+. I haven't really heard you speak too much about what your thoughts are on what Warner is doing with HBO Max. Well, depending on the exact numbers, they, I think they've got three or four million, you know, HBO Now subscribers, and Disney got up to 60 million. [Editor's note: Hastings meant to say HBO Max. HBO Now is HBO's digital product] . So that's a pretty big difference in performance, right? What about their general strategy? Do you agree with it? Yeah, I mean, they're doing the right things of focusing on HBO, and they're super talented. But are they really focusing on HBO? It seems like they're sort of not focusing on HBO. They named the service HBO Now. [HBO Max]. So, it's hard to tell. But ultimately, they'll do great content. Disney will too. And it's up to us to do even better content. And we definitely want to win. We want to do better content than them, we want to have a better UI, we want consumers to choose us more often. And that's the same as they want against us. So it's through that competition that we all produce great entertainment for consumers. We're starting to see the formation of these new bundles. CBS All Access is bundling with Apple TV+. And you've got Disney bundling Disney Plus with Hulu and ESPN Plus. How far away is Netflix from joining a bundle? I don't see a big push to do that. It might be fine to experiment with that in some countries, but it's not a big area for us. Our real focus is on how do we improve our service as opposed to work on that kind of commercial specifics. I mean, we bundle today in some cases with cable companies, where we're part of the offering. I know we mentioned that briefly, but you guys have never really done an acquisition of significance. Is it only a matter of time before you buy a large studio to gain more content? Or, we never do. I mean, we just hire great people from the studios, which is the subject of the Fox-Disney lawsuits . And so, our belief is employees should be free, like sports, and that we should be able to recruit them away and they get recruited away from us. And in that way, the employees do really well and the consumers do well. You mentioned this concept that Disney will do great things and HBO will do great, sort of this idea that there will be enough content to go around for everybody, but Netflix will just do better. Why do you think that? In other words, will there ultimately be a supply limit on great content, or is the answer to that, look, the content actually doesn't even need to be that great and people will watch anyway? The content does need to be great if a consumer has different options, because then they'll watch the one that they find most exciting, which is why we're so excited about, say, the " Three Body Problem " that Benioff and Weiss are creating for us — some of these really big, fabulous shows we have. "The Crown," season 4. "The Umbrella Academy" has been a big success, but you really live for doing this content that a lot of people watch and talk about. I don't know all the viewing numbers from Netflix, but is there a correlation between that type of quality content that you just mentioned and eyeballs? Because you obviously offer a lot of stuff that I would not consider to be quality that is clearly watched a lot. Well, clearly, everyone has a unique definition of quality. So if you mean what wins Emmy Awards, which might be your taste, yeah, that's one specific view on quality. But another one is shows that are highly relevant to me that I laugh a lot, I get to relax in. People have different notions of what's satisfying to them. And so we have a very broad range of programming, and we're proud of all of it — whether it's elite programming that tends to be award-oriented or non-elite and and tends to be just very fun. But is there a correlation between the award winning stuff and eyeballs? Not positive correlation. Right. And yet it still ends up being something that's super important to you guys. We have many groups of people, and even elite people will also watch "Tiger King", and they'll watch our co-production with ESPN, "The Last Dance," with Michael Jordan, and they'll watch, "The Crown," which is super prestige. So people watch a wide variety. The award focus is really for our talent. It makes a big difference for them. But for consumers, there's not much following the recognition of those awards. You mentioned, I think in the Variety interview that there may come a time where you'd consider sports and video games for the service. What would be the catalyst that would make you decide, OK, now is the time to do that? Well, there are potential substitutes like we talk about with TikTok, YouTube, sports, augmented reality. Think of all the things that you do to relax that are not movies and series. We know how to compete well in movies and series. And that's our main focus. In those other areas, we don't have any real theory of how to be competitive, and there's still big competition. There's nothing we can do about it except to do the very best films, the very best series we can. But there may a time that you would consider doing that...So what would be that the decision point where you — in other words, is there sort of is there is there a steady state here? Is there an end game on growth where you basically say, OK, we've hit sort of the number of people we can hit at this point, we need to do something else? Well, someday there may be, but for the next couple of years, we're really focused on every incremental billion Ted has earmarked already. He's incredibly ambitious about the films that we're doing and the series we're doing. And when you look at the budgets and then the breadth around the world, it's pretty incredible. I had this debate on Twitter. So I want to ask you, is Netflix a media company or a tech company? Netflix is an entertainment company. Media tends to involve advertising. You've got that three-party system. Tech, I mean, we're tech powered, but we're not really like Microsoft, that's in multiple areas of tech, or Google. We're a single application, a single service. It's all about entertainment. We have more employees in Hollywood than we do in Silicon Valley. Two thirds of our spending is on content. So we're really an entertainment company. We've seen the traditional entertainment companies become more and more like you over the past couple years, or they're trying. I remember I wrote a story a couple of years ago where I spoke with David Wells and he told me that this idea that all the traditional companies would try to become Netflix is flawed, because there's simply too many of them and they can't all be Netflix. Is there any way that, let's say other than Disney, the traditional guys can sort of figure out how to compete with you? Yeah. All it takes is focus and commitment. Let's look at Warner. They did not put "Tenet" on the HBO Max service, but Disney did put "Mulan" on it. So you'd say Disney's incrementally more committed to their service than Warner. So it's a matter of degree. I'm sure they have good reasons in those cases. We'll see. I think you'll also see continued combinations of the existing players, just like you saw with Fox and Disney coming together. Typically you bulk up to take on the other guys. You've written a book now and you just named Ted Sarandos co-CEO. These are signs that you're preparing to retire, right? That's what CEOs often do before they retire. They release a book they name a successor. You've said you plan on sticking around for the next decade. But are you going to start to sort of slowly walk away? Well, I said I would be around for at least the next decade. There's nothing I'd rather do.I jump up in the morning and read the metrics from the last day. It's incredibly exciting and fun. And we are broadening the management team with Ted as his co-CEO. But I'm as involved from a psychic perspective, from an hour's perspective, as much as I ever have been. Not as much from a travel perspective because of Covid, but up until Covid, I was a total road warrior and I look forward to getting back to that. Was the idea to name Ted co-CEO now to just sort of be very clear about what the eventual succession plan is here? Well, we've been acting as co-CEOs for a number of years. We've worked together for more than 20 years. But by naming him co-CEO, it's a little more stature externally for doing deals like Prince Harry and Meghan and others. So it helps him do more for Netflix. It's really no change internally. Do you see an eventual melding of user generated content and what Netflix is doing? Are those two different things going to come together more and more as one? It depends. What you could see is on YouTube, you could see more and more semipro content as it can be monetized by their enormous audience. And at least in theory, that could grow into being ABC, an ad-supported network of premium content. Now, they haven't pulled that off yet, but that's definitely a competitive path that could happen over time. My kids love the choose your own adventure stuff that you guys have put in. Are there other specific ways that Netflix can use its data to come up with other innovations that we haven't seen yet that you guys are working on now? You really have to use your intuition on that. That was an intuition that there would be a set of people that loved interacting with the story and playing with it. And then to have " Bandersnatch " be the initial launch was just such a great match for us. And now we're expanding its use out to kids, into all different contexts, and we'll figure out the edges of where that is a new storytelling format in the multipath stories.