Season 3, Episode 9 Netflix (Part 2)

In season three, episode nine of Acquired, hosts Ben Gilbert and David Rosenthal, delve into the transformative journey of Netflix from a DVD mailing service to a streaming giant and content creator. They discuss Netflix's early foresight in the DVD player market, its staggering 15% share of global Internet traffic, and its innovative use of compression technology. The episode also covers the launch of the Acquired Limited Partner program, the success of spin-off Roku, the strategic shift towards original content, and the financial strategies that fueled Netflix's global expansion. Despite past missteps like the Quickster debacle, Netflix's data-driven approach to content and subscriber growth, along with its evergreen focus on series rather than live shows, has positioned it as a dominant force in the streaming industry.

• Ben Gilbert and David Rosenthal host the technology-focused podcast Acquired.
• The episode is a continuation of their Netflix coverage, focusing on the streaming era and original content.
• Netflix, originally a DVD mailing service, now accounts for a significant portion of internet traffic.
• The podcast has launched the Acquired Limited Partner Program.

"Welcome to season three, episode nine of acquired, the show about technology, acquisitions and ipos. I'm Ben Gilbert. I'm David Rosenthal and we are your hosts."

This quote introduces the hosts and the podcast, setting up the episode's focus on Netflix's evolution and impact on internet traffic.

"Now, if you remember, the last episode we did covered the dvd saga of Netflix and where we left our heroes in 2009, shortly before the epic launch of Quickster."

This quote recaps the previous episode's content, which covered Netflix's DVD era and sets the stage for discussing the streaming era.

"Today we're going to dive in on the era of streaming and later original content."

The quote indicates the episode's focus on the transformative period of Netflix's business model shift from DVDs to streaming and original content creation.

"This company now accounts for 15% of all Internet traffic."

The quote highlights Netflix's significant share of internet traffic, illustrating the company's growth and influence.

"We announced on the last episode that we had formally launched the acquired limited partner program."

This quote informs listeners about the podcast's new membership program, which offers additional content and engagement opportunities.

• Netflix transitioned from a DVD mailing startup to a dominant force in internet traffic.
• The company was an early adopter of DVD technology and anticipated the format's popularity.
• Streaming movies and TV shows comprise the majority of downstream internet traffic, with Netflix as the leading service.
• Netflix's streaming service uses advanced compression and optimization technology.
• The episode contrasts Netflix's initial struggle for customers with its current global reach.

"So as you remember, they were once a plucky startup mailing dvds to customers... They were waiting for the dvd wave to crest."

This quote describes Netflix's early strategy of mailing DVDs and anticipating the rise of DVD player ownership.

"Streaming movies and tv as a category actually now makes up 58% of downstream Internet traffic."

The quote provides a statistic on the prevalence of streaming content in internet usage, emphasizing the industry's growth.

"No single service accounts for more of that bandwidth than Netflix does."

The quote establishes Netflix as the largest single contributor to internet traffic among streaming services.

• The podcast has seen a positive response to the Acquired Limited Partner Program.
• Listeners can access bonus content and participate in Q&A sessions.
• The program featured Dan Hill, who shared insights from his experience growing Airbnb.

"We've been just totally floored by how many of you have joined our lp community and are listening to the bonus show and are sending us really great questions for doing Q A on the show."

This quote expresses the hosts' gratitude for the enthusiastic response to their membership program and listener engagement.

"Anyway, listeners, if you want to hear Dan talk about why Airbnb was successful... you can click the link in the show notes to support the show for $5 a month."

The quote provides information on how listeners can join the program and what content they can expect, such as insights from successful industry figures like Dan Hill.

• Pilot, an accounting firm, is a sponsor and partner of Acquired.
• Pilot provides comprehensive financial services for startups and growth companies.
• The company's success story mirrors that of Netflix, starting as a startup and becoming a significant player in its industry.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds."

This quote introduces Pilot as a sponsor and highlights its relevance to the startup and technology focus of the podcast.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact now is the largest startup focused accounting firm in the US."

The quote details the services offered by Pilot and its position as a leading accounting firm for startups, underscoring the importance of specialized financial services for growing businesses.

• The podcast addresses corrections from the previous episode, including clarifying that "The Good Place" is an NBC show, not a Netflix original.
• Blockbuster's DVD business model and pricing are corrected based on listener feedback.
• Redbox's profitability and business model are highlighted, with unique strategies such as purchasing Disney DVDs for their kiosks discussed.

"The first one is actually on my carve out from last week where I mentioned that the good Place was a Netflix show. That is a classic millennial mistake."

This quote acknowledges a mistake from a previous episode, correcting the misattribution of "The Good Place" to Netflix.

"It's difficult, actually, to track down the exact number... But it's somewhere between $50 and $100 that they actually had to pay for every dvd."

The quote addresses a correction regarding the cost Blockbuster incurred for DVDs, adding clarity to the discussion on business models.

"So Red Box, as you know from the last episode, was actually originally a project at Netflix that an executive quit to go and work on full time."

The quote reveals the origin of Redbox as a Netflix project, contributing to the narrative of industry competition and innovation.

• Netflix initially planned to launch its own streaming hardware but pivoted to focus on partnerships with existing device manufacturers.
• Anthony Wood, hired by Netflix, led the development of the Netflix box, which was spun off as Roku, now a successful independent company.
• Netflix's management made strategic decisions to avoid competing with consumer electronics manufacturers and to foster partnerships.

"We have a little bit of follow up from the last episode. We have some awesome listeners that wrote us in about Netflix part one."

This quote sets up the segment addressing feedback and corrections from listeners, demonstrating the podcast's interactive nature.

"So in 2007, they make a pretty key hire onto the team. They hire a man named Anthony Wood."

The quote introduces Anthony Wood as a pivotal figure in Netflix's foray into streaming hardware, leading to the creation of Roku.

"Well, they talk it over. They decide, okay, they spin the company out, and they name it. Roku actually was a name."

This quote explains the decision to spin off the streaming hardware project as Roku, which became a significant player in the streaming device market.

• The episode transitions from the introduction and corrections to the main content.
• The hosts prepare to delve deeper into Netflix's history and the streaming landscape.

"All right, now onto the show."

This quote signifies the end of the introductory segment and the beginning of the main discussion on Netflix's streaming era.

• Media contracts often include forward-looking rights, such as VR, which may be underestimated at the time.
• The value of these rights can become significant if the associated technology becomes popular.

"Since you don't know what the next frontier is going to be, sometimes people can sort of slip it into the contracts."

This quote highlights the uncertain nature of media rights in contracts and how sometimes underestimated rights can be included that later become valuable.

• In 2008, Netflix secured streaming access to NBC Universal content, including Saturday Night Live.
• Streaming the content the day after its airing led to instant product-market fit.
• This deal drove significant subscriber growth for Netflix, even during the recession.
• The shift from scheduled TV viewing to on-demand streaming provided a strong customer value proposition.

"This is like instant product market fit. So everybody who has any inkling of watching video on a computer or mobile devices... They just go nuts."

This quote emphasizes the immediate success and market fit of Netflix's streaming service, which resonated with consumers' desire for on-demand content.

• Netflix's "instant watch" or "watch now" feature was initially only available on Windows.
• The service required the use of Microsoft Silverlight and was limited to one browser.
• Setting up the video for streaming was cumbersome and time-consuming.

"It only worked on Windows because they hadn't gotten around to building the sort of Mac client for it yet."

This quote explains the technical limitations of Netflix's early streaming service, highlighting its initial exclusivity to Windows users.

• By 2010, Netflix accounted for 20% of all US Internet traffic.
• The company realized the importance of securing content and set up a content acquisition department.
• Netflix signed a significant deal with Epix, gaining access to content from Paramount, Lionsgate, and MGM.

"Netflix is just. They've beaten blockbuster at this point... They sign an 800 million dollar deal, five year deal with Epix."

This quote illustrates Netflix's dominance in the streaming market and their aggressive investment in content acquisition.

• There has been significant consolidation in the media industry.
• Content production companies are tied to cable companies, creating a conflict with the rise of streaming services.
• Cord-cutting became more prevalent as consumers found value in streaming services during the recession.

"Content and distribution are all within the same house, if not directly, then at least they're in bed together."

This quote captures the intertwined relationship between content production and distribution within the media industry.

• Cable companies, which also provide broadband, became protective against Netflix.
• Netflix experienced throttling from ISPs, prompting them to create Fast.com to help users gauge their actual Internet speeds.
• Reed Hastings, CEO of Netflix, lobbied for net neutrality through a political action committee, Flixpac.

"Reed Hastings is like, I can play politics. I know how this works."

This quote shows how Netflix's CEO took political action to address the challenges posed by ISPs and advocate for net neutrality.

• In 2011, Netflix began its international expansion, starting with Canada and then Latin America.
• The company invested in technology, developing the Chaos Monkey to ensure system resilience.

"Now, international is a bigger business for Netflix than their us business."

This quote indicates the success of Netflix's international expansion and its impact on the company's growth.

• Netflix attempted to spin off its DVD rental service into Quickster, which was poorly received.
• The announcement and the subsequent video explaining the decision were heavily criticized.
• Quickster was canceled within a month, and the DVD rental service remained part of Netflix.

"They're going to make a video and they're going to post it on YouTube and it'll go viral and everybody will understand the vision."

This quote shows the misguided strategy behind the Quickster announcement, which ultimately backfired.

• Netflix's pricing changes and the Quickster debacle led to a loss of subscribers and a plummeting stock price.
• Amazon entered the streaming market with Amazon Instant Video, increasing competition.
• Netflix faced challenges in 2012 with missed subscriber targets and a weakened stock.

"The stock price takes a beating... People felt betrayed."

This quote reflects the negative impact of Netflix's decisions on its relationship with customers and its financial performance.

• Netflix produced its first show, "Lilyhammer," in 2012, marking its initial foray into original content production.
• "Lilyhammer" was seen as a "Sopranos clone" and did not achieve significant success.
• Despite its lack of success, "Lilyhammer" was a sign of Netflix's future direction in content creation.

"Netflix produced their very first show called Lily Hammer." "Which was a Sopranos clone. I don't think it does very. I've never seen it."

The quote indicates the beginning of Netflix's venture into original content with "Lilyhammer," which was not particularly successful but was an important step for the company's future strategy.

• By the end of 2012, investor Carl Icahn acquired a 10% equity stake in Netflix.
• Icahn's involvement was based on the belief that Netflix had strategic value and should sell itself to a media or tech company.
• Icahn held his stake until 2015, making a significant profit, though he missed out on further gains due to his early exit.
• Icahn's investment came at a time when Netflix's stock price was languishing.

"Carl Icahn, who comes in to the stock price, is languishing by the end of 2012, who returns but acquired Superville, and he's like, barry McCarthy is gone. Great." "He announces that he has accumulated a 10% equity stake in Netflix on the public markets."

The quotes highlight Carl Icahn's investment in Netflix during a period of low stock prices, his belief in the company's potential, and his eventual profitable exit.

• Netflix discovered two key trends in user behavior: binge-watching and preference for TV shows over films.
• The data showed that users preferred to watch multiple episodes in one sitting rather than waiting for weekly episodes.
• This realization led Netflix to focus on long-form, episodic content, which was contrary to the industry's traditional model of appointment viewing.

"They realize, they start seeing the data for how people are streaming. They're doing two things that were not obvious." "The content that really works in streaming is television shows, not films."

These quotes underscore Netflix's insights into consumer behavior, which informed their strategy to focus on producing and acquiring TV series that catered to binge-watching habits.

• Netflix's content strategy was further solidified with the success of "House of Cards" in 2013.
• The company invested heavily in the series, committing $100 million for the first two seasons despite having limited cash on hand.
• "House of Cards" was a cultural moment that increased subscriptions and validated Netflix's original content strategy.
• Netflix's data-driven approach informed casting decisions and the decision to release all episodes at once.

"They debut in early 2013, is their first real big swing at content, House of Cards." "They make a ton of money. A ton of money."

The quotes reflect Netflix's strategic bet on "House of Cards" as a major content initiative that paid off by attracting subscribers and setting a precedent for future content investments.

• Netflix surpassed 50 million global subscribers in 2014 and launched in 150 countries in 2016.
• The company's focus on original content led to the production of 126 original films and TV shows in 2016.
• Netflix implemented a strategy of using debt to finance content acquisition and production, leveraging predictable subscription-based cash flows.
• By October 2018, Netflix had nearly 60 million US subscribers and 137 million worldwide, with a market cap surpassing $100 billion.

"They passed 50 million global subscribers. 36 million in the US, 14 million internationally." "They now have just under 60 million us subscribers."

These quotes document Netflix's rapid subscriber growth and international expansion, illustrating the company's trajectory to becoming a dominant force in the streaming industry.

• Netflix's small employee count relative to its market cap suggests a streamlined product offering and reliance on contract-based staffing for productions.
• The company's ability to raise debt for content investment is a testament to the strength of its subscription business model.
• Netflix's focus on data-driven decisions, experimentation, and feature management has been crucial to its product development and success.

"They only had 5500 employees." "You can just slowly buy and buy and buy and buy, and then you don't want to announce that you're buying because it'll move the stock price."

The quotes highlight Netflix's operational efficiency and strategic financial moves, which have allowed the company to scale rapidly and maintain a competitive edge in the market.

• Netflix has transitioned from a complex company with many branded elements to a simplified, focused service.
• The company has cut various features over time, including DVDs, set-top boxes, and social features.
• Netflix's strategy aligns with Steve Jobs' approach to Apple, focusing on core products with a strong value proposition.

"Netflix never really changed leaderships, but sort of spiritually, they had this moment where the public now knew what they did and they could sort of drop all of the posturing and all of the education and just be, we deliver this thing that has an incredible value prop and perfect product market fit, and that's all we do."

This quote underscores Netflix's strategic pivot towards simplification and focus on their core streaming service, which occurred once the public became familiar with their offerings.

• Amazon's entry into streaming with Prime Video initially caused concern but ended up benefiting both Amazon and Netflix.
• The streaming market is growing rapidly, displacing traditional cable and allowing both services to coexist and thrive.
• Exclusive content on each platform encourages consumers to subscribe to both services.

"Amazon launching even like an essentially free version of Netflix is just helping Netflix grow right now, I think. And likewise, Netflix is just helping Amazon video grow because they're each adding their own exclusive content."

The quote highlights the symbiotic relationship between Amazon Prime Video and Netflix, with both platforms growing together by offering unique, exclusive content.

• There is speculation about the onset of subscription fatigue among consumers due to the increasing number of streaming services.
• Consumers have a comfort number for how many subscriptions they are willing to maintain.
• It remains to be seen how the market will respond to this potential issue.

"We're going to hit, people have been forecasting this, but it hasn't seemed to happen yet. Hit subscription fatigue where it's like, look, I'm not going to do my HBO now and Netflix and Amazon and Disney effing plus, I think we'll have to see."

This quote addresses the concern that consumers may eventually become overwhelmed by the number of available streaming subscriptions, although this has not yet been a significant issue.

• Netflix's business model benefits from low marginal costs after high initial content creation or licensing costs.
• The company's strategy involves creating a broad set of shows for a wide audience to maximize utilization of content.
• Netflix's approach contrasts with HBO's strategy of targeting narrower audiences with highly produced content.

"Netflix licenses all of this content upfront or creates it, so they don't even have any licensing fee. They just sort of create it and take all the risk or spend to create all that risk. So then all the marginal revenue goes to them."

This quote explains Netflix's business model, where they bear the upfront costs of content creation or licensing, leading to high initial expenses but low ongoing costs, allowing them to reap the benefits of their large subscriber base.

• Netflix's content strategy involves producing both hit shows and niche content, balancing broad appeal with targeted offerings.
• Subscriber growth is often driven by hit shows, while a rich catalog of niche content helps retain a diverse subscriber base.
• Netflix's strategy avoids sports and live content in favor of evergreen content that remains valuable over time.

"The thing that drives new subscriber growth for them is hit shows. So when they have a quarter that tons and tons and tons of people come and sign up for Netflix, it's because they have an orange is the new black that draws in all the people."

This quote emphasizes the importance of hit shows in driving new subscriber growth for Netflix, which is a key component of their content strategy.

• Netflix's business model creates a virtuous cycle: more content leads to more subscribers, which in turn allows for more content creation.
• The company's structure enables it to scale successfully, with the product improving as the subscriber base grows.
• This model contrasts with other businesses where customer acquisition costs typically increase over time.

"The more capital that they amass, either through debt or equity or earnings, the more content they can license or produce, which then makes the product better for users."

This quote describes the flywheel effect in Netflix's business, where increased capital allows for more content, improving the product and attracting more users, which fuels further growth.

• Netflix has consistently grown its subscriber base by approximately 30% year over year.
• The company strategically balances marketing spend and content investment to achieve its growth targets.
• Netflix's data-driven approach allows it to adjust its strategy based on the performance of its content and market conditions.

"Netflix has grown its subscriber base by 30% year over year, give or take like 1%. Basically every year they're growing 30%."

This quote highlights Netflix's consistent subscriber growth rate, which is a result of their calculated approach to marketing and content spending.

• Despite being grouped with larger tech companies (FANG stocks), Netflix's revenue and growth are relatively smaller.
• Subscription-based businesses like Netflix offer stability and predictability in revenue, which can impact valuation compared to other business models.

"I also assumed before really diving in and looking at market caps, that they were much bigger than they are because people talk about them as a fang stock."

The quote reflects a common misperception of Netflix's size relative to other major tech companies, despite its inclusion in the FANG group.