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Yahoo Finance’s Alexandra Canal sits down with Netflix Co-Founder Marc Randolph to discuss his book ‘That Will Never Work’, Netflix’s longevity, the company’s move towards ads, and their crackdown on password sharing.
ALEXANDRA CANAL: I am joined now by Marc Randolph. He's the co-founder of Netflix and author of the best-selling book, "That Will Never Work." Marc, thank you so much for joining me today. There's so much to talk about with Netflix, with this company. We saw the company lose 200,000 subscribers in its last earnings report. You talk about in the book several points where you had to pivot the Netflix business model. We seem to be at that inflection point today. How can Netflix pivot once again in this challenging, competitive environment? Where does the focus need to shift?
MARC RANDOLPH: Well, Allie, thanks for having me. But one of the reasons that I wrote "That Will Never Work" was because I wanted people to understand what was really at the heart of Netflix. Because to understand a company, you kind of have to go back to its roots and understand how it thinks. And Netflix has always been a company willing to do whatever it takes to do what the customer wants.
And of course, that changes all the time, especially in the last couple of years in COVID, where, all of a sudden, the world's turned upside down. You can't know what's coming, and it requires being nimble, being flexible. And in my opinion, Netflix has that in spades. So the answer is, what are they going to do? I couldn't tell you. But I think it's going to surprise us. I think they are willing to do whatever is required to be successful.
And I think you can look back time and time and time again in our history, when we walked away from selling DVDs, when we realized that we had to transform the company to not focus on our mail business, but focus on our streaming business, when they, after I left, began to say, we've got to begin stopping the emphasizing other people's content and prioritize creating our own. They're willing to always walk away from the past and do what's needed for the future. And I expect them fully to do that again.
ALEXANDRA CANAL: And to that point, you have said in the past, it's always better to build your own content than to buy it. But do you think Netflix needs to focus more on franchises, especially if it wants to compete with the likes of Disney+, for example, that has Marvel, Star Wars, and all those animated classics?
MARC RANDOLPH: I think one of the huge advantages that Netflix has is-- and don't take this the wrong way, but their longevity. From the very beginning-- and I do talk about this in the book-- we said, we are going to be a content company, even though, at the time, we were basically just shipping people movies on DVDs. But back then-- this is in 1998-- we began understanding what do customers want. We had a direct one-to-one relationship with them. And then, of course, when we entered streaming in 2007, we had a one-to-one relationship with the customer.
And then, now, finally, in the last two or three years, all of a sudden, every media company decides, hey, it might be a good idea to have a direct relationship with your customer to do a streaming business. But Netflix has already been doing this for, what do you say, 24, 25 years. I think that is the key Netflix advantage. Yes, Disney certainly has a very, very strong content slate. And I truly believe Disney has demonstrated that they are in it.
But I would be-- I would never want to write Netflix off. There is a huge advantage to the experience that Netflix has in understanding the subscription model and understanding how to give customers what they want and building a user interface and building a distribution mechanism. All those things count.
ALEXANDRA CANAL: And it's true, too, because there are so many options that they could pivot to, one thing being possibly that ad-supported model that is supposed to roll out later this year. But it's interesting because your co-CEO, former co-CEO, Reed Hastings, he prior said that he didn't want to touch ads on the Netflix platform. So what do you think the risk-reward there is, especially since, if we look at the landscape right now, a lot of these platforms do have that option to go ad-supported?
MARC RANDOLPH: One of the core principles from the very beginning at Netflix-- and I do talk a lot about this in the book-- was focus. It was something we actually called the Canada principle, which was basically saying that low hanging fruit rarely is, and that the effort you put into expanding your business is way better utilized if you focus it in your core business. And for years, Netflix has been relentlessly focused. However, you do get to a point where, all of a sudden, you do have the bandwidth to be able to take on additional responsibilities.
And quite frankly, I've always been a little wrong about this. If you had said, Marc, is Netflix ever going to get into gaming? I would have said, absolutely not. And oops. If you had said, Marc, is Netflix ever going to get into selling merchandise, I would have said never. Well, oops. And quite frankly, if you had asked me a year and a half ago, is Netflix ever going to have an ad-supported service, I would have said never. Oops. It looks like they are.
But I think what they're doing, this is basically a way to broaden the accessibility of Netflix to other people. There are, in fact, a very big audience who can't afford what the normal annual subscription, what the monthly subscriptions are for Netflix, and would prefer to have something which is more economically reasonable and is willing to use advertising to subsidize that. And certainly, a number of the other streaming channels have shown that you can have two tiers very successfully.
ALEXANDRA CANAL: The company also said it will be cracking down on password sharing. To your point, a lot of people have said that they've left the platform because they can't afford that higher priced model. How do they execute this in a way that they won't alienate subscribers since that has been a concern?
MARC RANDOLPH: Carefully. Netflix, from the very beginning, has been obsessed about testing. You really want to make sure you know what you're doing. You don't want to just roll something out and see what happens. And again, I don't see it because I'm not in any of these regions where they're doing it. But I do know that Netflix is testing various approaches to how do you fairly put in place some reasonable controls on password sharing. I don't think anybody wants to make it difficult for people who have legitimate uses to share their password or to use their password in multiple locations.
But at the same time, they'd like to say, are there ways to control what you might consider egregious use, which is people distributing their password to dozens or scores of other people? And obviously, it's a continuum from one to the other within the obviously wrong and the obviously right. And I think Netflix's challenge is finding that middle point, where basically the people who are legitimately using the service and want the convenience of being able to share passwords between family members who use passwords in different geographic locations make that easy, as they always have. But yet, say, what's the reasonable way to take people who are unfairly using the platform and say, no, maybe it makes sense for you to pay for this service.
ALEXANDRA CANAL: As the former CEO of the company, I'm curious to get your thoughts about how leadership is operating today. We had Disney CEO Bob Chapek, he came under fire for not immediately responding to Florida's Parental Rights and Education Act, a.k.a. what critics have dubbed the Don't Say Gay Bill. Do leaders today have a responsibility to weigh in on societal issues?
MARC RANDOLPH: All I'm going to say is thank goodness I'm not the CEO of a major media company today. What a tightrope act. We have a country which is becoming more and more polarized. There's people on either side of it. In the past, where it was very straightforward to either ignore these issues or find some way to straddle them, that has become increasingly difficult. I don't see any way for a CEO today to not have to engage, to not have to take some position, to not have to be honest and realistic and say, here's where this company stands. And I recognize that it's going to upset some people and not upset some other people.
And I have seen Netflix take some steps in this direction. I actually thought it was quite interesting, the recent memo they sent to employees, saying, we are a media company. We produce content. We prefer to let our customers decide what is appropriate and inappropriate. And if you're working here and don't believe that you're comfortable working with content you don't agree with, then maybe you shouldn't be here. That doesn't sound so egregious to me. And I think Netflix and all other companies are going to have to begin not taking positions, but being honest and clear about what are the role of this company-- what do they do, how do they feel about these issues, and let customers decide.
One of the things that I talk about in the book all the time is that entrepreneurship is courage. You have to have the courage to try things. You have to do things you're not sure how they work. But you also have to have the courage to say what you think. And I think companies have-- they believe certain things. And I think they have to be willing to say them.
ALEXANDRA CANAL: And to that point, you work with a lot of entrepreneurs. You're very involved in the investment space. And we're in this very challenging economic environment right now with inflation, labor, a lot of companies still recovering from COVID. What's your advice to some of these startups or these smaller businesses, as they try to navigate this climate?
MARC RANDOLPH: So COVID has basically just emphasized something which has been in place for startups forever, which is your inability to predict the future. Large companies used to have this wonderful advantage, which they had this predictability. They could see what their revenues were going to look like four quarters, six quarters, eight quarters out into the future and could plan accordingly. But of course, all of a sudden, now, we're all plunged into a fog. We're just not sure what's going to happen.
And so my advice to early stage entrepreneurs, as well as all companies, is, you have to focus a lot less in trying to predict the future, and you have to begin putting together a company which is prepared to respond whatever the company brings you. It requires thinking like a startup. It requires pushing your decision-making closer to where those decisions need to be made, whether that's closer to the customer, whether that's closer to the point of sale. You have to be prepared to respond, not predict and plan. Rapid decision-making is going to be the necessity for the next several years, and I think, actually, pretty much forever.
ALEXANDRA CANAL: And Marc, if you could go back in time when you first started Netflix, what would you tell yourself?
MARC RANDOLPH: [LAUGHS] Well, quite frankly, at the time that we started Netflix, my aspirations were quite straightforward. I wanted to be the size of a single blockbuster store. I never imagined that Netflix would become what it was. I never imagined that we'd have 200 million plus subscribers making our own movies, producing our own TV shows. Netflix and chill, I never saw that coming. I don't know what I would tell myself, except Marc, prepare to be surprised.
ALEXANDRA CANAL: Prepare to be surprised. Marc Randolph, the co-founder of Netflix and author of the best-selling book, "That Will Never Work." Thank you so much for joining me. Always good to chat with you.
MARC RANDOLPH: It's been a pleasure.