How Netflix outsmarted everyone else in TV

By Eric Johnson

Netflix CEO Reed Hastings
Ernesto S. Ruscio / Getty Images for Netflix

Jason Hirschhorn, the CEO and chief curator of Redef, returned to Recode Media with Peter Kafka this week to talk about media moguls, the virtues of taking time off and what Netflix got right that everyone else in TV got wrong.

The old guard’s first mistake: Thinking Reed Hastings and co. were “suckers” for paying a lot of money to license old content in the early days.

“I was brought into a media company after I left Viacom,” Hirschhorn recalled. “Their head of cable distribution said to me, ‘We’re going to push off one of the cable deals, because this Netflix is offering us $70 million, and they’re not going to be around in a couple of years.’

“This is the greatest land grab in the history of media ever,” he added. “It happened because those guys are brilliant and they ultimately figured out and made great shows, and they did like any other media business, which is they started out curating other people’s stuff. But really, they also succeeded because of the laziness and this silly laughter out of the people that were licensing stuff from them.”

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Below, we’ve shared a heavily condensed transcript of Peter’s conversation with Jason. You can read a full transcript of the interview here.

Peter Kafka: I’m back here with Jason Hirschhorn, a two-timer at Recode Media.

Jason Hirschhorn: I am.

You were at MTV early. Early-ish.

I sold my company to MTV in March 2000 and I left at the end of 2006.

And one of the big things that happened when you were there — this is covered extensively in Keach Hagey’s book, which we had Keach on earlier this year, she’s really great too. You were advocating, “Hey, there’s this thing called YouTube, we should go buy it.”

Yep.

Didn’t buy it.

I can’t remember if I said buy it, but I said “You should absolutely not sue it.” I think the intrinsic problem with MTV Networks and Viacom at the time was this was a business that was set up to tell the youth of trends. To be the cool factor in their lives.

Right, and maybe just to set the context, this is 2005-ish?

Yeah, that was towards the end of my, I guess 2004/2005-ish. It was around the time of “Lazy Sunday.”

Because they didn’t buy Myspace, but people were still thinking, “Yeah all right, the internet’s a thing but it’s not really a business.” And if you’re the TV guys, “We’re still where the action is.”

I actually think there was actually a bit of happiness that the internet had faltered in the early 2000s and the TV people could be, “Let’s get back to work.”

TV, but that happened to magazines, lots of places. Like, “Whew, good thing we don’t have to worry about that anymore!”

“Look at these idiots, they wasted all that money.”

And by the way, because you could feel smart if you were a traditional media guy, because you saw these guys burn enormous amounts of cash on businesses that made no sense, and turns out you were right.

Yeah.

But then you were wrong.

Well yeah, I mean I suppose, it depends on the timeline. But at the time, I think my whole point was, we need to be a platform for the youth who are our audience. We’re going to tell each other what was cool. Be the platform that enabled that. And I don’t think that the executives could ever let go of the fact that they weren’t going to be the trend setters.

Then you have YouTube come about, really from, obviously through user-generated content, but there was a moment where there was a clip from NBC, the new digital shorts, “Lazy Sunday,” it was on there and you saw YouTube’s traffic skyrocket.

And that’s certainly a compressed version of the story, but I think all the media companies started calling me for advice, even at MTV, saying, “Should we sue?” And I said, “No, take some equity. Get a seat at the table.” And what was fascinating at the time was that the company, you had a legal department who wanted to sue these companies, and then you had the promotional departments that were putting content up on YouTube.

So, but to rewind it back, let’s say Viacom pays attention to your advice.

Yep.

And not only doesn’t sue them but buys YouTube, or any of the big media companies buys YouTube.

Or takes a piece, yeah.

What happens to that company’s trajectory? Because as you said, the labels had managed to extract equity deals right as the sale was going on. But YouTube grew in part because it was kind and not very regulated, and had a whack-a-mole ...

I think it would have been a disaster had a major media company bought YouTube.

So it couldn’t have worked?

I don’t think it would have worked given what I know of Viacom at the time. The idea probably would have been, “How do we have a kids’ network on YouTube for Nickelodeon?” and, “How does the music thing get rebranded MTV?” there’s this idea that when you have these media companies of scale that you need to do more of the same thing, and you need to continually extend your brand. I think companies like Viacom at the time had forgotten what it was like to have a sub-$100 million project and to have a new brand.

Big media on the internet vs. digital-first DNA

There really isn’t an example of a big media company that has figured out the internet, that has managed to buy major assets and make them into something bigger. The best you can say right now, there’re companies like Fox that sort of set itself up and then sold. Disney is at least making a bet, spending a lot of money on digital. You can argue whether it’s working.

They both did good things, but they should have been bigger ...

And they’re later.

And the traditional things that they did are what hurt those investments.

But realistically, though, you’re saying, “Look, these companies are constitutionally incapable of dealing with a new threat,” which is the internet, which is digital media.

A friend said to me the other day, who’s a very prominent media and technology executive, that it ultimately comes down to DNA. “If they can’t change the DNA of a company, I don’t care what’s on their strategy deck, on what they will acquire or the people that get to work there, they will eventually fail.” I think you’re starting to see some changes.

But even with Disney, man, they’re late. Now, they happen to have the IP to make up for that, and I think that they’ll be one of the main players, but the reality is that this strategy that we presented in some of rterd our pieces at Redef or the stuff that you and I have talked about for over a decade, this isn’t new stuff. But these were people who were looking at short money versus long-term money.

Also, you have a DNA problem inside the media business, which is direct-to-consumer was never a thing. There were always middlemen. Now, you need to set up a company that’s completely about going direct to the consumer.

How Netflix outsmarted the TV guys, part one

The flip side, right, is you’ve got Amazon, Netflix, Apple, on down the line, all spending increasing amounts of money to buy/make TV shows and movies, the thing the Hollywood guys know how to do. There’s a weird disconnect, right? The stuff they make is kind of more valuable than ever. Their companies are worth maybe less than ever.

Yep. Well, a couple of things ...

Can you tease this one out?

Netflix, everyone misunderstood what Netflix was doing. When they first came out, they were licensing things.

Yep.

I will tell you that I was brought into a media company after I left Viacom to ask me some opinions about how to explain strategy to the Street. Their head of cable distribution said to me, “We’re going to push off one of the cable deals, because this Netflix is offering us $70 million, and they’re not going to be around in a couple of years.”

I remember one of the guys from the networks laughing about the deal he’d made. I remember it very clearly.

He is a moron!

He said, “they have to choke on this stuff we’re giving them.”

Yeah, and the difference is, other than traditional media executives, is that Reed Hastings and Ted Sarandos would never sit there and argue back. Meaning, they’d take all the crap they take from people, they do it with a smile, but the reality is, this was post-2008. The media companies needed that money to replace where advertising was in a slump, and they were having some of their carriage deals renewed, but they would push back.

So Netflix was also misunderstood in terms of they would see what they were spending on a show when they went in there, and they’d said, “Oh, my God. No network spends on that.” If Netflix is going to spend $8 billion on content, I believe that’s four billion less than Charter spends. They were spending to be the video experience.

This is the greatest land grab in the history of media ever. It happened because those guys are brilliant and they ultimately figured out and made great shows, and they did like any other media business, which is they started out curating other people’s stuff. But really, they also succeeded because of the laziness and this silly laughter out of the people that were licensing stuff from them.

Yeah, they thought Netflix was the sucker at the table.

Yeah. So that’s the Netflix story, and their execution has been fantastic. Their buildup on original content, which has been high, medium and low, “Netflix Originals” means something, they changed the way that the media business worked in terms of release velocity, the cadence of their programming and, frankly, as an operating system.

We just wrote this piece on Netflix and the misunderstandings on Redef, Matt Ball did, and talked about the importance of product in technology. If you think about it, I still like TV. I like channel surfing. Now you have rollovers on Netflix. On Amazon, you could see what song is playing and what actor’s in the scene. Those were innovations that TV weren’t making, so that’s a big deal.

Tell people who don’t know, which again is a very limited percentage of these listeners who do not know what Redef is.

Redef is a company I call “the interest remix” company. It’s a bunch of newsletters we put out on different areas like media and music, and every day I write a forward as does Matty Karas on music, and we’re coming out with or relaunching some of those publications called the Rant and the Rave, and we talk about something personal or something in business and we give it pop culture context and then we pick twenty items for you to read or listen to or watch every day.

It’s free for now.

It’s free for now, largely because I had lot of life stuff that I had to get by, but we’re going to go into subscription, and you’ll see Peter’s podcast.

And incredibly you were giving away these amazing analysis pieces, many by Matthew Ball, former Amazon guy now doing something he won’t disclose.

He wrote a piece called “Disney Is a SaaS Business” about three years ago, and I got a call from Kevin Mayer at Disney and said, “Hey, Bob Iger and I would like to have ...”

It’s a subscription business. It doesn’t know it’s a subscription business, but it is.

Yeah, well, not yet. But he says, “We’d love to have lunch with you.” And I’d known Kevin for a long time, so I had lunch with him and Iger. And Iger, I’m going to paraphrase here, but we’re having lunch at Disney and Iger says, “You know, you’re an idiot.” And I’m like, “Why is that, Bob?” And he goes, “You give away for free what we pay tens of millions of dollars a year from management consultants for.” So, thus came in the idea of a subscription and paywall.

Amazon and Apple

One of the reasons I wanted to have you here besides to tell old mogul stories is to talk about what’s happening today. We talked about at the beginning with Silicon Valley versus LA versus New York, you’re in LA most of the time, you’re seeing the Valley guys now show show up all the time making deals, you’re watching Apple make deals; we’re not quite sure what they’re doing.

Yup.

How do you gauge their chance for success? Netflix is already very successful.

Apple?

Everyone, Apple, but all the other, all, everyone else who’s trying to get in to media who hasn’t fully gone there yet. Even Amazon spent a lot of money, kind of did a reboot in the last year.

Yeah listen, I think Amazon’s first swing was a pretty great swing. I can’t speak to what went on management-wise there or the success that, ’cause it’s comparative, but some of their early shows were good shows. I’d actually give them a better mark on early than I gave Netflix when they first started doing Originals.

Apple will license like everybody else, and they’ll start to pepper these things in. I think they’ll do okay. And remember that this is, imagine, what is it gonna be, 70 bucks a month maybe?

You think ultimately the Apple play is a big subscription service where I get music, video, Apple Care, whatever else they can throw in there?

And the new phone. Matt Ball wrote a piece which we called “Apple Prime.” That was his take on it, whether, I think we’re directionally correct.

Yeah.

And there’s been some leaks around it, but the idea would be that instead of buying a new phone every time, you get the phone when it comes out. You’d have your extended warranty and your Apple Care, you’d get, you know, iTunes. You’d get whatever, you know, maybe App Store stuff. That’s the way that it’s going. And remember that the hardware is still so significantly great that that keeps you in the ecosystem.

Does the fact that Apple missed really badly a year and a half ago when they rolled out two new shows — a reality show and a spinoff from James Corden’s show — should that indicate something in terms of how they’re gonna perform this time out? Or is that just, “Look, in order to succeed you gotta fail,” etc.?

You know, it’s, on the “30 for 30” documentary I think Christian Laettner, I’m gonna paraphrase him, said something about the Duke, famous Duke basketball player like, “People remember the wins.”

When you have “Orange Is the New Black,” when you’ve got “Peaky Blinders,” when you’ve got all those things, I don’t remember any of that kind of crap. So, what’s the hit ratio on a television network? Even the stuff that gets canceled off of HBO — which is pretty good — would be better on any other network.

I think sometimes — and again, this is just me pontificating without fact, my take as being a media observer, and I don’t know the Apple people well — is they get taken in by svengali sometime. So they get the big guy who does and does not work for the company and tells them, “This is gonna be the good thing.” And they’ll do their version of whatever.

If it was me, that would not have been my calling card. My calling card would have been something, would be as close to my version of “Game of Thrones” or my version of a “Silicon Valley” so that I can set the example.

How Netflix outsmarted the TV guys, part two

Right. And so what, now they’re going the other way which is, “All right, we’re gonna hire two other guys who are well regarded, and they’re gonna come out with dozens of shows.”

Yeah. I mean, one of the problems, and you’ve been in this, covering this business for so many years; you know, it’s fascinating, when YouTube comes in the business and says, “TV’s over, TV’s shit, no one cares about TV.” Then they hire everybody from TV, they want the TV ad dollars, they want the TV creators and they want the TV operating system.

When it comes time to make money, the media guys haven’t been so stupid after all. And while I admit the comps may not be what it is, everyone is signing up now because content is a differentiator. And therefore you can’t just load your system in with catalog, you have to have some signature shows. And as we’ve proven, the marketing for your service is the show.

It’s not just putting up, you know, performance ads or saying, “Join Netflix on TV for 9.99,” when you have “Peaky Blinders,” when you have the new season of “Stranger Things,” when you have an Amanda Knox documentary, that’s why people join. And the genius of Ted Sarandos and those guys has been, think about November traditionally, you have holiday programming, some sports, you go into the New Year, TV’s off the air essentially, and some movie openings. The first week in November I remember a couple years ago, they’re hitting you with the new “Black Mirror,” “Stranger Things ...”

I love that they put stuff out during holiday weekends. That’s when you put the Jerry Lewis telethon on. And they go, “No, no, here’s a hot new show from us, which we know you’re gonna watch ’cause we know you’re sitting around, you can’t stand your relatives or you’ve already had your picnic. Watch.”

Yup. But think about the difference in businesses there. So, a TV network says, “We’ve already made our numbers for the year advertising-wise.” Anything we, and when you over deliver in advertising, the consumer gets it. I mean the buyer get it, you don’t anything.

Yup.

And all of a sudden, what they, what they’ve proven is churn. To fight churn, you keep releasing stuff. The idea after November that I would ever cancel Netflix unless I went broke is insane because they keep giving me stuff. And even if all of it isn’t great, there’s three or four shows that I’m talking about. And that is not by mistake. I mean, they’re doing it because they’re doing the opposite of what the TV business did.

Which is basically shut down from December till mid-January.

Yeah, they’re all in St Barts, all of them, while Ted Sarandos is eating their lunch. You know, I think it seems pretty simple but it’s pretty genius, and those are the kinds of things that we need to change. The television or video experience now is great content, content for all of the family.

So what Netflix did, look at Netflix. They’ve systematically gone after children. Matt Ball will tell you he thinks they’re cornering the comedy market now, maybe not at the scale or quality that HBO has had but they’re getting there.

Enough.

They announced the Bruce Springsteen show, which I just saw. I can’t believe …! Like Bruce Springsteen, like he was literally an HBO guy.

Exactly.

I mean, Netflix is literally going in to all these sectors and then they’re releasing in such a way that you’re never letting go. You look at Starz now, Jeff Hirsch, who is the CEO of Starz, who has responsibility for these units. And you see David Nevins on Showtime. Two episodes to the end of the series, you introduce a new episode. You introduce a new show, sorry. And that’s what keeps churn. They’re starting to understand what Netflix has been doing.