Sunday Snapshots (2nd February, 2020)
Netflix’s Origins, Bullets and bandages, Readwise, Tyranny, and Animal coordination
Hey everyone,
Greetings from New York City!
I’m here visiting my high school friends. Whenever I’m here, I’m struck by the shear speed of the city. Last week, I wrote about how Thomas Jefferson was at “the center of things” in Virginia. It’s tough to argue that NYC isn’t that in 2020.
The highlight of my trip so far has been going to the Intrepid Aircraft carrier. It’s an amazing and unique experience. Here’s a photo of me on the flight deck.
With that, let’s get into this issue of Snapshots. This week, I want to talk about:
That Will Never Work by Marc Randolph
The bullets and bandages method of doing business
One of my favorite products
Tyranny of the Minority
Animal coordination
And more!
Book of the week
The streaming-ecosystem wars are in full throttle. You have content players like Disney+, Netflix, HBO on one side and distribution players like Apple TV+ on the other. It’s not clear how the chips are going to fall.
When things are up in the air, it can be to go back to the start of them. Winston Churchill said, “The longer you can look back, the farther you can look forward.” That’s exactly what I did this week with a book about Netflix’s origins – That Will Never Work by Marc Randolph, the company’s first CEO.
The whole story is amazing but it is very beginnings that are most instructive in my opinion. Here are my takeaways from the very early days of Netflix:
Timing is everything: The initial idea for Netflix was to put VHS tapes on the internet so that you could get them delivered to your house. An Amazon for VHS. But Marc and Reed (the current CEO) quickly realized that that wouldn’t work because of the size and weight – and the corresponding cost to ship them to and from the customer – of VHS tapes. So they moved on to other idea for a while before hearing about an upcoming technology – DVD.
Take note of that: compact disc–sized. That was what caught my eye. A CD was much smaller than a VHS tape. And much lighter. In fact, it occurred to me that it was probably small and light enough to fit into a standard business envelope, requiring nothing more than a 32-cent stamp to mail. Quite a difference from the heavy cardboard box—and expensive UPS shipping rates—a VHS would have required.
Every success has enabling technologies behind it and you have to time the launch of your company with them. In Netflix’s case, they timed it well. Timed it well to the tune of ~$150B in market capitalization today.
Freedom and Responsibility: One of the things you always hear about in startup land is how important culture is to the success or failure of a young company. Marc shares the central motto behind the now-famous Freedom and Responsibility deck:
Culture isn’t what you say. It’s what you do.
I’ve seen a fair share of team “constitutions” and while they can be helpful in a bureaucracy, it’s hard not to scoff at them in a 2-3 person setting. Just do the right thing.
Reed Hastings: Reed is now the CEO of Netflix, but he started off as the first angel investor. Marc’s description of Reed is telling:
For every one of my points, Reed has an answer. He’s analytical, rational, and doesn’t waste time with niceties. I don’t, either. Our voices are raised, but we’re not angry. It’s an argument, but it’s a productive one. Each of us understands the other. Each of us knows that the other is going to offer stiff, uncompromising resistance.
I think it’s so rare to get to that level of comfort with someone. One of my goals for 2020 is do exactly that. My strategy is instead of spending 30-40 mins “catching up” over coffee, I want to spend 2-3 hours with person to get the best conversations.
This is a timely book with some timeless principles. Definitely check it out.
Business move of the week
I’ve long maintained that the way to make money in the current e-commerce and delivery wars is not by marching on to no man’s land but to own the bullets and bandages.
These are also know as infrastructure businesses.
The bullets and bandages for the modern e-commerce and delivery wars are real estate and robots.
Real Estate
The reason for an increased need in real estate is the problem of customer expectations. In the age of the “divinely discontent” customer, companies need to have fast response times. For companies with physical inventories, this means ever decreasing delivery times. Since the method of moving large inventories remain the same – airplanes or trucks – this must mean that companies must hold pockets of inventory around the customers.
You have to execute on two levels here – large warehouses for sorting and storage and the “small pockets” of inventory close to the demand points.
Blackstone is the king of real estate and it’s not surprising that they’re at the forefront of the first level – large warehouses. In 2019, they agreed to a deal to buy large chunks of the warehouse network in the US from Singapore-based GLP for $18.7 billion, making it "the largest private real-estate transaction ever.”
The key player in the “small pockets” space isn’t clear right now. There is a lot to play for and we see clear indicators of an increase in demand for their spaces.
Once you’ve mastered the first R, you have to master the other.
Robots
Given a warehouse with the right products (not a trivial problem itself), it is difficult to manually sort and pack these products into boxes for delivery. This could be a grocery store or a retail store.
Companies are looking for “micro-fulfillment” systems that help them sort through all the available products. The beachhead market for them are grocery stores as they have to sort through fresh produce in a highly time-sensitive process.
At every step of the way, these robots are compared to their human counterparts and an ROI analysis is done. Increased initial cost and large space to operate for these robots give the humans some points. However, increased efficiency in the long-run might just make these robots worth it for large retailers.
The broader lessons here is this: don’t get into businesses where you will be easily competed away on the basis of price. Either create something a lot better than the next best alternative, or own the bullets and bandages.
Product of the week
Readwise’s pitch is simple – “Get the most out of what you read.” It syncs with your Kindle highlights and sends your an email at a pre-set frequency with a selection of these highlights. The aim is to use spaced repetition to increase the retention of what your read.
I’ve been using Readwise for almost two years. But they released an iOS app recently which has been a complete game changer. It was the first time I completed a 31 day streak of reviewing my highlights.
I wanted to highlight some of the key decisions they made that I think has allowed them to succeed where many others had failed:
Paid product from the beginning (~$2.99-$4.99): By having a paywall from almost Day 1, they were able to identify their core user who has demonstrated willingness to pay and give themselves financial runway without taking on venture capital. This allows for product development in a manner that a free app literally cannot afford.
Focused on core user: For the longest time, people would request new features and support for their pet reading app. Tristan and Daniel have been very disciplined in the way that they have added features. Until recently, you could only do Kindle highlights. By doing this, they were attracting self-selecting power readers. This allows them to build the app for those users. Now, as the user base has expanded, they’ve expanded into syncing highlights with Pocket, iBooks, etc.
Leveraging the Twitterati: You can built an amazing product, but without distribution, it’s going to die a lonely death. Every company has to answer the question, “How will our product grow?” The founders used the perfect platform for this – Twitter. From Day 1, you could share a photo of your highlights as you were reviewing them that had a very distinct Readwise-format. This meant that your tweet would inevitably get responses like “What app is that from?” at which point you can tag @readwiseio and they might gain some new customers.
Here’s what this strategy looks like:
The whole thing reminds me of the Tesla model of product development with a fairly expensive initial product that has helped the company develop a more mass-market company. Tristan and Daniel have kicked it out of the park with this and I’m excited to see where they take the company next. I’m proud to be an early user of the product and to have played a very small part in their success.
Concept of the week
The tyranny of the minority
We often think decisions are made by the majority. This is not really true.
Consider a dinner party. Let’s say the composition is something like this:
Given that the host has limited time and resources, what should they make for dinner? Something vegetarian! The vegetarians can’t eat meat, but the meat eaters can eat vegetables. This type of asymmetry doesn’t seem important, but let’s apply it to a far more serious context: politics.
From Skin in the Game by Nassim Taleb:
The same illusion exists in political discussions, spread by political “scientists”: you think that because some extreme right-or left-wing party has, say, the support of ten percent of the population, their candidate will get ten percent of the votes. No: these baseline voters should be classified as “inflexible” and will always vote for their faction. But some of the flexible voters can also vote for that extreme faction, just as non-kosher people can eat kosher. These people are the ones to watch out for, as they may swell the number of votes for the extreme party. Galam’s models produced a bevy of counterintuitive effects in political science—and his predictions have turned out to be way closer to real outcomes than the naive consensus.
Let’s take it up a notch and apply to a life and death situation:
While some believe that the average Pole was complicit in the liquidation of Jews, the historian Peter Fritzsche, when asked, “Why didn’t the Poles in Warsaw help their Jewish neighbors more?,” responded that they generally did. But it took seven or eight Poles to help one Jew. It took only one Pole, acting as an informer, to turn in a dozen Jews.
We see how this simple idea of an intolerant minority can lead to negative consequences. But the good news is that this cuts both ways:
Never doubt that a small group of thoughtful citizens can change the world. Indeed, it is the only thing that ever has,” wrote Margaret Mead. Revolutions are unarguably driven by an obsessive minority. And the entire growth of society, whether economic or moral, comes from a small number of people.
Random corner of the week
I’m absolutely fascinated by coordination in animals. This is an amazing video. If you see any more examples like this, please send them my way!
Meal of the week
Last night, I went to Momofuku Noodle Bar near Columbus Circle in New York. It lives up to the hype. I got the Garlic Chicken Ramen. The wait times were pretty long so I definitely recommend getting a reservation.
That wraps up this week’s Sunday Snapshots. If you want to discuss any of the ideas mentioned above or have any books/papers/links you think would be interesting to share on a future edition of Sunday Snapshots, please reach out to me by replying to this email or sending me a direct message on Twitter at @sidharthajha.
Until next Sunday,
Sid