The Signal Interview
Ted Sarandos credits his career in media to “a weird parlor trick.” Four decades before he found himself running a $400 billion streaming giant as co-CEO of Netflix, he worked at a VHS rental store in Phoenix called Arizona Video Cassette West. There he developed an uncanny ability to remember his regulars’ tastes in movies, and to recommend which tape they should take home next.
Satisfied customers were rare in the video rental business of the early 1980s, Sarandos told Semafor Editor-in-Chief Ben Smith at a Paley Center event marking his 25th anniversary with Netflix last week. As he rose to become store manager and then took on bigger roles with a video distributor and a 500-store rental chain, he came to realize why: The business model was “managed dissatisfaction.”
Limited inventory meant that “almost nobody who walked through the door on Friday night got the movie they came for,” Sarandos recalls, and consumers “hated late fees more than anything else.” Retailers like Blockbuster Video knew that perfectly well, but were “hopelessly addicted” to that outsized source of profits.
Customers were just waiting for an alternative, and Netflix provided one. When Reed Hastings and Marc Randolph founded the company in 1997 as a DVD rental by mail service, one of its biggest selling points was that it charged no penalties for late returns.
Netflix gets credit for Blockbuster’s demise, Sarandos notes, but late fees were hardly the only flaw in the legacy business’ model: Tied into deals preventing it from offering formats other than video tapes, Blockbuster was slow to even stock DVDs.
While Hastings and Randolph were sketching out their business, Blockbuster was still doubting whether DVDs would catch on. Viacom, Blockbuster’s parent company, said in a 1997 filing that it felt “unable to determine whether this new format will gain significant consumer acceptance.” It assured investors that Blockbuster’s competitive advantage rested on its 5,000-strong chain, its large inventory, and its “competitive pricing.” Nowhere did it mention the hated late fees.
Nobody Wants This
Netflix’s original business is now as dead as the Blockbuster store. The difference is that it was killed by Netflix itself. Sarandos admits that when the company began its streaming video service in 2007, its first instinct was to protect its legacy business. “We said, ‘Don’t do anything to screw up the DVD business. … We know [streaming] is the future, but right now this is all the profit.’”
It took about 18 months, once Netflix was delivering more hours of entertainment digitally than in red envelopes, for its leadership to say, “OK, this is the future and screw up DVD if you need to.” And so they did — Netflix devised a plan to split the mail-order operation into a separate company called Qwikster, but handled the announcement so badly that a revolt from customers and investors forced it to reverse course.
Soon, though, executives stopped inviting the DVD team to company meetings. “We did not try to be rough,” Sarandos explains, but once you find yourself protecting an untenable profit stream at the cost of a long-term growth opportunity, “you’re toast.”
Netflix remains ruthlessly data-driven. Asked why it refuses to release films in movie theaters, Sarandos points to the theatrical box office’s failure to bounce back post-pandemic. The average American goes to the movies twice a year, while his typical subscriber watches seven films a month on Netflix, he observes. “You’ve got to look at that and say, ‘What is the consumer trying to tell you?’”
Arrested Development
Early in its streaming days, the message from customers was that the content on Netflix was “horrible,” Sarandos recalls. “There was nothing to watch.”
As chief content officer, that was his problem. The reason was that studios were “protecting the downside,” he explains, defending deals with strict windows for cinema screenings, television syndication and home video distribution.
Netflix responded by making the most of what was left — shows that had been canceled, had too few episodes to be worth syndicating, or were too foreign or risqué for broadcasters to be interested. That led to early hits like Arrested Development, La Vie en Rose, and Pan’s Labyrinth. But as Netflix’s reach grew, Sarandos began to believe that threatened rivals would essentially embargo their content. He put that idea to the test.
“I said, ‘Let’s pick a show that would be impossible for them to sell anywhere else, and let’s offer an enormous amount of money, and if they say no to that, then we’re never going to get there,’” he recalls. The show was Deadwood, with language “so filthy” that no broadcaster would take it. When HBO turned his offer down, Sarandos knew: “We’d better get good at this ourselves.”
The Diplomat
His strategic pivot toward original production transformed Hollywood, but even this featured an element of luck. A chance call from actor and Bruce Springsteen bandmate Steven Van Zandt landed Lilyhammer in Sarandos’ lap. Sarandos gambled on making every episode available at once, giving birth to the binge-watching era, but he says there was no grand strategy. “I wasn’t thinking about being a legend. I was just thinking, ‘I’m not sure what to do here.’” Les Moonves, then running CBS, called Sarandos and patronizingly asked, “Do you know how TV works?”
That was 2012. This year, Netflix will spend $18 billion on content — more than CBS’s parent company, Paramount Global — and the returns on some of its investments have been better than others. Shonda Rhimes’ shows, like Gray’s Anatomy and the “brand-defining” Bridgerton, made an estimated $2.4 billion for streamers over the past four years. Netflix aired a disproportionate share of them, but there have been misses among its hits, too.
Sarandos is diplomatic about the deal he signed with Barack and Michelle Obama in 2018 and expanded last year, even though their productions have drawn smaller audiences. “They’re not big commercial projects, typically, it’s not what they were trying to do,” he says, but “there’s an element of prestige television that they brought to us.”
Much of what’s working best for Netflix now is instead what Bela Bajaria, his chief content officer, calls “gourmet cheeseburgers” — shows like Running Point, Nobody Wants This and films like Carry On that count as a higher-class of televisual comfort food.
“A cheeseburger is a cheeseburger is a cheeseburger,” he explains. “But that $30 cheeseburger at the hotel sometimes really blows your mind.”
Last one standing
A new era in Washington has seen streamers pursue a different kind of political prestige deal, with Amazon commissioning a documentary about First Lady Melania Trump for a reported $40 million. Sarandos says the president did not pitch him the show when they dined at Mar-a-Lago in December, but deadpans: “For $40 million, I hope it’s great!”
Sarandos claims not to pay much attention to rivals. “I don’t mean to be snotty about it. I honestly tell the employees all the time, ‘If you’re looking over your shoulders at the competition all the time, you’re going to trip.’”
Competitors are closing in, with MoffettNathanson’s media analysts writing this week that YouTube should surpass Disney’s revenues this year, to be crowned “new king of all media.” And vying with giant tech and media groups for prime content, such as the two NFL games Netflix will stream this Christmas Day, is not cheap. That didn’t deter Sarandos from arguing that he has the better offer for “pro-am” creators like MrBeast, who could develop their ideas on Alphabet’s video platform but would be doing so with no upfront funding from YouTube.
Over the past year, shares in Netflix have outperformed both Disney, Alphabet, Amazon, Apple, and Warner Bros Discovery — even before a tariff-driven market selloff that hit its rivals harder. Unlike those companies, streaming is Netflix’s only business. It can’t bundle or subsidize, Sarandos notes, and unsatisfied consumers can quit with one click. “We have to do this really well, all the time.”