Ep. 2 - Netflix's Business and Patent Strategy

Scoring Netflix's Patent and Business StrategyScoring Netflix's Patent and Business Strategy

Welcome to the Patent Strategy Podcast

Samar Shah: Hello and welcome to the Patent Strategy Podcast. I'm your host, Summer Shaw, and with me is Ian Holloway. Ian, how are you? It's good to be back. Episode two here. I'm doing well. I am glad to be continuing our theme and our journey into the world of media. I never would have thought that we would start here being focused on patents and technology companies.

But here we are. I mean, this is such a fascinating industry, right? There's a lot changing, there's a lot happening. And I think it's a great fertile ground for us to talk about strategy and to bring in patents. In an industry that's not traditionally associated with patents. So I'm glad to be able to talk about this with you, Ian.

Ian Holloway: Same here. Anytime you have this moment of transition, it gives our companies an opportunity to. Make good and bad decisions, and we're going to take a look at this one here.

Samar Shah: Yep, we have plenty of good and bad decisions to talk about. So let's get into it.

[00:00:55] Netflix: The Streaming Giant

Samar Shah: Netflix is today's topic, and we're going to talk about where it is currently.

Where is it going? How is it positioned relative to its competitors? And how is its patent strategy serving or hurting the business strategy? So I think before we talk about patent strategy, we have to talk about business strategy. And in order to understand the business strategy, we got to talk about what the business is.

So do you want to kick us off Ian here and maybe talk about where Netflix is or what is it currently?

[00:01:27] Competitors and Market Position

Ian Holloway: Netflix, as we have found out is the number one streaming platform. They're the biggest fish in the pond, but there are some. Competitors coming up fast. They're distributing initially started long ago where they're sending out DVDs through the mail.

We're now into a streaming era where if you want to be able to watch movies or apparently play games, Netflix is. A location that you can do that coming up, though, you see a lot of these companies that traditionally were distributing through cable or purchasing movies or going to the movie theater.

They decided that we're going to jump in and try to make our own streaming platforms with mixed success. I think we've seen Hulu and Amazon and Apple. All kind of put their hat in the ring and decided we've got the content already. We don't need Netflix to distribute that content anymore, so let's just do our own thing.

But that's not just an easy jump in situation here. You've got to be able to handle the amount of traffic. You've got to be able to, I think we found what Netflix does well, is recommend things to their subscribers. Because if you don't have what people want to watch, or if you can't. Push them in a way of knowing or suggesting what they want to watch.

You're gonna lose customers and I think we found that places like Apple and Amazon and Warner Brothers did not Anticipate what that was going to be like.

Samar Shah: Yeah, how hard

Ian Holloway: can it be right to set up a streaming platform? Say we've already got the shows that people want to see they're gonna come to us. It's very much a If you build it, they will come kind of attitude, which is not what we've seen with Netflix there.

Hey, we've built this. Let us show you what's here. Type attitude.

Samar Shah: Yeah, I think it cannot be overemphasized enough. I don't think is how big of a juggernaut Netflix is. We talked about Spotify last week and they own what, 30 percent of the music streaming business, right? I don't know what it is for Netflix, but I imagine it's a Much more than that, right?

I think we're looking

Ian Holloway: at about

Samar Shah: 50%. 50%. Yeah, that's insane. They have really just cornered the market here. They're the 800 pound gorilla in the room and they have just crushed everyone out of the water. Um, you know, by a couple of different things, right?

[00:03:59] Netflix's Content Strategy

Samar Shah: Um, One, they had really good analytics. They just acquired shows that people wanted to watch.

Somehow, and I think they figured out, they were one of the first ones to figure out that, Oh, people want to watch crime, true crime detective stories. And they were just like, yeah, let's just go all in and produce more of those. Or people want to see Christmas rom coms and let's make more of those and go all in.

And they just knew what people wanted to watch. Even though they weren't like these big blockbuster things. And that has really helped them initially. And now they're just very good at recommending shows and they're turning previously failed projects or not failed, but less popular projects like Suits or even Cobra Kai was another example where it started off on YouTube and they were able to bring it to Netflix and just make it hugely popular.

So they're able to first produce shows that people wanted to watch and keep people on the platform, and now they're able to resurface shows and make the shows more popular and keep people on the platform. Well done by Netflix.

[00:05:02] Challenges and Headwinds

Samar Shah: The other thing I always think about is in order to become a total juggernaut, they must have been just like killers, right?

Like they must've made all the right calls, anticipated the market. And done all the right things, but as we analyze the company and that's not what we found, certainly they did a lot of right things, but there was another reason why Netflix is a total juggernaut. Should we get into that?

Ian Holloway: So Netflix themselves, I think we were talking about, they were able to take advantage of a new marketplace as a whole where before writers and producers didn't necessarily know how to price their content properly.

Netflix was able to gather that up initially. And be that only place to go, which helped build that initial customer base, I'd say. But if we go further than that,

Samar Shah: Yeah, the thing that I was thinking about is that Netflix became a juggernaut. Certainly it made all the right decisions, but I think a big part of the story is that the legacy media companies, like you alluded to earlier, is that they just stumbled and Face planted over and over again.

I think that's a big part of the Netflix story is not just that Netflix is awesome and they certainly are, but also the legacy media companies just spell their own demise in many ways. Yeah.

[00:06:24] Legacy Media Companies' Struggles

Samar Shah: Legacy media companies, I guess we should step back and talk about who those are. So there's Warner Brothers Discovery, there is in NBC Peacock, there is Paramount, there is Disney.

I would consider them to be legacy media companies or competitors to Netflix. And they had historically one of the greatest businesses in the world, in any industry, which was the cable business, right? Which is generate content, and then you deliver it to a cable company. And the cable company uses their copper wires that they built out into the infrastructure and distributes it to the people.

And the cable company were smartly able to lock people into multi year contracts, kept on raising prices. And they were able to get a lot of dollars out of people or extract value from the content by bundling all of this up together. So if you wanted to get ESPN, you had to sign up for a more expensive cable tier, or you got HGTV for free, or Discovery for free, or the History Channel for free, if you really were only interested in some things.

But it was still value added in everybody extracted value out of this. You know, a hundred dollars or 200 a month that people were spending. So one of the greatest, most profitable businesses of all time. And they said, let's destroy that. And let's put our stuff on to a streaming platform and charge people 799.

And I think what they all realized, the legacy media companies and what we know today is that. None of this content is all that valuable on its own, right? It was the bundling that was valuable and value extractive, um, from the consumer. It's the way to extract more dollars from a consumer, but on its own, it's not, not nearly as, um, value accru accretive, if you will, to the customer.

So they had all these issues that any traditional SaaS company knows a lot about, customer acquisition costs are high. In order to acquire a dollar of revenue, you had to spend several dollars to acquire that customer, which is a problem. I think one way they tried to reduce their acquisition costs is by saying, Hey, all of our stuff is on our streaming platform.

Come check it out for free or for a few dollars. So that was a way to reduce their acquisition costs. But the problem with that approach is that it reduced the need for a cable. So there, they accelerated the cord cutting trend, which was already a foot. And then the other thing they didn't appreciate, I think is churn mitigation, which is what any large SaaS company has to deal with.

They could acquire a customer, but they just can't keep them on the platform. People churn out a couple of months in, in there, there's some analysts charts out there that like kind of plots everyone's churn. All the streaming platforms and like, like Paramount, Disney, all these Warner Brothers are tightly coupled at, I think it's three to six months.

And then there's Netflix, like all the way up into the right. I think their churn is something like 12 or 16 months, something like that. Netflix has figured out all the hard stuff, which was acquisition costs and churn mitigation and the legacy media companies. Didn't fully, I don't think understood or internalize those costs.

And then in the process, they also destroyed their cash cow, right? Like the golden goose that laid the egg.

Ian Holloway: They've cannibalized their own base business. At this point, they built their Starbucks across the street from their Starbucks and started charging half price at the other one. It's a

Samar Shah: great way to put it.

So this is. Why we're here. I just wanted to set the table for our listeners is that everyone else is trying to get into the game, but others like the legacy media companies are handicapped in some ways. And there are all sorts of issues there we can get into if we want to, but.

[00:10:06] The Future of Netflix

Samar Shah: Why don't we talk about Netflix a little bit more in some of the challenges that we saw as we analyze the company.

So far, everything is up into the right. Everything is rosy. They're killing it. They're making more money that they're just like up into the right. But what do we see as kind of potential headwinds going forward?

Ian Holloway: Yeah, I think we look long term for Netflix here, short term, they're looking great, but they are seeing slowdown in their subscribers and they pretty much operate.

Now that makes a lot of sense because you can make a lot more money, uh, within this marketplace than you can elsewhere in the world, you know, eventually your customer base keeps shrinking and you need to find some way to get out and reach new customers, whether that's a way to monetize the people who haven't signed up already here in North America or expanding internationally.

And we talked a little bit about their content costs used to be Netflix could pay for an entire. Series and own it outright. Eventually the producers of those series decided that we're not making nearly as much money as we should on these deals. It was a new business environment, right? So the rules weren't really set in stone.

And once they realized that, Oh, we need to license these things out. We need to collect royalties for every stream that gets made. And how do we count those views? The whole way the Netflix pays for content has changed. And not in Netflix's benefit. And recently we saw, yeah, the next thing I was going to talk on is Netflix has been cracking down on making sure that their customer base is paying for what they have.

Password sharing is handled a lot differently depending on which streaming service you use. I think places like HBO seem to almost encourage it, whereas Netflix very much has pushed back against that to, I think some. Negative feelings from their consumer base, but they've got to be able to monetize every view at this point in time.

Samar Shah: Yeah. And I think they're related, right? Like there is a definite slowdown in subscribers that they have, which makes sense, everybody who's probably ever going to sign up for Netflix, probably signed up for Netflix, right? And there's just not more people to sell to in the United States anyway. So I think the password crackdown made a lot of sense because look, people are sharing passwords with each other and that's a way to get additional subscribers and I think it was last quarter they announced that they used to always in their financial data, describe or tell you how many subscribers there were in the U S and worldwide.

But they stopped reporting that a quarter ago or two quarters ago. I can't remember exactly. Which caused a kind of a stock price drop for them because investors are like, Oh, this is a sure sign that subscriber growth is slowing down. If Netflix is going to stop reporting this information, then for sure it's plateaued.

And it's true. It has probably plateaued. We don't know. The latest reports I read said that subscriber counts are still going up. Largely due to password sharing crackdown. But we don't really know, and I think Netflix has publicly stated that they don't share the subscriber data more because it's a less important metric for the company's financial performance, which is actually true too.

I think it's just like the business of Netflix has changed so significantly and will continue to change with some of the things that we're going to talk about next, Ian, that maybe a subscriber count is not a very good proxy for growth and the health of the company. So there is that, but at some point we have to assume that the number of people who are going to sign up for Netflix is going to plateau just because everybody has already signed up for Netflix.

So then the question is, how do you keep these people on the platform? How do you get more money per user? That kind of thing. So I'm sure we'll talk about that next. I think let's jump into it. If you're, yeah.

[00:14:09] International Growth and Revenue

Samar Shah: I'll just say two more things about this is that there is a lot of growth available internationally outside the United States.

And Netflix has been, I think, cognizant of that. And we see that in some of the media deals that they've made. So like one of the hit shows for Netflix has been Drive to Survive, the Formula One show, and that's been huge internationally, right? Not just in the United States. So they have hit on this thing where there are some sports that are very popular outside of the United States.

HBO has a similar thing with like Hard Knocks, where they do a preseason thing with football teams, and that's been hugely popular for them. So I think they're going to continue to explore. More of these like sports adjacent shows, because that's interesting in international markets. And then wrestling is also huge in international markets, right?

So they signed a 10 year deal with WWE to be the exclusive supplier of that content. And I think a big part of that deal is probably international growth because wrestling is hugely popular outside of the United States as well. I think they're making inroads and they're going to grow that subscriber base, but the challenge is that the average revenue per user in international markets is less than the ARPU of a user in the U.

S. So there, there's that. They can grow that subscriber base, but it doesn't come with the same dollar

Ian Holloway: associated benefit out of it. So how do we make more for these users? In America, in the North American markets, and that's what we're going to jump into here. So part of it is they need to be able to attract their users and they've done a great job of that.

I think we've seen they know how to find the hit show. They know what's going to attract people. They know what's going to bring them there. But how do you get money per view? And I think traditionally is with ads. We see a lot of their competitors doing this. Hulu, Amazon. have ad supported subscriptions and non ad free ones, right?

[00:16:01] Ad-Supported Model and Technology

Ian Holloway: So Netflix is going to have to find a way to start selling ads to people, uh, based off of what shows they watch, and they need to be able to show a good return on investment to their advertisers. Now, the one thing that Netflix has been great at, I think, is tracking user preferences. They've got, uh, A large database of information on what people like, and if you know what those people like, they've been able to point them to things that they will continue to enjoy.

So I think a big part of Netflix moving forward is being able to target these ads appropriately and insert them within their programming at an appropriate times. Which actually has been fun as we get into the IP stuff, we can talk about Netflix being able to insert, uh, suggestions, uh, at the right time.

Uh, some of their patents have been directed just to that very specific thing.

Samar Shah: I think that's right. So like they are moving to an ad supported model. And actually this is related to what you said earlier, right? The kind of the cost of acquiring content. It is that it used to be, they would have fixed inventory costs, right?

We talked a lot about this with Spotify. They acquire, Netflix used to acquire content. Like they would purchase a show for many millions of dollars and just purchase it outright. And then they don't have any kind of associated carrying costs with that inventory. They just own the show outright. House of Cards, I think, is an example.

I can't remember if Stranger Things is an example of that, but there are a lot of shows. I think

Ian Holloway: they also own that one outright. Yeah. And it's the ones that had viral appeal to people, right?

Samar Shah: Yeah. So it used to be expensive to acquire content. Netflix had the cash to do it and they would pay many millions of dollars to get that show recorded and then they own it forever and they don't have to owe any royalties, which actually, as far as I know, artists really liked, right?

Everybody liked getting paid up front because getting paid with royalties over time was a crapshoot, if you will. You just don't know how popular the show is going to be. So initially I think the industry welcomed this and they were like, Oh yeah, if it's going to pay me 10 million to do the show, I'll take it.

And it was nice, but I think over time, everyone realized how big streaming is. And they realized that, Hey, there's maybe more money to be made in a kind of a royalty arrangement. Their model has changed. All the creators are asking for royalties instead of an upfront sale. So their business model is changing from having fixed costs.

To having variable costs, right? Used to be zero marginal costs to deliver content. Once you buy a show, each additional subscriber is zero marginal costs from a delivery standpoint, but that's not the case anymore, right? They're becoming more like Spotify and they have marginal costs associated with each additional user.

So the business model is just becoming less profitable. I think anytime you move from, especially in the world of software, where delivery costs are essentially zero or marginal costs are zero, anytime you move from fixed costs to marginal costs, business structure, you just become less profitable. So that's the backdrop, right?

Like there, there are just like the business is making the model. So what does, how do you deal with that if you're Netflix? And those are all the things you talk about, right? Which is the ad model. Ads are a great way to have a marginal revenue on each additional user. Cause you can charge 10 a month from a user, but if you had to keep paying out for everything that they watch, that 10 either needs to go up a lot.

Or you had to find a different way to monetize this content. And I think that's where the ad comes in. And we talked about this with Spotify too, in order to have a good ads business, you need to have good amount of content inventory, right? Cause you got to up the view time that somebody's going to watch something.

You need to have plenty of advertisement inventory. You need to have the technology backend to be able to serve ads and track ROI or the return on investment. So those are some of the things that you need to do, which I think Netflix is working on. And there's some duality to that as well. Ian, do you want to talk about that a little bit?

So Netflix.

Ian Holloway: I think traditionally has worked on their nuts and bolts distribution type aspects. So we're dealing with how do we get that content out to the user? How do we allow the user to binge a show? And how do we allow multiple users to binge a show without slowing down, buffering, making sure that it's still the proper.

Resolution and all that. Netflix loved that kind of technology. They were heavily invested in it. But that's a little bit different from what you need to be able to pair up people with the proper ads or to track the proper ROI. So, they need as a company to shift culturally to, okay, we've got our ability to distribute this stuff already.

Now, we need to focus on how do we make sure we're getting stuff to the right people. We don't want to do this by gut feeling. We're not studio execs here. We're data driven. So we need to have good data and good ways to analyze that data. And I think it's hard to change the path of a ship that's going in one direction of nuts and bolts technology into perhaps that world of AI and machine learning.

But it needs to happen for Netflix, I think, to succeed. And we're going to show just how much they're actually putting into that coming up here.

Samar Shah: That's right. The ads business in many ways is like the greatest business model in the world. Maybe the second best business model was the cable business, but the ads business is just like printing money, especially if you are large scale software company, just because the distribution costs are zero, zero marginal costs, It's just bits, right?

Once you have the data, actually not that expensive to host the data, relatively speaking, and then to distribute it is zero marginal costs for sure. You do have server costs and stuff like that. Electricity, you need all that stuff. So it's not truly zero marginal costs, but close enough for our purposes.

It's a great business. And when you pair that with an ad model, it's maybe one of the greatest businesses ever, right? Companies like Google and Facebook are built on top of this. And certainly Spotify is trying to get there. Netflix is also trying to get there. So there's a theme here. You can see how the basic underlying businesses of fixed costs versus marginal costs and acquiring content can really affect the profitability of a company.

It has to change as your business of acquiring content changes. The model has to support that. They have to execute. This is very hard. Ads businesses, once you have them up and running are amazing businesses, but it is hard to stick the landing, so to speak. They need to do both. Netflix need to find all the right shows and then recommend all the right shows.

And they do have two co CEOs. One is on the business side or the media side, and the other one's on the technology side. And I think they're doing a great job on both fronts. So there's that, like I was listening to a, a shareholder or an investor call. And one of the analysts there asked, what would you attribute Netflix's success to in this kind of changing or dynamic business climate?

And it was illustrative to hear the co CEOs answer that question. Cause the first one was like, oh yeah, we've been so smart about acquiring really high quality content and understanding what people want and working with the right creative teams to support their shows. And fostering an environment of, of creatives, which is true, which is all the things you need to do to bring these creators on board.

But the other CEO chimed in later and was like, also, we have been very smart about recommending these shows to people. And he brought up the Suits example, which is like really blown up. So I think it's both, and it is smart that they are, they have this co CEO model. Which is where, by the way, Disney with Bob Iger, right, left.

And one of the reasons he came in is because I think they're Bob Iger's previous, I guess he chose his own successor when he left Disney. But by all accounts, the, the CEO that he replaced was not as great with the studios, right, with creatives, burned those bridges. You almost had to be a politician. I think to be a great CEO with media executives, because artists are just like they're creatives.

Like they're not like business people per se, like certainly they do a lot of business, but they, you have to foster those relationships and foster the right kind of creative environment for these people to do well. And so there, there are multiple skillsets involved. It's not just like running a technology company, I think.

Ian Holloway: But you need to have those skillsets too, which it's

Samar Shah: in

Ian Holloway: this

Samar Shah: environment. That's right. Take us a little bit off track here, but I think maybe the best politician CEO is Tim Cook for Apple, right? Like he's equally as comfortable talking to Obama, talking to Trump, and then talking to Xi Jinping in China.

He just navigates all these worlds amazingly without really catching flack for aligning himself or not aligning himself with anyone. He's just like, okay, these are X, Y, and Z relationships we need to have to bring Apple's business forward and he just navigates it really well. But like the flip side of that, even though they have navigated the social environment really well, they have, I think, done a poor job of navigating the app developer ecosystem.

Like Steve Jobs used to be pretty visionary, right? Like he had this way of bringing developers on board and being like, yeah, like everybody wanted to build on the Mac just cause it was cool. It was interesting. It was creative. And I think they haven't fostered that relationship much, especially with the app store being what it is.

People have really turned on the app store. And now when Apple has launched the Vision Pro, they can't get any developers on board. A big part of a CEO's job. We forget this. Like when I'm analyzing companies, I forget that it's like a people business a lot of times. But Netflix is actually doing that really well.

They're fostering the creative media side of things and they're fostering the technology. Analytics side of things really well done there.

Ian Holloway: And that might just be the business architecture that they've got set up with those two co CEOs. You've got a way to, to maximize that. And I don't think we've talked about that kind of like corporate structure type stuff before, but it may really be what's helping Netflix succeed in this environment.

Samar Shah: Yeah, one of the other quotes, and maybe we'll find a way to play these on the podcast, but when they asked the CEOs, they're like, what did you learn from Reed Hastings was one of the co founders of Netflix. And what did you learn from him? And they were like, one of the things Reed always talked about is that you don't want to build a lemonade stand in front of a gold mine.

They're like, you have to be hyper focused on what is the gold mine. And what is going to make the most amount of money. And there might be other, you can have kind of ancillary businesses, but Lemonade stands by, by nature, a low value business. So they have philosophically stayed focused on the big opportunities, which is something that the legacy media companies have not done, right?

They just gotten lost and muddled. It's a great way to think about Netflix as a company. I'm going to pull us back into what we're

Ian Holloway: looking at here. Thank you for doing that. No, it's all right. It's all right. It's interesting. So we're looking at that advertising model and what keeps people engaged, right?

How do you keep a person engaged on a show that they can stop and pause?

[00:27:30] Live Events and Sports

Ian Holloway: At any point in time, and I think Netflix has anticipated that problem here in that they are looking at more and more live events on their platform, get people to watch all at the same time to be able to watch Uh, look forward to an event coming up on Netflix, uh, to get that water cooler moment every week or what have you.

So they're, they're starting to look towards, uh, actual live sporting events. And I think very famously the Tom Brady roast is what we looked at, uh, here. They're finding ways to engage people, to get them to set time aside to watch or to use Netflix as a platform.

Samar Shah: Yeah. If you are an ad business, like Nothing drives ads better than sports, right?

Cause like everybody tunes in and everybody tunes in at about the same time, which is what ESPN was able to figure out. Right. And like ABC or NBC and Fox, they said Fox way overpaid to get football, right, NFL rights onto their station. Many analysts have said that Fox never made a dime of money. In fact, they lost money on that deal.

Just from ad versus what they paid NFL perspective, but they've more than made up for it by just getting more people onto their channel and then they can advertise their other shows and blah, blah, blah, and Fox is pretty big company and build a great business that way. Sports, if you're going to be an ad supported model, now you need to get a lot of people onto your platform.

And there's no better way to get a lot of people on your platform than having a lot of sports and live things. Right? But the double edged sword with sports is that sports leagues know that, right? They know that people are logging onto your platform because of the NFL and they're going to extract their pound of flesh for giving you rights to that.

Right? This is why Fox can. Maybe not, never make a profit on the NFL rights deal, right? Because NFL has extracted all the value from this deal, right? It's an established market. They know what they can charge here. Yes. And they know they can bring people onto your channel or your platform. People will tune in to watch.

That's the double edged sword, right? It's like easy to sports on board to your platform. But as soon as sports get on your platform, then they just squeeze you out, right, because they squeeze all the margin out of you and they take all the profits for themselves. So how do you deal with that? Netflix is gonna.

Probably my guess is, or at least from listening to their investor calls is that they're dipping their toe in this water, right? They're trying to understand what value can we bring to the sports leagues that it would be a win for them, right? Cause what they don't want to be in a position of is being like beholden to the sports leagues, because that is value destructive to Netflix.

What they want to do is be on an equal playing field when they negotiate with the NFL or whoever, or the NBA. And say, you should do a deal with us because we're going to distribute your content further than anyone else or whatever, or we're going to do something that's going to help you make more money than going with somebody else.

And I don't think they know exactly what that is, right? This is where Netflix's famous culture of learning really comes into play. But I think they're experimenting with live events to figure out what they can bring to the table. And how they can even the playing field when they negotiate with sports leagues in the future, maybe five years from now or more, or maybe they never do it if they can't find a way to not

Ian Holloway: be value destructive.

I, I have faith in Netflix. If they don't think they can make money on, Putting forward these sports or live events. I don't think they will pursue it.

Samar Shah: Yeah. And this is where they're also so smart, right? Cause like they have some live events, like the Tom Brady roast, it was a famous live thing that they did, but it's also evergreen in nature, right?

When the roast was airing, I had a lot of friends who were texting me and like forwarding memes and jokes to me during the event, but I actually didn't watch it, like I had something else to do. And then I watched it like a couple of weeks ago. So like I watched it, I don't know, three, four months after it actually aired live.

So in some ways it's like not just the live event, but there's like an evergreen aspect to it because with sports, the other double edged sword part of this is that. Sports are only valuable while they're actually happening live. And as soon as it's not live, it has zero value associated with it. Like you're not going to watch an old football game that happened six months ago, just going to happen, not worth it.

So I think they're trying to thread the needle. They're like, yeah, let's get into live and let's learn, but also let's make sure it's still evergreen content so that people like myself can watch it later. And it's still. Worth it. I just still entertaining and it's not worth 0 at that point. And then the same with the WWE deal they did, right?

There is value in having airing these like events live, but like WWE is like a. It's a show, but it's also a live show. Yeah. Like I can imagine somebody being like, Oh, they watched it. L's WWE live sporting event. And they were like, I wonder how so and so became the bad guy. And they'll just go back and watch old stuff.

Um, this is the thing we talked about this with Spotify, right? Like the value of music is in the back catalog, right? People sign up to hear old songs in particular, not necessarily like new songs that are coming out today. And it's all the values backloaded into the back catalog video is different, right?

Like most people watch video shows or TV shows and movies when they come out. So like the back catalog has less value, but Netflix is going to try to figure out a way to you have live events to get. Inventory for their ads product, but also have evergreen content and really smart there. This is why Netflix is such a juggernaut.

They make these smart decisions.

Ian Holloway: I think maybe it's a product of just being exploring this new media first. You don't have anything ingrained culturally to say, this is how we've always done it. Cause there isn't a, how we've always done it type thing where those legacy companies, they just, we're going to put all our stuff out like this.

Samar Shah: Yeah, this is where being a data driven company is really helpful because I think the legacy media companies were just like started with the end in mind and they just like made a straight line to that end. They saw that the world is moving to digital and moving to streaming. And they're like, yep, we're going to be there too, but they didn't fully appreciate or internalize all the challenges in getting there.

Whereas Netflix is like, well, we don't know what the end is going to be, but we're going to take some bets and kind of work our way up that stack,

Ian Holloway: which is

Samar Shah: probably the biggest difference between these companies.

Ian Holloway: See, it's that focus there. And that's the last point we have on here is they don't all pay off.

[00:34:13] Exploring Video Games

Ian Holloway: I think in the end, Netflix has decided to start streaming or had started streaming video games, go onto our app and play games here. I couldn't find much good press on that or any good results for streaming services in that regard. I guess it's a related industry there. It's still user interaction and engagement.

But it's, they're still known as the place you go watch shows. They're not the place you go stream video games. I think Google famously tried something similar a while back, where they would stream video games, you had to still purchase some sort of system to do it, but that, that fell out underneath them.

Netflix is still making this little bet, but I don't see them putting too much effort into it either. They're able to take these little bets to see what succeeds, and

Samar Shah: Yeah, I'm curious as to what they were thinking, like from listening to their investor calls, it seems like they decided that video games are like a very sticky product.

So if you're worried about churn mitigation, what is the one digital media content that has the lowest churn video games, right? So they're like, we always have to worry about churns and this thing has the lowest churns. So why not add it to our, And maybe that's it. Maybe they're just learning something else too.

But yeah, I struggled to understand that because you know, the video game, it's hard to displace like PlayStation or Xbox, right? Like you just don't have enough fidelity there. Maybe you will at some point, like maybe you will be a competitor to Xbox game pass or something like that over time. But. And realistically, it's like the mobile app games are like a better proxy for what is possible on the platform currently.

They do have some tie in with content that they have. There, there were some talk in the analyst circles about having IP rights, right? So video game IP, like becomes valuable, like movie IP down the road or TV show IP. There's the video game Last of Us that became a hit HBO show. So there's some people who are speculating that like by owning this IP, when it's like at its lowest value, and then if it turns into a TV show or a movie, they will have all the IP rights and it will be at a fixed cost as opposed to marginal cost or more expensive IP rights to acquire.

But I think that's far fetched. I think these video games are more like social media video games. It's quite the same thing. So we'll see. I expect. This business to not go very far, but I think they're thinking about the right things. It's a good bet to make you want sticky products. It's just that the video games that they can attract on the platform are not what you would associate with the Netflix brand, right?

I think it'd be brand destructive in some ways to get a lot of these low quality video games on their platform. So we'll see, I think at least the logic is there.

Ian Holloway: Yeah. And then time, we'll see if it plays out well for him.

[00:37:12] Patent Strategy for Netflix

Ian Holloway: I think we're ready to see, we've said what Netflix is moving towards now. So I think our next idea is what are we going to patent?

If we're Netflix's IP department, what are we looking at to move towards what we saw as an advertising friendly model and a way to stay on top of what's coming out? And then I think what would be helpful too, is how much of your resources would you put towards this as well? So if you're going to recommend pursuing this technology, how much of your portfolio would that make up?

Samar Shah: Yeah. If I were Netflix's outside counsel, I would try to understand that the business model is going towards advertising. Like it's an ad platform and that's what we're going to be. And that's where we're going to generate, uh, a lot of our revenue. And in fact, I would guess that like in five or 10 years, the ad revenue will eclipse any kind of subscription revenue, right?

Yeah, so I would say, okay, what are the things that make us an awesome ad platform, right? I would say we have the two things here, the advertising measurement, measuring what people are watching when they're watching it, and then how it's turning into revenue for these advertisers is important, right?

Because the more they understand their return on investment or ROI, the more they're going to spend on your platform, right? So you need to be able to get that data somehow. And with the Apple's app tracking transparency issue, it's hard to know exactly when, because you can't track across apps, so if you see an ad on Netflix and then you purchase it on Amazon, you don't have that correlation that you can obtain.

So it's challenging. Companies are investing in AI and ML algorithms to predict when somebody's going to purchase something or has likely purchased something. So measuring that return on investment, I think is critical. And then the second thing I would focus on is content recommendation system. Um, Because the name of the game in an ad model is to increase view time, right?

The number of hours somebody's watching, because you can serve more ads to them. That's not necessarily something you worry about in a subscription model because you don't care how much they watch. In fact, the less they watch, the more profitable that customer is. But in an ads model, the more they watch, the more profitable that subscriber or customer is.

Being able to make recommendations on shows, increasing view time is going to be pretty important. And then the third thing. Is that I like many of these companies when they're at their peak is also usually when they're on their way down. So it's so easy if I was Netflix to be complacent and be like, we have conquered this space.

We have won like objectively won. And then everyone else is going to continue to falter around us as we gobble up more and more market share. What happens in that world, right? What happened if all these other companies that we talked about, like Disney and Paramount. Eventually realized that the streaming business is just too hard of a business.

We need to get out of that business. What we're good at is content generation, right? Like making star Wars shows or Marvel shows. Sony has already done this, right? Sony has said, we're not going to get into the streaming business at all. We're just going to sell our content to the highest bidder. Which is maybe where some of these companies will end up.

[00:40:25] Future of Content Suppliers

Samar Shah: Some of these studios will end up in the future. And what happens if there is another content supplier out there who is just paying a little bit more than Netflix to get all the content, or I can imagine where all these studios are selling to Netflix plus one or two other streaming companies, right? So like.

Everyone has the same content, no matter what streaming service you subscribe to because the studios have made a deal with everyone. How do you differentiate yourself from others, right? Like, how do you get people to sign up for Netflix as opposed to Comcast streaming service? That's something I would worry about as an existential crisis because that's a profitability killer.

You're just not gonna be the same company in that environment.

Ian Holloway: And it's not much place to make money. Efficiency improvements to lower your costs at that point, either. Like you're stuck with that.

Samar Shah: You become Spotify, right? Cause Spotify, Apple music, they all have the same content. Right. Um, and how do you differentiate yourself from others?

Like, those are the things that I would spend some time thinking through and trying to patent. Um, is that

Ian Holloway: how you would think about it too, Ian?

[00:41:28] Advertising Strategies for Streaming Services

Ian Holloway: Well, the other thing that I think would be interesting. Is being able to provide ads in a, I guess, pleasing ways to the, to the consumer, right? Maintaining that consumer goodwill to keep them engaged and, and finding ways to do that without having to invest a lot of human resources into that, uh, could be beneficial as well.

Yeah. Go ahead.

Samar Shah: You bring up a great point. Uh, in many ways, Spotify is a great advertising platform because the ads are songs themselves, right? Like it's not a jarring kind of user experience. But Netflix, if you have an ad for a t shirt, you're going to have a QR code that you got to click and then it'll take you to the store.

That doesn't seem like a great experience from a user perspective. What you need, and I think this is probably where they're going to end up, is this concept of brand advertising, right? And then there is direct to consumer or a DTC type of advertising. And brand advertising is advertisements for Mercedes or BMW or Colgate, whatever.

Right? Like you just associate a brand with positive vibes. And then when you go to a grocery store or wherever and you see this product, you're like, Oh yeah, I'll buy a Colgate toothpaste because I trust that brand. They seem to have good stuff inside that toothpaste. Yeah. Let's just go for it. But it doesn't have a direct sales aspect to it.

The direct sales approach is like the ads on Facebook and Instagram. Where you see the ad, you click on it and you can purchase it right then and there. And it's much easier to measure ROI with those types of ads, the latter, right? That's just why Facebook and Instagram and Google have become such big companies.

Because the advertiser knows, okay, I spent a hundred dollars on this ad and I made 400, right? So the next time I will spend 200, right. And hope to make 800. And then next time after that, I'll spend 400 so on and so forth. It's really easy to measure your return on investment with brand advertising.

There's no, no real way to measure it. I'm sure some of your colleagues from MBA are doing

Ian Holloway: our surveys and things like that to see how far you get into the consideration set or the awareness set of brands. There are ways to measure it, but it's expensive to do that.

Samar Shah: Yeah. So I, I don't know. I think probably the direct to consumer is an easier thing to monetize and we probably charge more for those ads.

Because there's a high fidelity of information between, uh, cost and sales. But brand advertising, good business to be in as well. I think that's how the cable business was built, but they are at odds in some ways, right, because like with brand advertising, you don't need a lot of targeting, right? Like by definition, it doesn't need to be very targeted.

It's a mass market product. So everybody needs to see it. And the value of mass marketing is that, which is why it's such a perfect compliment to sports, right? Like you don't need a lot of segmentation and things like that. You just need to get it in front of as many people as possible. That's the real value of brand advertising.

With direct to consumer advertising, it's all about niches, right? Like you have to get into a specific show or a specific data mine or whatever it is, a specific segment of people who are interested in a specific thing and advertise to them specifically because most of the direct to consumer brands don't have the budgets, right?

To spend millions of dollars on an ad. Anyways, they can spend thousands, hundreds of thousands of dollars. So it is, it's opposites, right? Netflix is such a data driven company. They probably have a lot of segmentation data and all that stuff. Need up for a DTC type advertising. But the platform is not suited for DTC advertising, right?

So it's a challenge. I'm sure Netflix will figure it out at some point, but it's not a perfect. A monetization mechanism for what they are as a company, right? So there's some challenges there. I probably want to file some patents if they can solve that on that front as well.

[00:45:17] Netflix's Patent Portfolio Analysis

Ian Holloway: Let's see what Netflix is up to then

Samar Shah: we did some armchair analysis.

Let's actually get into data.

Ian Holloway: So from what we found in our search, and once again, we'll put a caveat out there. This data is, is what's been published to the public. There's always that delay, some stuff doesn't get put out there, and some stuff will take about 18 months before we actually see what's here.

So, this is a little bit in the past, but we can look at trends and see what's happening. So, we've got about 3, 000 patents. We've got 2, 958 divvied up into 422 families. Decent amount of IP that they've been producing. They want to know how we can distribute it. We want to know how we can manage our databases.

without causing corrupt files or slow distribution. And that makes up about 50%, a very healthy 50 percent of their portfolio. So that's fine, they were getting into that environment, it makes sense. Now recently, they've been starting to look at machine learning and predictive analytics. At least say 10 percent of the portfolio on this slide.

That's 10 percent of the recent portfolio. So it's not like in comparison to all of these distribution or database management. And then also recently, in the last three or four years, we saw that password sharing crackdown. There's a lot of security related patents that took up 15%. It very much was a spike recently in focus, and that spike peaked and went back down again.

Gaming related didn't find a whole bunch in it. So whatever they're doing is got a lot of crossover to their video distribution. So that's what we saw at a high level there.

Samar Shah: Yeah. I have lots of thoughts about this, but maybe I should save some of those for our later sections or the scorecard section. Or once we get more granular into the data, but yeah, that's interesting.

I was not expecting like half of their patents to be about the actual video distribution and encoding and like kind of the nuts and bolts of the streaming process, but that makes sense. Like they were the first to the space and they had to solve a lot of complicated engineering challenges to distribute content over internet, which we take for granted, but they really did pioneer the space.

It's harder than it seems. Very cool. So it was cool to see that reflected in the data. Yeah. I was surprised to see so many patents on the password sharing crackdown, but I'm sure we'll talk about that as we go to, and then. I certainly was underwhelmed by their AI and ML patent portfolio, but yeah, let's get into the granular data and we'll go, go from there.

Ian Holloway: Sure. And we'll touch on that in filing trends, just in general. Let's say you want to jump into the key technologies. Do you want to kind of compare to some competitors here somewhere?

Samar Shah: Let's see, I'll leave it up to you. If it's a quick one to do key technologies, we can do that. And then circle over to competitors back

Ian Holloway: down there.

So we're looking at, in general, that right side of the chart there, is all your distribution. But let's look at specifically, this is a good 15 to 20 percent, this selective content distribution. One of their main technologies, looks like they've been pretty consistent over time, putting out about 10 patent families a year.

Obviously started out a little slower at the beginning, but, Makes sense, and then we see the drop off just because once again, it hasn't all been published and they've had a decent, I would say less than decent allowance rate when we look back at our competitors here. So it'll be interesting to see.

Database retrieval. Also, once again, obviously dipped down a little bit in 2018 and 2019. But also fairly consistent had a lot better results with issuance rate on those and here's your machine learning summer It it was gonna show up eventually but it's only been in the last five years really any sort of focus on it at all and relatively, it's A smaller focus in general to a lot of the other stuff.

So I don't know. Which is

Samar Shah: surprising because you always hear about how Netflix has been so data driven in terms of the shows that they produce going as far back as like 2013, 2014, but I guess like they just had this like internal data set. They weren't actually like innovating in terms of how they process that data or things like that.

Interesting to see nonetheless.

Ian Holloway: I still could be treating it as like a trade secret, right? Not wanting to let the public know exactly what they're doing as a way to protect how they know who to advertise to and things like that. And I don't know, would you have expected them to be more trade secret or more, or putting their ideas out there?

Samar Shah: I think they internally just kept track of this data and then they made educated decisions, but they weren't actually using sophisticated AI ML techniques to process that data. So I think that makes sense. Like they're still very data driven. But it's okay if it's not reflected in their patent portfolio.

Yeah, I just thought it was interesting, but I don't know if I have any kind of takeaways from that other than being surprised. That's all. Let's jump

Ian Holloway: back to their actual overall filing trends. Yeah.

Samar Shah: Yeah. I was going to say the same thing. I think this is a good overview, but maybe we can really flush this out in their patent strategy in relation to their competitors.

Right. That might be a great place to do it.

Ian Holloway: So. We see this chart here overall, started out slow, ramped up, and I think we anticipated to see something like that. What's interesting in here is we've got one giant drop off in 2018 in their allowance rate. So I don't know if you want to speak to that or why we would, it would, maybe less worried at why that appeared there.

Cause we, we would see this and we would expect to see this in a lot of other companies as well, software companies, right? Yeah.

Samar Shah: Yeah, that is interesting. The first big drop off is in 2011, which is when the Alice case came down, right? So that is a landmark decision in the software space made it much more harder to patent software technologies.

You have to meet a much higher threshold of description and innovation to get a patent allowed in the software space. So that first dip we see reflected in 2011 is when the case came down. Hard to get patents through. And then in 2018, that is interesting. I don't know. Do you have theories as to why that allowance rate

Ian Holloway: dipped so low?

I think we saw them start to expand into other less nuts and bolts technologies at that point in time. I think their focus started to switch. And you get into a different area like that, I think you expect to have more misses than hits starting out.

Samar Shah: Yeah. This is why we keep track of this data, like our allowance rates and stuff.

And then a big thing of what we do is like allowance rates relative to the unit that we're prosecuting in front of. Cause yeah, you can just be very conservative in your patent filing strategy. And get GIMME patents allowed, right? And your allowance rate would be really high. But part of a good patent strategy, I think, is to take some shots on goal that are going to be inherently difficult or where you have less certainty because those patents can end up becoming very valuable.

So maybe that's what I was thinking too, is that they're filing harder patents and that's dragging down their allowance rates. But to me, that's a good sign because those harder patents are software patents. And if you think of the trajectory of the company being an ad business and more of a software kind of a company from an ads perspective, that would to me be encouraging, even if your allowance rates are low.

Ian Holloway: So

Samar Shah: good news. I think overall, I don't know how their general counsel feels about that, but this is why it's just the numbers by themselves. Don't tell the whole story. Yeah, I agree.

Ian Holloway: All right.

[00:53:06] Competitor Comparison

Ian Holloway: So let's compare a little bit to their competitors. We can do this over time, or we can probably do this just as a whole here.

Looking at Netflix, we've got some of their main competitors, and just to give you an idea of how we came to these numbers for their competitors, this is just in Netflix's key technology groups. We took the top 75 percent of key technologies that were identified and limited Hulu's, Amazon's, Apple's stock portfolio to that.

That way we're avoiding gobbling up the iPad information, or the rides at Disney that might be included in there. Try to keep this kind of in the same ballpark as far as comparisons. And what we've seen, just Netflix is not the biggest fish in the pond as far as IP goes. We've got Amazon and Apple just dominating this space.

Traditionally, software based companies or database or technology based companies, they put out a lot. They generate a lot of applications every year. But if we look towards Hulu, which I think is more of a company that was, let's say, more purely a competitor to Netflix. In this space, they're not split between lots of other concepts.

Same thing with Warner Brothers. They're smaller, they're half and a quarter the size Netflix is putting out there. Interesting to look at and understand that Netflix is still a bigger operator in this industry. Yeah,

Samar Shah: there is a tale of two numbers here, right? The numbers on the left are the numbers you found in your searches, Ian.

And then the numbers in the parentheses are the ones that I found in my searches. We didn't spend a ton of time reconciling these because it's hard to parse these portfolios at a high level, especially when you're looking at thousands of patent documents. Yeah. So, so, so there's a lot, a lot of different words on, um, so this is, this is what I was looking for in search is a video streaming patent.

We didn't want Amazon or Apple's patents related to like Alexa devices or iPhone devices. We want them to be specific to video streaming. And it seems Netflix is much smaller than everyone else, right? Like Hulu, Amazon, Apple, Disney have more than double Netflix's filings. Warner Brothers is the outlier here.

They are really far behind everyone else. Then I looked at number of patents related to recommendation systems. Netflix is more than half the next nearest competitor in Disney. And then companies like Amazon and Hulu are just blowing them out of the water. And then number of patents with the keywords related to advertising.

Everyone else is also blowing them out of the water. So that is interesting to me. Why don't you talk about your numbers Ian, and then maybe we'll talk to them together a little bit.

Ian Holloway: I think we see a very similar result when we look at advertising. They are late, late to the game here against all their competitors.

And it makes sense because Netflix traditionally hasn't been advertising. They haven't put ads into their platform as often. And now we're moving towards that. So potentially maybe they've got a bunch in the queue coming up that we'll see in the next year or two. But right now we're looking at a company that has a Only very slowly started in that direction.

As far as recommendations go, I was able to find a little bit more on Netflix. They're still not there where Amazon and Apple are. And even like Warner brothers, I think we've seen through this whole thing is behind the game, but Hulu is kind of just catching up to Netflix. Netflix as a whole, I think is once again, just starting into this.

They've been in here a little bit longer. That's why we see a bigger uptick. They're more on par with what Disney is doing. Amazon and Apple have just existed in this environment for so much longer. And there's such bigger companies that it's going to be hard for Netflix to carve out a space for them, differentiates themselves over Amazon and Apple.

Samar Shah: Yeah. And our chart doesn't even include Google or YouTube, right? The number one video distribution platform. And I would be willing to bet that Google's advertising related patent portfolio and recommendation algorithm portfolio probably is bigger than all of these portfolios combined. I had the feeling that

Ian Holloway: they were just going to be huge.

I think that's a very safe bet to make somewhere.

Samar Shah: Yeah, it makes sense in a way also because direct to consumer advertising is much more technology focused, right? So you would have a lot of innovation happening there. With brand advertising. It's not like you need a lot of sophisticated tracking and AI systems to figure out that stuff.

The way it works is that you have a sales rep at a company and they're like, okay, we're willing to sell you this for X amount of dollars as a bidding system. There's just not a lot of technology innovation that needs to happen with brand advertising, right? Brands have been advertising on cable for many decades, for 60, 70 years.

You don't need a lot of AI to make that happen, but direct to consumer you do. So maybe that's reflected in there. And I don't know if that tells us where Netflix is going, right? If they're going towards a brand advertising model versus a direct to consumer model. We did talk about this, that the direct to consumer model is just not suited for Netflix.

No. My wife and I were watching a show on Amazon and there was an ad for one of the actors wearing a dress. And during the commercial, they were like, you can buy this dress for X amount of dollars on Amazon. And I was like, Oh, this is really cool. There's a cool tie in there. Now they have bridged the gap between direct to consumer and brand advertising.

And I was like, Oh, I wonder if I go to my Amazon app, will they show me this dress again? Cause they're like, okay, you're more predisposed to buying this dress. So here it is. Buy it one click. I didn't see that, but I could see that happening in Amazon, right? Like where they are able to track and get that sale on their properties.

Like there's no such outlet for Netflix. I don't think so. Maybe it does show that they need to go in the direction of brand advertising, but not super clear. Certainly I was not impressed

Ian Holloway: with this.

Samar Shah: Oh, go ahead.

Ian Holloway: No, I just say, if it's impossible to check, we actually did it move to sale for you based on our recommendation.

If you're locked out of that, you have to go. I think the brand way, you know,

Samar Shah: yeah, if certainly this to me was not an impressive portfolio, just like in terms of sheer size of the portfolio, they're less invested in IP relative to their competitors, but also in terms of the allocation of the patents in their portfolio, they're incredibly underweight on their recommendation system and advertising systems.

Which is the future of the business. Like that is really the only thing that's going to differentiate you from your competitors, as we talked about, right? If there are other streaming platforms and they're at in terms of content, the only way you're going to distinguish yourself from others is by recommending these shows being a more profitable platform, increasing view time, becoming Spotify essentially, right?

Where it's like, they have the same content as everyone else, but people still prefer Spotify. Because it's a better experience. And that's where you should be overweight on from a IP filing perspective. Because IP inherently is forward looking, right? Not necessarily backwards looking.

Ian Holloway: Very interesting.

Let's continue on. We have a little bit of information on how the competitors are doing. A little bit better allowance rates in general.

Samar Shah: Yeah, see, if I was the GC of Netflix, I would be like, Oh, it's okay. Our allowance rates are lower, but we're like being more aggressive with our patent strategy. But then I would look at the Disney portfolio and the Amazon portfolio and be like, why are our patents not getting laughed at the same rate as our competitors?

Ian Holloway: Apple's a little bit closer on par with Netflix. Just interesting to note, I think in general. And poor Warner Brothers.

Samar Shah: The Warner Brothers is a mess. I actually thought that they were on the right track. And maybe we should talk about some of these legacy media companies in future episodes. But I was like, internet has this way of becoming, having a barbell effect on content.

On one side, you have like super niche content that, and then like people will pay for. And then on the other side is like really mass market content. That's like basically free to produce, right? Like very cheap to produce. And then everything in the middle just gets slaughtered, right? You don't want to be in the middle there.

You don't want to be in the middle in the internet age. But to me, I was like, HBO, that's like highly curated, expensive content on the one side of the barbell. And then you have the Property Brothers and like these discovery shows like House Hunters and stuff like that. Yeah. You are the mass market stuff, right?

Costs nothing to produce, but everybody will watch it. That's those are the shows we watch. Quote unquote, because if we're doing something, my wife and I will have those kinds of shows on in the background, just because it doesn't take any like mental calories to watch them. And you can still do other things like that you need to do around the house.

So I was like, this is super smart. Like HBO and Discovery, it's like the perfect marriage of the two sides of the barbell. So I was actually pretty high on them, but yeah, what really is hurting them is their debt load, right? Like they, they have so much debt that they need to service and carry. Even if it's a good idea, at some point, like the business fundamentals went out.

You don't have the resources to, to manage it essentially. Yeah. Anyhow, Warner Brothers Discovery got a lot of flack for canceling a lot of shows that were like finished. So I'm just like, if you finished a show, why wouldn't you just put it online? I get zero distribution costs. Come on. But they still apparently cancel shows and I don't quite get it.

Yeah.

Ian Holloway: Just it's more valuable as a write off. So

Samar Shah: yeah, that's still don't understand it.

Ian Holloway: I think we're probably ready to look at, like I said, this is once again reflected.

[01:02:57] Scorecard Evaluation

Ian Holloway: I think we're ready for the scorecard if you are. Yeah.

Samar Shah: Yeah, let's do this. All right. Uh, we took a long circuitous route to get here, but let's talk about it.

So the first one is, does it cover base technology? I guess like you've got to always start with that, right? Like how do we get our products into the hands of our customers? We got to cover that part of it. And what do you think Ian, you've looked at the patent portfolio more than I did.

Ian Holloway: Yeah, they're covered as far as making sure that they can get their stuff into the hands of consumers or the eyes as it were in this case, it's been their focus.

It seems since their founding as far back as we looked and continues to be. So yeah, I think an A. It is easy to give them an A, I think, in this one.

Samar Shah: Yeah. I looked at some of these patents and they're actually pretty high quality and they cover all the stuff. There's so much technology that goes into delivering a video feed on the internet.

They do a really good job of that. So I would give them an A as well.

Ian Holloway: So then I'll ask you, does it cover competitive differentiation? Does it have a way to provide more than Hulu and Amazon and that, and, and. Warner Brothers. Yeah, this was tricky because

Samar Shah: I think historically, like there's the backwards looking part of competitive differentiation and then there's the forward looking part of this.

And I think we'll keep coming back to this theme over and over. But if you are thinking about it or looking at it from a backwards looking perspective, I think they've done a great job, right? Like it was actually pretty hard to deliver video content over the internet and they do a better job of that than others.

There's certainly less buffering that happens with Netflix. Like when I'm watching various streaming services, like the Netflix feed is less pixelated, more quickly. Like it's just a better experience, a better product, and they have captured that in their patent portfolio. For sure. Like even little things like, like sometimes the audio and the video is off by a little bit on other streaming platform, never happens on Netflix.

They do a really good job. If I was looking at it backwards, I would say they've done a great job of capturing their competitive differentiation. Oh, but now look at it forwards, right? But from a forward looking perspective, if we are going to be an ads company, and if we are going to be generating all of our revenue through better recommendation by increasing view time.

By getting more inventory of shows and more inventory of advertisement, I don't see any of that reflected in their patent portfolio, right? They're so far behind from that perspective.

Ian Holloway: No, we almost just have to hope that the piece that has been covered up over the last year and a half hasn't been published, that there's focus on that because just aren't seeing it right now.

Yeah, I agree.

Samar Shah: Okay. Benchmarking against competitors. When we talked a lot about this Ian, but yeah, how would you rank?

Ian Holloway: I think they get a lot of positives when I looked at my numbers, they're not the biggest company out there, but when you compare them to Disney, which is another fairly large company, when I was looking at it, they seem to be keeping up with them in the video streaming space, they're doing better than Hulu and Warner brothers.

But on the other side of that, they are nowhere close to the size of Apple and Amazon. So we gave 'em a b, I'm thinking now maybe even a B minus, but overall, they're putting up a good showing. They're just, they're not the biggest fish in the pond right now. They don't have as many resources as some of these multi-industry companies here, like Amazon and Apple.

Samar Shah: Yeah. Hard to compete with Google, Amazon, apple, like those are in a different league as far as scale and size goes, and as far as patent spend goes as well. Right. You don't be keeping up with those Joneses. That would be a very expensive thing for the companies. I actually, I'm not too down on them. I think it's okay to under invest in patents, especially if you don't have any big milestones coming up.

If they were going through an IPO process right now, I would say, Hey, you're really far behind, like we need to catch up or we're going to pay for it in our valuation, in a roadshow and stuff like that. Is, but there are no real inflection points coming up for the company. So I think the number of patents are fine where this really gets tricky is like I said, if you're going to IPO or do a big fundraise or a debt round raise, you don't want to be underweight on your, if there is an industry consolidation down the road, like if, Some of these streaming companies, I said, I wouldn't name any names, but maybe like Peacock, if they go under and somebody acquires those patent portfolios or might be motivated to monetize that patent portfolio, right.

By suing Netflix. So I'd be worried about that. Like whenever there's industry consolidation or there's a contraction in the industry, usually you see a lot of patent lawsuits flying around because somebody's going to acquire those portfolios on pennies on the dollar. And they're going to find. Or try to find a way to monetize that portfolio.

So you got to worry about that and start hedging, right? So you can start taking out. Uh, license to a patent pool, for example, or cross license your technology with some of the other companies. So there's some things you can do to get ahead of that. But that's one thing I'd worry about is industry contraction.

That's when your benchmarking becomes more important.

Ian Holloway: But broadly speaking is a fair grade then. Yeah.

Samar Shah: Yeah. Broadly speaking, I'm not too worried about the size of their patent portfolio given where they are right now. If I am Netflix, I don't want to be filing as many patents as Amazon or Apple for sure.

I just want to be smarter about my patent filing. Right. That's what we always tell our clients. So I guess like not the number of patents is the type of patents that you file. That's where they get dinged in our grading system. And probably why you're giving them a B minus because the quality of that portfolio is not where we would want it to be.

I think.

Ian Holloway: Does it exclude important competitors?

Samar Shah: Yeah. Same thing here. Right. I think backward looking they do forward looking. Definitely not. Yeah.

Ian Holloway: I would agree with that. And that's, I think feeds into this next one here, it does not really align with forward looking business plans. Yeah,

Samar Shah: that's a tough one.

But yeah, this is where I usually always have a problem. When I look at companies like patent portfolio distribution, I think companies are very good and general counsels and patent counsel are pretty good at like covering technology that was important, but maybe not as like forward looking and part of this is just nature of technology, right?

Like you have to invent something before you can file a patent on it. So in a way you have to be backwards looking, but I think there are ways you can optimize that process and be much more aggressive about unearthing or mining for IP that's in the forward looking space and maybe taking some budget out of some spaces like the video game patents or the password sharing crackdown patents and reallocate those resources towards AI, ML, advertising, recommendations, user experience type of patents.

Like to me, those are like, I would, 50 percent of my portfolio would be on those three things personally, if I was advising Netflix.

Ian Holloway: Yeah, I think it's interesting because there were a couple of patents like that where the UI, I think touched on a little bit, where they seem to be looking at that, but it's one in very few.

Yeah,

Samar Shah: it just, it puzzles me like you have such a great user experience and then you haven't tried to patent it or protect it and differentiate yourself on the basis of that. Very puzzling to me from just resource allocation perspective, like the password sharing crackdowns patents, like security pat patents, it's, what did you say it was 15 percent of their portfolio?

Yeah. Yeah. I would, if I were advising them, it would be closer to 3%, right? Because. The password sharing, it's not an ongoing thing, right? Like to me, it happens once and then everybody has their own accounts and you already see the subscriber count going down. You could like continually juice up your subscriber count numbers by having a lot of patents.

Yeah, a 15 percent makes sense, but if it's a one time thing, it's a one time event. Like we have a lot of talk of inflation. Um, Especially with the presidential election here, right? Like adding tariffs to like stuff imported from other countries. Like that's not an inflationary event, right? In many ways.

Cause like it's a one time thing. And then like the costs are just different now, right? Everything is more expensive because of the tariffs, but it doesn't continue to be inflationary over time. That's how I think about those password sharing patents. Yeah. It happens once, but it's not going to continue to keep juicing your numbers in a forward looking way.

So why spend so much of your portfolio

Ian Holloway: on

Samar Shah: that?

Ian Holloway: Doesn't make a lot of sense to me. We're in a downer note here, but does it anticipate potential horizontal or vertical integration in the industry?

Samar Shah: What are you talking about? Litigation, lots of fun for everyone. Yeah, I don't think so. I think this is where I would have the biggest concern for them.

Like some of these competitors might be going away. And if these competitors turn into just studios that make content, they're going to want to sell their content to everyone, right? That's what I would want to do. If I was a studio, just like if I was a music studio, I want my music to be on Apple and on Amazon and on Spotify.

You're just going to have a hard time differentiating yourself from, so that's where the UI patents really come into play. I don't see any of that. We don't see any of the ad related recommendation engine type of patents or the ROI calculation patents for advertisers. I don't see a lot

Ian Holloway: of that there.

They're starting. I think we gave them a little bit of a bump because it looks like they're starting to look at that recently. But as a right idea, just not enough of a push, I think, in general, which as a company They're still embodying the culture that got them to this point, when there needs to be a shift and shifts like this happen slowly, although in the software space, usually they come a little bit faster, right?

So perhaps they're just, maybe we're happy that they're moving in the right direction. We just wish it was a little bit stronger.

Samar Shah: Yeah. When you contrast that to their like actual leadership from a company perspective, like their CEOs. Have done such an amazing job of being ahead of the industry trends and anticipating some of these sticking points, like the sports rights deals and things like that, like they have been incredibly forward focused, but it may be the one exception is the ad platform, right?

Reed Hastings has publicly stated that he was too slow to move to this. Like he has always envisioned. Netflix as being a place with no ads, and he hasn't publicly stated this, but I imagine that's part of the reason why he wanted to step down at some point. He's, I didn't see this one coming. So, you know how I feel about founders who are ideological as opposed to data driven.

Hard to ding Reed Hastings, one of the most data driven people in the world. But that is one thing where the ideology won out over data, but they have course corrected. They have done such a good job of anticipating and being forward looking in their business strategy. It's just a shame to not see that reflected in their patent strategy.

You wish they were just as forward looking and anticipatory in their patents as they were in their business.

Ian Holloway: Yeah. That may

Samar Shah: be

[01:14:00] Final Thoughts and Future Outlook

Ian Holloway: where we leave Netflix for this episode here.

Samar Shah: No, this was a really fun one, Ian, it was really cool to analyze these patents, awesome patents, uh, especially when we started reading them and analyzing them, uh, Netflix has done a great job.

It would be interesting to see how they get those patents moving forward. So I'm looking forward to continuing to analyze them. Same here.

Ian Holloway: Always feels like we want to look ahead two years into the future and see what's next.

Samar Shah: Hey, that's part of our job, right? This is the fun. This is why I love being a patent attorney.

Cause we can think about this. We can think about strategy and we can be forward looking, which is awesome. Uh, really fun. Very cool. Thanks again, Ian. This was a fun one. I'm sure we'll come back with hopefully another interesting company to cover next time. Thanks so much.

Ian Holloway: And thanks to all our listeners out there.

Samar Shah: Yeah. Thanks everyone for listening. The Patent Strategy Podcast is recorded for informational purposes only and should not be considered legal, business, or professional advice. We are not responsible for any lost damages or liability that may arise from the use of this podcast. The podcast is not intended to replace professional legal advice and should not be treated as such.

The views expressed in this podcast may not be those of the host or the management.