Link to interview (paywalled). 3rd November 2022.

Sajith:  Really interesting conversation covering Netflix, Twitter and their challenges, and working off that to cover a bunch of topics. Eugene Wei is a deep product thinker, especially on social networks (see this and this) and Ben Thompson is a sharp observer. Their conversation, and this is more of a conversation and less of an interview, is consistently interesting and insightful. A couple of great takeaways including why Spotify as an aggregator benefits from commoditised content (vs a Netflix), Eugene’s 2×2 matrix for social networks (people unknown to known on x-axis and convergent to divergent views on y-axis) and a great quote by EO Wilson on how our primitive emotions battle with the godlike tech that has been thrust on them. The convo / interview is paywalled. Highlights of what I found interesting below.

Netflix’s challenges

Eugene: “I began my career at Amazon and I worked in strategic planning in the early days. The thing that we would tell all of our investors is that Amazon is an economies of scale business. Meaning that, at some point, if we just got enough customers, we would be able to cover all of our fixed costs, which were a substantial part of the business — building distribution centers, maintaining a website and the catalog and all of that. We had variable costs, of course, but a huge fixed cost space. We could show people that, “Hey, as long as we get enough market share, we will be a profitable business because our unit economics are positive.”

I think it made a lot of sense at the time to think, “Okay. Netflix has the scale advantage.” If they just outspend their competition on content, they will have the ability to be maybe one of the first streaming services on earth to be everything to everybody. They’d have some amount of content that would appeal to a whole wide variety of subscribers, and that for their competition, it would be very hard to emulate that because their cost base would be much higher.

Now that we’ve reached 2022 where we’ve seen their subscriber growth shoulder off, it’s a good time to reflect back and see if it played out as everybody hadn’t anticipated. I think in some ways, it did, and some ways it didn’t. It may be too early to even judge.

Because in a world of infinite entertainment options with competition from video games and TikTok and podcasts and all of that, I think we’ve ended up in a place where maybe Netflix is going to continue to have the scale advantage, but maybe the ultimate terminal value of that is less than we would’ve anticipated. “

SPW: Key reasons for the above per Eugene is “one of the things that economics teaches you is that prices are sticky…customers have been trained that the price anchor for streaming services is really low…I’d argue that a lot of content that is unique has been pushed into the category of a commodity. That reduces the leverage you have with that content to have pricing power. Now, a company like Disney is interesting because they really do try to go for a very specific type of IP that gives them extreme pricing power in the marketplace and they’re probably the best…Now, we’ve seen Netflix, they raise their prices and they had a few quarters where they lost subscribers. I had a lot of friends who were like, “Oh, gosh. I have so many streaming services. I don’t really have to keep them all going at once. I can just cancel this one for a while. In a state of infinite entertainment, the customer’s attention is now the scarce resource and managing that is very difficult.“

Spotify v Netflix

Ben Thompson: “Spotify’s actually in a better place than Netflix, because their content is commoditised. It’s very expensive content because the music labels own it and they take a big chunk of Spotify’s revenue, but Spotify has the same catalog as Apple Music, as YouTube Music, as everyone else. That’s actually better if you want to be sort of an online Aggregator. You want commoditised content, which I think is fairly counterintuitive where you would think that, “No, need to have differentiated content.” “

Eugene: “Yeah, they absolutely are right because if you are a tech platform, and your value comes from owning the platform itself, you really don’t want your suppliers to have any pricing power over you. You want your content to be commoditized.”

Social media networks as evolutionary systems

Eugene: “I think about every social media network as an evolutionary system. I went back and read Origin of Species and a bunch of books on evolution. There are three elements to any evolutionary system. One is you need variation. In nature, that’s handled by genetic mutation. But in the case of social media, variation is generated by just every user trying different things. The second thing you need is selection. So in nature, that’s sort of natural selection, survival of the fittest, and in western social media, it’s generated by the algorithm. And the algorithm is taking inputs on engagement and then choosing what gets distribution and what gets no distribution. The final thing you need is amplification. So in nature, amplification is handled by passing on your genes to your offspring. But in social media, it’s governed again by the algorithm. The algorithm can choose to show whatever you make to a whole lot of people, not just people who follow you.“

Tiktok v Twitter et al

Eugene: “What was interesting to me about TikTok when it came along was that TikTok was the first social network where you could have zero followers and get uncapped distribution…Whereas with western social media, yes you could go viral with a tweet or an Instagram post, but if you didn’t have any followers, it was pretty hard to. There was effectively a cap on your distribution. “


Eugene: “Not all businesses are meant to be great businesses. You can build a great product and it can be a terrible business and that may ultimately be what Elon has bought. And it’s funny because a lot of people are like, “He’s going to bring back free speech and all of that.” But also that might be a decision that also makes it a worse place for a lot of people.

Eugene’s 2×2 matrix for social networks

Eugene: “I have this two-by-two that I use to analyze social. The X-axis goes from people you know to people you don’t know on the left. And then the Y-axis goes from convergent worldviews to divergent worldviews at the bottom. I’d argue that western social media, the biggest thing it did was increase the surface area of the bottom left quadrant, which is interactions between people who disagree with each other and don’t know each other.

So the upper right quadrant, it’s easy to build a business, people you know, you share interests. The upper left quadrant, people you don’t know, but you share interests. It’s like Reddit and things like that, still works. A lot of Twitter’s like that. The bottom right quadrant, I call the racist uncle quadrant. It’s people you know but you see them at Thanksgiving once a year and they have some racist views, but it’s like, all right, once a year, they’re family, so you put up with it. And the bottom left quadrant is interesting because I would argue Twitter has probably more of that than almost any other social network.

Part of it is that Twitter chose at a number of points to just amplify distribution randomly. So when I look through my Twitter feed today, I get a lot of tweets from people I don’t follow. A person I follow liked this thing, or they just decided they were going to show it to me because they thought I was interested.

Ben: “I think to your point, you talked about the probabilistic versus deterministic, Twitter is at its highest value when it’s extremely deterministic and you follow the right people. Right now, getting someone to follow the right people is really, really difficult. And I think you wrote this in one of your articles, the problem is conflating the person with the interest, where people follow because they’re interested in something, not because they want to follow a person.”

Ben: “The meta of twitter is the dunk.”

Eugene: Yeah. It’s just the pleasure of going and just seeing the people that have terrible takes that you disagree with and dunking on people and telling weird jokes that go viral, a lot of which are jokes about other people. Maybe that is kind of the local maximum that they won’t be able to get off of. And maybe that’s what they’re destined to be.

Ben Thompson: Which is, by the way, a terrible product for advertising.

Eugene: Yeah, exactly.”

One of Eugene’s favourite quotes

Eugene: “One of my favorite quotes is from the sociobiologist E.O. Wilson. He wrote this a while ago. He said something like, the chief problem of modernity is that we have godlike technology, medieval institutions and paleolithic emotions. Something to that effect.

The thing I always take from the E.O. Wilson quote is not just the three things, the godlike technology, the medieval institutions and the paleolithic emotions, but I think what he’s really saying there is that the cycle time of change is different for those three things. So for technology, the cycle time of change is very fast. For institutions a little bit less so. They can be pretty slow to change. But for people, people change the slowest of all. You can read a Shakespeare play and still be like, “Oh yeah, I recognize why a fellow is so jealous.”

And I have a version of that quote, which is slightly adapted for the internet era. The latter two parts are still the same. We still have the medieval institutions and the paleolithic emotions. But the first part is that we now have godlike search and distribution. And what’s crazy is that we paired infinite memory and godlike distribution with people who are still the same crazy people that we always were. We saw with all the people getting canceled in that first era, it was just the mismatch.

Oral culture v print culture

Ben: I think there’s this bit because I talked a bit about before about Twitter being written culture and written culture was the dominant form of culture in the West for the last 500 years, and it transformed the world. I don’t know if you’ve read the book WEIRD, but this idea of the printing press, the downstream effects were just so massive and it fundamentally changed the way people thought and individualism and all these sorts of things. But the natural state of humanity is oral culture. It’s not being precise with your facts. It’s sort of passing down stories, passing down traditions and TV started it, but UGC, user- generated content, is all about the oral tradition. It’s the reemergence and that’s the natural state of humanity.

However, It’s a toxic mix with search because oral culture, it worked because once you said a word, it was gone forever. It wasn’t written down. Writing down the words changes them. This was Snapchat’s fundamental insight — the bit about stuff disappearing, that was the natural state for internet-based communication. We had this fundamental problem where computers, by default, save everything, but the zero marginal cost of distributing communications means we say stuff that ought never be saved, and I think a lot of the problems in society are driven by that mismatch.