Barry McCarthy: From Netflix CFO to Peloton CEO; How Netflix Beat Blockbuster | 20VC #962

1. 0:00 – 2:18

   How Barry Became CEO of Peloton

   1. HSHarry Stebbings0:00

      Barry, this is such a joy to do. As we just said, I've stalked you for- for many, many weeks now with- with-

   2. BMBarry McCarthy0:05

      (laughs)

   3. HSHarry Stebbings0:05

      ... references from Gustav, from Daniel, from so many others. So thank you so much for joining me today.

   4. BMBarry McCarthy0:11

      Oh, it's a absolute pleasure.

   5. HSHarry Stebbings0:13

      Now, I would love to start with a little bit of context. We look at the incredible journey you've had. And I'm gonna skip a few steps in between. But I'd love to know, how did you make your way into the world of startups first? And then, how did you come to be CEO of Peloton most recently?

   6. BMBarry McCarthy0:27

      Well, I got involved in startups in the- in the 19... (laughs) not to date myself, in the 1980s when I was at First Boston, uh, and they pulled together an investment pool, um, and were investing in startups, and I was invited to participate in that group, uh, as a venture capital investor, and I spent seven years doing it. And I made just about every mistake you could possibly make. And then, along the way, I realized that I wanted to be an operating guy, and then it took me quite a while to get my, convince someone to hire me in my first operating role. Uh, eventually, that led me to- to Reed Hastings' doorstep in 1999, when Netflix was quite small. I think I was the 40th employee. Um, and then, you know, the rest is sort of history. And then with respect to Peloton, I was k- comfortably (laughs) retired, uh, and, uh, uh, and an avid Peloton fan, user. And, uh, and, uh, had- had many, um, years of successful association with TCV, both co-investors in Netflix and co-investors in Spotify. And, um, and read about some of the difficulties in the business and thought it was particularly relevant, coincidentally, with things I'd done in my career that led me, gave me some insights into, um, maybe some of the challenges they were facing and possibly some of the fixes. And I was anxious to play another big game with an iconic brand, which Peloton is, and, um, fortunately, I was able to convince them to give me a shot at- at, uh, jumping in and turning it around.

   7. HSHarry Stebbings1:58

      I'm sure that was a tough decision for them looking at your incredible journey. (laughs)

   8. BMBarry McCarthy2:02

      (laughs)

   9. HSHarry Stebbings2:02

      Um, but- but, uh, I- I do, I- I just-

   10. BMBarry McCarthy2:05

       Well, I'm not everybody's cup of tea, let me put it that way. (laughs)

   11. HSHarry Stebbings2:08

       T- we'll get to it. (laughs)

   12. BMBarry McCarthy2:12

       (laughs)

   13. HSHarry Stebbings2:12

       I heard some weaknesses too. I just, I'm fascinated. And I'm sure Ben told you I go off schedule

2. 2:18 – 3:50

   Reed Hastings in Netflix’s Early Days

   1. HSHarry Stebbings2:18

      a little bit. What was Reed like back in 1999? We see this incredible leader today. What was Reed like back then in 1999?

   2. BMBarry McCarthy2:27

      Well, his- his original vision was to be retired and to run the company and be its chairman. And the performance kind of got sideways and he came in off the sidelines and replaced Marc Randolph as the CEO, and then the very first thing he did was to bring in Patty McCord and rebuild the entire team. And, uh, so I came in as part of the rebuilding and it was then an a la carte business. Now, he had been very successful building a company called Pure Software, which he ended up selling and had been taken public by Morgan Stanley, and I think was maybe the second most successful IPO of all time if I'm recalling correctly. A little bit out of my depth there. Um, and in hindsight, I think he wished that he had had the opportunity to build it in a slightly different way. He had been a first time CEO at Pure, uh, and this was his- this was his do-over, in effect. Um, and so he was, um, he was quite deliberate in the way that he- he built the culture, um, and measured performance. And, um, and then eventually we found product market fit. It's a sub- subscription model as it turned out, not as an a la carte business. And once we stumbled into, uh, into the subscription model, the- the business literally started doubling each year and for, gosh, five or six years just kept doubling.

   3. HSHarry Stebbings3:49

      Barry, I do

3. 3:50 – 5:10

   What are you running from/towards?

   1. HSHarry Stebbings3:50

      have to ask, you know, without being too much of a therapist, I alwa- always believe we're-

   2. BMBarry McCarthy3:54

      (laughs)

   3. HSHarry Stebbings3:55

      ... w- what we're- we're all functions of our history. And you've never been on a podcast like this before, my friend. So what are you running from and what are you running towards?

   4. BMBarry McCarthy4:05

      Running from boredom and, uh, and whatever the antidote for boredom is, what I'm running to. I love the game and, uh, I love being able to play on a team. You know, there, I l- if- let's see, if I used a musical analogy, I'd say that the- that the kind of music that you can play as a soloist is quite a bit different than the music that you play when you're in an orchestra. And I find the orchestral music to be particularly engaging. My whole life I've been involved in organized sports on teams in high school and college, and I miss it terribly when I'm not playing on a team. And for me, businesses is, it provides that opportunity. We happen to be associated with, you know, physical fitness, which has also been a- a important part of my life. And so the mission and the values of the business happened to- to resonate with me personally, but it's mostly the opportunity to- to do it with a group of folks.

   5. HSHarry Stebbings4:52

      Listen, I deeply agree. Having gone through COVID, um, I felt like Olivia Amato got me through COVID. And it's got nothing to do with my crush on her, I promise you. It's the engagement.

   6. BMBarry McCarthy5:02

      (laughs)

   7. HSHarry Stebbings5:02

      Um, but I do have to ask you, um, I- I spoke to, you mentioned team. I spoke to Daniel before, I spoke to Shack before, and they said, "You've got to

4. 5:10 – 7:59

   Why did you move from California to Stockholm?

   1. HSHarry Stebbings5:10

      ask, why did you move from sunny California to the cold, dark Stockholm?" What was it that compelled you to join Spotify at the time?

   2. BMBarry McCarthy5:19

      Daniel. Um, music. I- I knew music from my previous life at a company called Music Choice and- and from my experience on the board of Pandora. Spotify owned Cool. Daniel was using my pattern recognition skills. As exceptional in his own way as Reed was exceptional in his way, kind of, you know, one in 25 million. It was a unique opportunity to work with someone that I had come to admire and trust. I had been on his board before he invited me to- to join the management team. Stockholm was not on my list of places to live, for sure, and I (laughs) terribly missed California. On average, you know, living in Stockholm is great. In the summer, the sun never goes down and it- and it's-... one of the most beautiful places on Earth, and in the winter, it's (laughs) one of the most-

   3. HSHarry Stebbings6:09

      Depressing. (laughs)

   4. BMBarry McCarthy6:11

      Uh, uh, yeah. So there was a little bit of a struggle. But I would say, in comparison to the life we led in California before we moved to Stockholm, it was an absolutely fabulous experience. We led a relatively small and insular existence in Silicon Valley, and we had a much bigger life, much more adventuresome in Stockholm. And so, reflecting on those two years, it was a terrific opportunity. And interestingly enough, it, it brought my wife and I much closer together. In fact, could have gone, could have gone south pretty fast, but... Since, you know, we were in a foreign country, we didn't speak the language and, and we were sort of dependent on, on each other. And she actually still has friends that she engages with in, in Stockholm in a, in a book club. Anyway, eventually we moved to New York when Daniel asked me to also run the ad business, and that was kind of sad to go. But, um, it was tremendous fun while we lived there.

   5. HSHarry Stebbings7:00

      Can I ask you a weird question, which is, when you're running at the top of your game as you have done for so long, what are the secrets to a successful marriage? This is clearly something I have not mastered.

   6. BMBarry McCarthy7:11

      (laughs) Well, I failed miserably the first time. Um-

   7. HSHarry Stebbings7:15

      (laughs)

   8. BMBarry McCarthy7:17

      ... we have shared values and we have common interests. Um, we actually like (laughs) being with each other. And interestingly enough, most of the success I've had in my career has come a- after, after we met. So, I would say that, you know, that she's been very much part of it.

   9. HSHarry Stebbings7:31

      You mentioned Daniel and how he was so central to your decision to move to Spotify. He described you before the show as the best strategic CFO or deal maker in the world. Why do you think he said this, and what do you think makes you so good here, Barry?

   10. BMBarry McCarthy7:46

       He probably said it because he hasn't met most of the CFOs in the world. (laughs)

   11. HSHarry Stebbings7:53

       It was a large data set. (laughs)

   12. BMBarry McCarthy7:57

       (laughs)

   13. HSHarry Stebbings7:57

       But really, what, what, what do you think led him to

5. 7:59 – 12:07

   Working with Spotify CEO Daniel Ek

   1. HSHarry Stebbings7:59

      say that?

   2. BMBarry McCarthy7:59

      Well, look, we were a great team and we had a terrific run together, and a lot of success, and we, we broke new ground. Uh, we were quite compatible. You know, um, I wanted to do new and interesting things, and, and he's particularly interested in new and interesting and smart things. And he's, he's a risk-taker in ways that were appealing to me, and two, I had a skillset that was complementary to his own. And so, um, we never stepped on each other's toes, and he absolutely has skills that, from a product perspective, that, you know, are just, uh, technical, um, skills that, for running engineering teams that, that I don't have. And I would say the business model from a financial perspective was sort of a mess when I walked into ... well, there was a lot of low-hanging fruit, let me put it that way, when, when I, I got involved in, in Spotify. And so, the partnership worked really well at a personal level and pr- and professionally. Maybe that's why he said it.

   3. HSHarry Stebbings8:49

      Well, I w- I mean, one of the reasons, I'm sure, is, is your innovation around direct listings and how you played such a pivotal role with Spotify in terms of the direct listing. And I spoke to Jeff Jordan at Andreessen as well. I told you, I really stalked you.

   4. BMBarry McCarthy9:02

      (laughs)

   5. HSHarry Stebbings9:02

      Um, and I spoke to Jeff and he said, "You gotta ask about direct listings." Why do you feel direct listings are better, and what do you think you saw that others didn't see about the direct listing model being so good?

   6. BMBarry McCarthy9:14

      Well, there are a couple things to unpack. Um, as it relates to direct listing, you know, it's a drug that's very effective for addressing, you know, certain kinds of clinical circumstances. But it's, it's not for every occasion and not for every company, point one. So, at Spotify, I was trying to solve a particular problem, I wasn't trying to reinvent the, the going public thing. I will say, to D- very much to Daniel's credit, I walked in the room and I very intentionally said to him, "Hey, I have this crazy idea to do something that's never been done before." Now, there are an awful lot of CEOs and boards I know who if, if you were t- foolish enough to, to say that to them, would go, "Whoa, whoa, whoa, whoa, whoa." And, and Daniel was, like, leaning forward in his chair and couldn't, couldn't wait to hear what the idea was. So, one. Two, when you take a company public, you need to sell enough shares for there to be a liquid market.

   7. HSHarry Stebbings10:08

      Mm-hmm.

   8. BMBarry McCarthy10:09

      And you dilute the existing shareholders. You know, the typical rule of thumb, you're gonna raise sort of 12% of the market cap of the company, 10 to 15, may- maybe as low as 7, if it's gonna trade by appointment in the aftermarket. Okay, so for us, that would've been well north of a billion dollars, and we already had a billion plus, what, mer- several billion on the bal- I don't even remember anymore. Lots of billions on the balance sheet, and we didn't know what to do with the existing cash. We certainly didn't need any more, and, and the existing investors had no economic incentive to dilute their ownership interest to raise more cash that we weren't gonna use productively. So, how do you solve that problem? That's what, that's, that's what got me thinking about, uh, direct listing as an alternative. So, the question for the lawyers was, the securities lawyers was, "Okay, well how do you go public without actually s- selling stock? Is there such a thing? How would you do it?" And so we, we ripped off an existing structure mostly used by companies that are coming out of a bankruptcy proceeding or are being spun out of large public companies, and then used it in a novel way in, in the IPO market. I think the thing that most people don't understand, even very experienced bankers (laughs) , I have to point out, the stock opens in a direct listing exactly the same way it opens in a traditional IPO, which is exactly the way it opens for already traded public companies.

   9. HSHarry Stebbings11:27

      Can I ask, do you think we will continue to see many more direct listings moving forward?

   10. BMBarry McCarthy11:32

       Well, not in the current capital environment. And that's because public company shares are, are trading at, at such a steep discount that the only way you're gonna get a company public is if you essentially promise to the institutions who are going to buy the IPO a big pop in first-day trading.

   11. HSHarry Stebbings11:48

       And you're not gonna get that

   12. NANarrator11:50

       And that's a, that's a-

   13. BMBarry McCarthy11:51

       ... the price.

   14. HSHarry Stebbings11:51

       And that's a traditional offering. Yeah. No, I, I, I totally get you in terms of the pop. Uh, can I ask one final one before we actually get to, you know, how you work? But it's just on, on kind of the move to Peloton. This was your first time adopting the role as CEO. W- without sounding strange, given

6. 12:07 – 20:14

   Barry’s Move to Peloton

   1. HSHarry Stebbings12:07

      your incredible career, but were you nervous about being CEO for the first time?

   2. BMBarry McCarthy12:12

      Yeah, a little bit. Actually, I, it was Daniel who talked me into... It was Daniel and, um, a very successful venture capitalist, um, who'd been on the, the Netflix board for a long time named Tim Haley, both of whose counsel I had sought, and, uh, and my wife, two together got me thinking about the CEO role. Because initially, I was talking to Peloton about a COO role. I wasn't entirely sure that, that I had the chops to, you know, actually step up. But in the course of understanding the sort of the challenge ahead in the business, I thought, well, the only rational way that, to actually do that is if, is if I can be assured that at the end of the day, I, I have the final say about how we manage through the turnaround. Because different from Daniel, where I had a relationship of trust, um, and I'm not throwing shade at, at any of the founders, um, we didn't know each other, and I didn't know if I could trust their judgment or not. We just simply were unknown to each other, and that was more risk than I was willing to, to, to take.

   3. HSHarry Stebbings13:13

      Can I ask, when you, when you have that decision, you have, you know, the pros and the cons, and when you thought about the challenges that you were maybe nervous about, are the challenges that you were nervous about, the challenges that fa- that you face today, is it what you expected in terms of the hard things or are the hard things different?

   4. BMBarry McCarthy13:30

      Super good question. So, I knew that in sit- from experience in situations like that, you don't know what you don't know, and so you're absolutely gonna discover things that will be challenging to you, and you're gonna have to be good enough in real time in order to figure out how to deal with those black swan events, and we had a couple (laughs) , I'll just say straight up. And, and maybe a few more than I was anticipating. But, you know, we've been able to navigate them successfully, let me say. The biggest surprise to me is the amount of emotional resilience required of a CEO in a situation like this 'cause people don't come to you when things are working well, and in a turnaround, almost nothing's working well. And so you're, uh, like a constant firefighting (laughs) mode, and it's just one mess after another is, you know, arriving on your desk that ne- that needs to be dealt with. And you need to both have the, uh, the intellectual horsepower and the emotional energy to fix it, and you need to also be able to lead and motivate the people you're trying to fix the, the problems with, which is, and this is where the, the emotional resilience, you know, comes into play, 'cause it does eventually grind you down. But, you know, that's not a formula for (laughs) successful leadership. You gotta, you know, motivate the, the troops same time you're trying to solve all these problems, the same time as you're, you know, trying to manage your own emotional state.

   5. HSHarry Stebbings14:58

      Barry, Barry, I, I think, I think turnarounds are a bit like Matt Wilper's endurance rides. They're hard, they're long-

   6. BMBarry McCarthy15:04

      (laughs)

   7. HSHarry Stebbings15:04

      ... but at the end you feel pretty good. You do. Um, that's how I equate it. Um-

   8. BMBarry McCarthy15:10

      (laughs) Okay.

   9. HSHarry Stebbings15:10

      And you might, and you might need a banana halfway through for some energy. Um, but I (laughs) I want to go to, like, you mentioned the emotional resilience there. Uh, in terms of your performance, obviously Peloton is, is a company of performance in its sporting endeavors. When you think about the words high performance and leadership, what do they mean to you, having seen also many different organizations?

   10. BMBarry McCarthy15:31

       Um, it was Reed Hastings who taught me the importance of business models. So first and foremost, if you don't have the right model, you, you can't win, or you c- you know, you, it would be enormously difficult for you to extract competitive advantage and sustain those advantages in a way that enable you to, to be successful in the marketplace. So first and foremost, you, you know, you have to have the strategic chops that enable you to think about your business model, its inherent weaknesses and strengths, and how you can leverage it, um, for the future success of the business, and then secondly, great leaders are, are all about talent density. It's, it's both the ability to, to recognize talent for what it is, and then it's, it's the ability to, to hire it, to recruit it, get people to want to work with you, and then lastly, it's the ability to extract from that talent every ounce of their talent and getting them to perform, uh, at a high level for the benefit of the business.

   11. HSHarry Stebbings16:30

       So, I, I have a couple of things I have to unpack there. You, you mentioned competitive advantage. What would you say is Peloton's biggest competitive advantage today?

   12. BMBarry McCarthy16:38

       This is gonna sound overly simplistic, but it's not, and maybe as a user you'll be able to relate to this. The brand is golden and the user experience is platinum, and always has been. So there, there are many mistakes that have been made along the way, but from the get-go, it's had product market fit, and despite all of the, the foot faults, it has never once damaged the product market fit. And so there is an army of consumers who are pulling for the success of the business because they, they absolutely adore the user experience. That's the, that's the primary success. That, that's the asset, you know, it's the content that we have, one. Then two, I would say, Mike Moritz put it best when he was talking about the Instacart business but it absolutely applies to the Peloton business, COVID was the marketing campaign that Peloton never could have afforded, and the growth that happened during COVID propelled the business to scale in a way that no other company in the space, to a level that no other company in the space has achieved. And that has, uh, afforded the company access to capital that it wouldn't otherwise have, and, um, has made it the dominant player in the con- active fitness category.

   13. HSHarry Stebbings17:54

       This is what I go back and forth on, actually, in my mind, which is like, was, you know, obviously COVID's a terrible thing and obviously terribly sad it happening-

   14. BMBarry McCarthy18:00

       (laughs)

   15. HSHarry Stebbings18:00

       ... but was it, like, a good thing for the business or not? 'Cause it also placed a huge amount of unnecessary expectations and pressures on a company that maybe wasn't ready for such hypergrowth overnight.

   16. BMBarry McCarthy18:11

       You know, what has made, um, among the things that it makes f-... um, Reed Hastings, such a great executive. And I would say Daniel, great executive. One is that, that they deal with the world as it is, not as they want it to be. And they, they process data at a bit rate that, you know, humbles most of us, and they have the capacity to pivot based on the, the data th- that they ingest at a pace that would make most people's heads snap. Reed in particular. I would say that the, the Peloton team didn't exhibit that capacity, right? The imagine that COVID was gonna be the new normal. Now, in 2020 hindsight, kind of hard to see how that was a logical expectation, but, um, you know, we weren't in their shoes at the time. So, you know, it is what it is. Whereas Reed, um, at least at, at Netflix for the most part, not entirely, but for the most part, and Da- and Daniel when he pivoted into, into, um, podcasting, ha- have been able to anticipate Reed in streaming, let's say, by way of example, you know, reinvent the business model in important ways than anticipated, fundamental shifts in consumer behavior, and then they've been able to surf those waves. So, you know, there is a scenario where you could have scaled it and then anticipated, you know, in a post-COVID world there was, you know, gonna be this shift, and position for this shift, but there aren't many companies ... I mean we're talking about a very few ex- truly exceptional CEOs who, you know, could have taken that information on board in an anticipatory way and repositioned their businesses, um, because of it.

   17. HSHarry Stebbings19:42

       Can I ask you, you mentioned their talent as well. I'm trying to hire ... And we both know that the top 1% increase company trajectory tenfold.

   18. BMBarry McCarthy19:51

       Yeah.

   19. HSHarry Stebbings19:51

       And I'm trying to hire a top 1%, and their argument against joining is just loyalty. "I've been there for 10 years. My team is there." Loyalty. You've acquired some of the best talent over the years. How do you argue against loyalty when that is what you're fighting against in the bid to acquire an incredible talent? For myself

7. 20:14 – 22:30

   Why Peloton is a Team and Not a Family

   1. HSHarry Stebbings20:14

      here, you're helping me. (laughs)

   2. BMBarry McCarthy20:16

      As I've said to our employee base here, and as we said to the employees at, at Netflix, we are not a family. We are a professional sports team, and you will want to work here because you, you will ha- you will be afforded the opportunity to work with some of the most talented people in the business. And because of their talents, we will all succeed. But if we as managers make the mistake of hiring someone who we send down the field to catch a pass and that person keeps dropping the pass, that, that puts the entire business at risk. And so, you know, we're gonna s- we will swap out that player and put someone in who actually can catch the touchdown so we can win the game for the benefit of, of the, the entire employee base, right? So in spite of the loyalty. So, I was at Netflix for 12 years. Onto God, it wouldn't have surprised me in the least if on any particular day that I'd walked into work, Reed had walked up to me and said, "I think it's time to make a change." Now, that's not for everybody. I mean, everybody says they wanna be a g- many people say they wanna be a gunslinger, but o- you know, once the people start, (laughs) start getting shot, not everybody thinks that's such a good idea. Did I worry about it every day? I didn't worry about it on any day. I just, you know, you just learn to accept it and move on. Be confident in what you do and do it to the best of your ability, and it is what it is. And if you're good at it, you g- you get to play another day, and if you're not, you know, you go someplace else.

   3. HSHarry Stebbings21:44

      Totally agree with you there, especially on the professional sports team, not a family. But you also mentioned the bit rate of Reed, of Daniel. It's funny you say that because Andy Ratcliff, um, someone you know, said that you are an exceptionally quick and analytical mind, one of the fastest that he knows.

   4. BMBarry McCarthy22:00

      Well, that's coming from a guy who I find it very difficult to keep up with analytically. (laughs)

   5. HSHarry Stebbings22:06

      (laughs) Well, I mean, uh, you know, Andy knows many people. He's been around a, a fair few times.

   6. BMBarry McCarthy22:11

      Yeah. Sorry, for everybody's benefit, Andy was a, was a founding partner at Benchmark, and is on the faculty at, at Stanford d. School, and was the founder and chairman of Wealthfront. So, h- is enormously accomplished.

   7. HSHarry Stebbings22:22

      So, what ... With that in mind, what's your framework for problem solving? You said about emotional resilience earlier. When the problems come, h- what's your

8. 22:30 – 32:21

   Barry’s Framework for Problem Solving

   1. HSHarry Stebbings22:30

      framework for problem solving?

   2. BMBarry McCarthy22:31

      Well, the first thing I do is ... (laughs) I'm not sure if you can't surround by that. But I, uh, it depends on the nature of the problem. It depends on whether I have functional expertise or not, that, that, you know, makes me competent at diagnosing the problem. Um, my experience is that oftentimes, the way that people, uh, articulate the problem and the solution is relatively uninformed because they, they have misinterpreted the underlying data or th- they haven't done the data analytics rigorously enough to understand the full scope of the problem. And so, I just start pulling on strings and trying to get to the, um, to a, a basic understanding of the root cause, and I try to understand the data that informs us about why we think the nature of the problem is what it is, and then I just follow the data and see where it leads.

   3. HSHarry Stebbings23:25

      How do you think about the trade-off between speed and quality when making decisions? It's always something that I struggle with.

   4. BMBarry McCarthy23:32

      Um, yeah. You know, I think that Jeff Bezos at Amazon provided us both a really helpful framework for how to think about the answer to that. It begins with this concept whether it's a one-way or a two-way door. So, if you can make a decision and you can undo it, then you can afford to move a lot faster with that decision, uh, than you can if it's a, an irreversible decision that you're gonna make, which he describes as a one-way door. And if it's a one-way door, then you really wanna make sure that, you know, you got all your ducks right, you fully understand the scope of what it is that you're, that you're deciding, and what, what trade-offs you're, are making as a ... in process of that decision. And if it's a two-way door, you know, you could move faster. You can afford to be wrong. Let's take by way of example the expansion of our business into, into third parties with the exporting goods and with Amazon. Is it a good thing or a bad thing for the business? The only way to know that is to actually do it.... and if it doesn't work out, then you just, you stop partnering with them. We can all agree, reasoning from first principles, that we need to be where, wherever our customers are buying hardware. And so, um, seems like it, it's kind of a no-brainer. But you could be wrong, and you just gotta get started.

   5. HSHarry Stebbings24:41

      The thing that most founders get wrong is they don't have milestones or signposts for what is wrong, and so they just let it continue and continue. When you think about, like, as you said that, the only way you know with Amazon is to try it, what is the sign of success versus failure when you look at that, in particular, as a guiding post?

   6. BMBarry McCarthy24:59

      I will say, by way of answering the question, that it's super helpful sort of before you start down a path to try to define for yourself what success looks like.

   7. HSHarry Stebbings25:08

      Hm.

   8. BMBarry McCarthy25:08

      So, so, when you get there, you, you know it, or when you're falling short, you know it. Just like if you're gonna buy a company, you're thinking about buying a company, it's really helpful before you start the bidding process and the emotions kick in to decide where you're gonna draw the line from a pricing perspective, you know, what's your walkaway? So, um-

   9. HSHarry Stebbings25:25

      Hm.

   10. BMBarry McCarthy25:25

       ... we definitely had some very specific goal posts in mind when we thought about direct listing and what success would look like by way of example b- before we started.

   11. HSHarry Stebbings25:33

       What was the signpost of success with Amazon?

   12. BMBarry McCarthy25:36

       It's a decent margin. We bring in an incremental subscriber, a user from, let's say, a demo that we hadn't previously been able to, to access. So if, if all we do is, you, you know, if they would otherwise have purchased directly from us at a higher price on our own website, that, that's probably not success. But if, because of the Amazon name and the reach of, of Amazon's website, w- we're able to access a, a consumer that we wouldn't have otherwise, then probably it's additive to the value of the enterprise.

   13. HSHarry Stebbings26:08

       I, I, I, I have to ask, you know, when you're making a decision, there's always lots of different opinions, and we mentioned, um, potential weaknesses earlier, uh, and you very humbly mentioned it. When I spoke to some, they said that you have zero tolerance for BS. When you think about hearing lots of different opinions, um, how do you manage and deal with BS as a leader, Barry?

   14. BMBarry McCarthy26:31

       Uh, I, I, I could do that better. Not, not very well. (laughs)

   15. HSHarry Stebbings26:36

       So is it, how do you, how do you deal with it? 'Cause right now, I just get bluntly frustrated and visibly angry. That isn't productive, actually, and people just ...

   16. BMBarry McCarthy26:44

       Yeah, I agree.

   17. HSHarry Stebbings26:46

       ... clamor.

   18. BMBarry McCarthy26:46

       And I'm susceptible to that in high-pressure situations, and particularly when I'm being surprised with negative news that is inconsistent with the mental model that I, I'm bringing to the conversation, or with people who are, eh, eh, advocating for a position that I think is not well-reasoned and don't have the data to support the, the position they're advocating for, I can get frustrated pretty quick. And as you say, it can be really demotivating for the team.

   19. HSHarry Stebbings27:11

       Yeah.

   20. BMBarry McCarthy27:11

       And so, um, if that's frequently your MO, people don't wanna work for you.

   21. HSHarry Stebbings27:17

       Yeah.

   22. BMBarry McCarthy27:17

       Uh, and the good people will leave. You know, you, you try to strike the balance between being inclusive and listening. People wanna be heard. It's not important that we all agree, but it's important that people have, feel like they've been given the opportunity to voice their point of view, and then I think it's important, if you disagree, Daniel was particularly good at this, at articulating the reasons why you are deciding to do whatever it is you've decided the business should be doing at that particular point in time, so people can at least understand what you're disagreeing about that has caused you to reach a different conclusion, perhaps, than they've recommended. And if you can do that in a, you know, in a balanced and a matter-of-fact tone of voice and, and take the emotion out of it, it's pretty successful, and I'm less good at that.

   23. HSHarry Stebbings28:04

       (laughs) I might have heard. (laughs) Um, but you said a-

   24. BMBarry McCarthy28:09

       Yeah, I mean, for better or worse, I, I play with a lot of passion and, you know, that's ... e- e- and there's a place for that, but it's not-

   25. HSHarry Stebbings28:15

       I've gotta ask. You, you, you said about disagree there a couple of times. You know, I think Gustav before said on the show with me, you know, about disagree and commit. And I don't know if I really agree, to be honest. I don't know if people can really commit when they really disagree. How do you feel about the disagree and commit as a management philosophy in action?

   26. BMBarry McCarthy28:35

       I think we do it pretty well. The decision-making process in a Swedish culture, and at, and at Spotify, can, at times, to an American, feel a little bit like watching the paint dry.

   27. HSHarry Stebbings28:43

       (laughs)

   28. BMBarry McCarthy28:44

       Uh, I mean, the amount of time that Da- that Daniel invests in allowing the organization to work its way through the decision-making process when, in fact, he's already made the decision, he's just waiting for everybody else to catch up to the decision he's already made, you know, it, it just seems to an American like a complete waste of freaking time.

   29. HSHarry Stebbings29:01

       (laughs)

   30. BMBarry McCarthy29:01

       And, and c- they certainly don't move in Silicon Valley time. I'll give you an example. There was a point in time, very early in, um, before the world had discovered AWS and its progeny, that that's where the world was moving, and so he decided overnight, literally, that we were moving to the cloud. And there was no discussion, there was no debate, and he, and he h- had no interest in tolerating any discussion or debate on the subject. (laughs) And so if you were an engineer and you disagreed, you could leave. Those are your choices. You're like, "Get with the program or leave." Okay. Well, that kind of decision would have taken, oh, maybe three or four months at Spotify, even if Daniel had decided overnight that we were moving to the cloud. But he would afford the organization the, the time that it needed in order to reach its own consensus. Now, the Swedish culture would say the benefit is once the decision is made, people commit, and there's none of the passive-aggressive kind of behavior that you see from, in US companies, where, you know, people aren't really committed. They're like, you know, behind the scenes trying to, trying to deep six the, you know (laughs) the strategy change 'cause it's, you know, wasn't really theirs. Okay, so where does that leave us? If everybody's playing on the same team for the benefit of the organization, it, it needs to be absolutely clear who owns this decision, and all the people who don't own it are free to weigh in on, on, you know, the different pros and cons and express their point of view-... but then we're going to hold the person who owns the decision accountable for the results of the decision. And if you have the right people on the team, then more often than not, you know, you'll have a terrific batting average. It won't get everyone, but it'll get most of them, and that's why they're there. So I'll share with you an example. Early in the history at, at Netflix, Ted was running content, Reed was running the business. Periodically, as the quarter progressed, we would assess our performance, and, and if we were running out of budget, we would scramble to figure it out. We could reallocate it to marketing or content, something else. In this particular quarter, we had, I don't know, $30 or $50 million to spend, and Reed really wanted Ted to invest it in, in, uh, in feature film content, and which Ted thought was a really stupid idea.
9. 32:21 – 35:36

   What makes a great Board of Directors?

   1. HSHarry Stebbings32:21

      on some of the best boards. What makes an amazing board to you, having seen so many different types?

   2. BMBarry McCarthy32:27

      Yeah, I, I wrestle with this. I would say managers manage and board members don't, and that's i- important to bear in mind. The best board members tend to be operators who are strategically focused, who can help provide context for the management team and sort of see around corners in anticipation of issues that maybe they're not thinking about and encourage them to socratically to steer them towards anticipating issues that, that, you know, they might not otherwise have seen. So that's one model of value-add I've seen. Another is, uh, they've got a lot of functional expertise, and, and if you want them to lean in and help you in some particular aspect of your business, that's been true here at Peloton. By way of example, on the supply side, had some really valuable help from one of our board members in that regard. That can also be quite, um, value-added, but it's a from time to time sort of thing. Let me say, in my experience in sitting on boards, and I've sat on many, no matter how hard you tried, you never really know what's go- my experience has been you never really know what's going on inside of a company. So board members are entirely dependent on, on the management team and, and the CEO to assist in their understanding of the business. And so as a CEO, you kind of get out as much as you put in. The more informed they are, the more value-added they can be, and the less context they have and the less visibility they have, the less value they're gonna be to you in your running of the business.

   3. HSHarry Stebbings33:46

      Can I ask, how do the best founders manage their boards? You've seen Reed manage a board, you've seen Daniel manage a board. Now you manage the board yourself. How do the best founders manage boards? There's often big voices, big characters. What's, how do you manage a board?

   4. BMBarry McCarthy34:03

      Well, I would say that founder-led companies have a different board dyna- dynamic than, than companies sort of led by professional managers. I'm the professional hired gun. Uh, that's totally different than a founder who's, you know, bootstrapped the company, become an iconic leader, picked all of the, of the board members in the room. For the longest time, I think the board members at, at Netflix didn't want Reed to not think they weren't strategic and value-added. You know, God forbid he'd walk around Silicon Valley and say something bad about one of his board members that would trash their, you know, their reputations permanently. And so everybody's on their best behavior, and, you know, let's take the Apple board. I mean, who was gonna get in Steve Jobs' face about anything, ever?

   5. HSHarry Stebbings34:48

      Hm.

   6. BMBarry McCarthy34:48

      Like, it just wasn't gonna happen, even when they were running it like a Depression-era company and they had more cash than the US Treasury.

   7. HSHarry Stebbings34:56

      Is that not a failing of the company though, when you think about it?

   8. BMBarry McCarthy34:58

      Oh, yeah. Uh, yeah.

   9. HSHarry Stebbings34:59

      Or what is the point then?

   10. BMBarry McCarthy34:59

       Yeah, yeah, absolutely it is. But look, I mean, did the shareholders do well? They did fabulously well. I mean, you know, they had a brilliant founder, and so the board should be enabling of that kind of unique talent. I'm just pointing out that those are uniquely different situations than the situation that most of us find ourselves in. And there you need to, you know, invest in the relationships and invest in their understanding of the business and know when you need help and be courageous enough to ask for it when you need it i- instead of trying to hide it. Be proactive about it as a, you know, as a CEO.

   11. HSHarry Stebbings35:34

       In terms of being proactive about it as

10. 35:36 – 37:46

    How to Give Hard Feedback

    1. HSHarry Stebbings35:36

       a CEO, uh, you know, I, I, I spoke to one of your board members, and they said you have this incredible ability to bring your glasses down and say the hard thing that everyone is thinking. Now, as a board member myself on the investor side, I struggle with this. I like to please people. How do you advise me-

    2. BMBarry McCarthy35:53

       Yeah.

    3. HSHarry Stebbings35:53

       ... on the right way to deliver tough news, if I bring my glasses down, and deliver that feedback in a hard but, like, fair way?

    4. BMBarry McCarthy36:01

       Well, if you had less EQ, um, you wouldn't wrestle with it as much as perhaps you do. And I'm not blessed with the same degree of EQ as you are, and so I don't act, I'm less self-aware (laughs) when I do it.

    5. HSHarry Stebbings36:14

       (laughs)

    6. BMBarry McCarthy36:14

       I mean, oftentimes, it's just a question that's top of mind and I think it's particularly relevant to the discussion, and so I just ask the question. I'm, I'm certainly not trying to be confrontational. I don't mean to do it in a confrontational way, for sure. If I could liken personalities to radio frequencies, some, some people are, are frequency agile and they can deal with many different kinds of personality types, but, but some are not. And to be interpersonally effective, you have to find frequency. You need to find a voice and a way of communicating with the, with the CEO, particularly if they're a founder, in a way they're able to take it on board. Maybe raising an issue or you're challenging them or you're, you're trying to get them to see something in a, in a different way than maybe that they're thinking about it. But human nature, it's not... You need the same skill set to be an effective employee and, you know, interacting with your, your boss, right? Like, that's the art of it. So you need to get your, like, check your ego at the door, and your intellect if necessary, and you know, find the interpersonal skills required to, to say it in a way that makes it accessible to the people or the person you're saying it to.

    7. HSHarry Stebbings37:20

       Can I ask one final thing before the quickfire? (clears throat) And it's, I spoke to Daniel before the show, as I mentioned, and he said the one thing I just had to ask you most of all was your, (laughs) he said, "Ask him about demand creation theory and your ideas about whether the market is efficient." That didn't really mean much to me. So I'd love to hear your thoughts, Barry, on demand creation theory and whether the market is efficient.

11. 37:46 – 42:53

    Demand Creation Theory at Netflix

    1. HSHarry Stebbings37:47

    2. BMBarry McCarthy37:47

       Okay. Let me try to parse that. Let, let's think back to Netflix. DVD by mail. Blockbuster is the gold standard. It, it was a retail model. They have 4,000 things in their store that they rent on an a la carte basis overnight. 90% of what they rent comes from what's called the new release wall. And the core thesis in the marketplace is that what consumers want to watch are new releases. Netflix has this revolutionary view of the home video market that, that that's not true, that what consumers want to watch are movies they like, but they can't remember the names of them.

    3. HSHarry Stebbings38:23

       (laughs)

    4. BMBarry McCarthy38:23

       And they rely on their friends to tell them what it is they should, should be watching, and they walk into the Blockbuster store and they use the new release wall to find something to watch. Because the middle of the store, which has thousands of DVDs, is just, you know, too imposing to actually flip through. And plus, you don't recognize any of the titles, so they don't mean anything to you. Okay, so 90% of what Blockbuster rents is new release. 30% of what Netflix rents is new release and 70% is catalog. It actually, for the first time ever, creates a catalog content in the home video marketplace. And in the process of doing that, it developed an understanding of what Ben likes that's different from what Harry likes, that's different from what Barry likes and Gustav likes and Daniel likes. And when you come to the website, the content that it serves you is what Netflix thinks you like. This is something that, that Daniel's invested in aggressively at Spotify. Okay, now if it's really true that I know what you like, I can begin to shift demand. So if I have a limited number of suppliers and one of them is charging me a lot for my content and one of them is charging me a little for my content... Let's do Universal and Warner by way of example. Let's make this specific. So Universal thinks that the way it maximizes its profit is by maximizing its profit margin. And so its cost per movie is pretty expensive. But Warner takes a different strategic approach. They think the way they maximize their profit is by lowering the cost of their content and making it cheaper for you to buy. And if it's cheaper for you to buy, you will buy a disproportionately large percentage of it and they will punch above their market share, which is in fact what happens. Now, that strategy only works for someone like Netflix if they're able to demand-shift you from a Universal title to a Warner title without sacrificing your satisfaction. And as it turns out, there are a ton of movies that they can demand-shift you to, because they do know what you like and they can find something that's, you know, nearly similar to, in Warner's catalog, to something that you did want fr- in the Universal catalog, and you won't even notice the shift. And as I say, in the process of doing that, they maintain customer sat. Now, I think we had 100,000 things to choose from, so owning demand creation was, you know, becomes super important now. It's even, it, it, it, it's infinitely more important in the music biz, because Daniel's got 100 million things for people to choose from. And, and you would love a bunch of them, but you're never gonna find them because (laughs) there's just too much stuff.

    5. HSHarry Stebbings40:53

       Mm-hmm.

    6. BMBarry McCarthy40:53

       But because he understands, you know, your demand, or he understands, you know, your likes and your dislikes, he's able to drive discovery and, you know, drive this virtuous cycle. And he's able to demand-shift so that when individual suppliers try to extract margin from him, he can depress demand for their content on his website and shift to lower-cost content from other people. And in the process, he's been able to negotiate economic incentives with his various suppliers that reflect his ability to, to own and shift demand creation. So at a high level, I would say, it's kind of in summary, whoever owns demand creation owns the gross margin.

    7. HSHarry Stebbings41:32

       How do you do d- demand creation theory well without having supplier churn? 'Cause if you do it well, everyone moves to lower cost of content, content, but then do you not get supplier churn on the higher cost, which then no longer have engagement?

    8. BMBarry McCarthy41:46

       Well, where are the suppliers gonna go?

    9. HSHarry Stebbings41:48

       ... create their own, Disney?

    10. BMBarry McCarthy41:50

        Y- yes. But think how many years it took before Disney underwrote the cost of trying to get there, right? Uh, th- uh, th- there are real barriers to entry-

    11. HSHarry Stebbings41:59

        Mm-hmm.

    12. BMBarry McCarthy42:00

        ... associated with trying to build out your distribution to end users, and there are many examples of, of music labels, by way of example, who tried and failed. So all of the music label, almost all the music labels, let's take Sony, went down this path, and it wasn't until they went down the path and failed that they, that they repositioned themselves and licensed content. Sirius XM tried to do the same thing, uh, or sorry, Starz tried to do the same thing, and then pivoted and, and licensed. So Di- Disney's one of the few examples of a company with a, that had a brand that was umbrella, that was broad enough that consumers saw value in the brand, broadly enough that they were willing to, to license the content of the subscription model. But many, many, many companies have tried and failed.

    13. HSHarry Stebbings42:41

        I think Disney, you're right, probably is one of the only ones who have that consumer brand recognition. But I do wanna move into ... I could talk to you all day, Barry ... but I do wanna move into my favorite, which is a quick fire round.

    14. BMBarry McCarthy42:50

        (laughs)

    15. HSHarry Stebbings42:50

        So, I say a short statement and you give me your immediate thoughts.

12. 42:53 – 49:48

    Quick-Fire Round

    1. HSHarry Stebbings42:53

       Does that sound okay?

    2. BMBarry McCarthy42:54

       Yes. Absolutely. Let's do it.

    3. HSHarry Stebbings42:55

       So, what books are capturing your heart these days?

    4. BMBarry McCarthy42:58

       Um, you know, I've said in, uh, in my investor letters that, uh, turnarounds are full contact sports. And so, uh, I literally am working 24/7, and I'm, the only thing I'm reading is, is, uh, New York Times, uh, Washington Post, and the Wall Street Journal every morning. I did find myself on Thanksgiving flipping through a Peter Kaufman book about Charlie Munger, um, but it's a long time since I've had the time to sit down and actually, you know, read something.

    5. HSHarry Stebbings43:25

       Barry, the amount of times people come on my show and tell me about books and I pretend I've read them. I, I really don't have time to read either. I'm like, "Really? Marvelous. You've read that many books? Well done." Um, so-

    6. BMBarry McCarthy43:34

       (laughs)

    7. HSHarry Stebbings43:34

       ... I, I totally feel your pain. Uh, tell me, what do you believe that most around you disbelieve?

    8. BMBarry McCarthy43:39

       I, well, I mean, (laughs) aside from the viability of the Peloton business model (laughs) long term, I have no idea. (laughs)

    9. HSHarry Stebbings43:48

       (laughs) What's your biggest strength and your biggest weakness?

    10. BMBarry McCarthy43:51

        May- maybe at this point, strength is pattern matching skills, you know, from all, all of the various business models and, and people that I've had the opportunity to work with, that, in this situation in particular, it's, it, um, has helped me move at speed. And I would say the biggest challenge are my interpersonal skills. Uh, you know, I'm not the smartest guy in the room, but unfortunately for me, I have more IQ than I have EQ, and I would be (laughs) a better manager if I had more EQ. So, I try to compensate by surrounding myself with people who do have more EQ than I have, but I still have an EQ deficit.

    11. HSHarry Stebbings44:21

        What's the most painful lesson that you've g- gone through that you're pleased to have gone through?

    12. BMBarry McCarthy44:27

        Um, I'm not pleased to have gone through any of the (laughs) of the painful lessons. I guess, I don't know, I was in basic training in, uh, Quantico, in what amounted to an R-, an ROTC program in college, same one that Reed Hastings had gone through. Um, so I suppose that experience, um, was very formative. Uh, but it was quite painful at the time. (laughs)

    13. HSHarry Stebbings44:50

        (laughs) I'm sure. What, what would your advice be to current CEOs going through the downturn with you?

    14. BMBarry McCarthy44:55

        Honestly, I, I wouldn't presume to have advice for my peers. I mean, I'm still unproven myself. Talent density is job one. Like, that's it. If there was one thing to focus on, more than any other, aside from, you know, the structure of your business model, and I can't emphasize the importance of that enough, by the way. It's the thing that helped us be successful at Netflix. It's the thing that propelled Daniel to success. It's the thing that's propelling us to success. It, it can enable real structural, sustainable advantage. Its people, 'cause you, you, you know, without them you can't execute.

    15. HSHarry Stebbings45:28

        Barry, I can see why you didn't like being a VC. You're far too humble. VCs, "Oh, I'll tell you what to do. I've got the answer for you."

    16. BMBarry McCarthy45:36

        (laughs)

    17. HSHarry Stebbings45:36

        Um, yeah, I can totally see. Um, tell me-

    18. BMBarry McCarthy45:39

        (laughs)

    19. HSHarry Stebbings45:39

        ... uh, who's your favorite Peloton coach and why them?

    20. BMBarry McCarthy45:42

        You know, I'm not gonna answer that question (laughs) because they're all my children and I love them all. (laughs) I do. I mean, I thank God for the content team, because, you know, it's the thing that gives, uh, it's the reason that we're still here.

    21. HSHarry Stebbings45:58

        I'll give-

    22. BMBarry McCarthy45:58

        You did-

    23. HSHarry Stebbings45:58

        ... I'll give, I'll give you a different one. What's your favorite type of ride? Hitting hills? Are we a climber? Are we a low intensity? What are we going for?

    24. BMBarry McCarthy46:06

        No, I find myself riding a lot with Matt Wolpert and Ollie Love and a few of the other instructors, kind of in the 30 to 45 minute range, you know, and, and in the, you know, zone three, zone four.

    25. HSHarry Stebbings46:18

        Let, let's not go riding with Barry. That's the takeaway from today. Um, what-

    26. BMBarry McCarthy46:22

        Well, I'm in the lower 20%, just to be clear about that. (laughs)

    27. HSHarry Stebbings46:26

        (laughs) Tell me, Barry, what board member have you been most impressed with over the years and why?

    28. BMBarry McCarthy46:31

        Well, the one I've worked with the most consistently is Jay Hope. I remember when Netflix was actually going down after, after the dot-com bust. We were running out of money, even though we were growing, we were doubling every year. But the world was in meltdown, you couldn't get capital from anybody, and he stepped up in a moment of immense bravery to the, (laughs) to the long term benefit of his investors, I might add. They made a killing. But it was a moment of, of great courage. And I've, have known him, you know, through Spotify, through, through a number of really terrific, and Netflix and, and other, you know, really lucrative investments. And he was responsible for bringing me here to Peloton, and he's been enormously helpful to me in stabilizing the performance of the business and moving it forward. And so, you know, he would be at the top of my list, probably.

    29. HSHarry Stebbings47:14

        Penultimate one. How do you reflect on your own relationship to money today, Barry?

    30. BMBarry McCarthy47:19

        Company money or personal money?

Episode duration: 49:48