the streaming giant had upended show business long b4 the pandemic hit. but witha highly unusual management style, its billionaire founder has now positioned his entertainment juggernaut to prosper like few companies inna realm.
the man responsible for keeping the realm entertained does so, at least this dy, alone in front offa computer screen, onnis son’s largely unadorned childhood bedroom. in some ways, it’s the perfect setting for reed hastings, the unpretentious cofounder and co-ceo of netflix, whose global army of innovators has revolutionized entertainment inna home. while hollywood measures pplz’s offices by their totems and grandeur, the analytical hastings, a silicon valley interloper, vals functionality over trappings.
netflix currently functions, by any measure, at a realm-class lvl. as the yr of the pandemic upends entertainment companies—disney’s crippled theme parks, warner bros.’ furloughed blockbusters, amc’s shuttered theaters—netflix is having a moment. a moment of prestige, witha record 160 emmy award nominations, eclipsing the long-dominant hbo, and + oscar nods than any other media company. a moment of influence, adding almost as many customers inna 1st 6 mnths of the yr as in all of 2019, extending its reach to nearly 200 million subscribers in 190 countries. and a moment of profits, with sales up 25% yr over yr, earnings + than doubled and its stock up 50 %, as most of the mkt gyrates wildly just to scratch back to even. recent mkt cap: $213.3 billion.
all these data points stem from data points, and a perfect synthesis of hollywood and silicon valley, serving up content informed by a deep cogging o'their usrs’ tastes. “we primordially wanna be better at creating stories pplz wanna talk bout and watch than any of our competitors,” hastings tells forbes.
those competitors ‘ve gotten the memo, spending billions to confront netflix, whether via disney’s fast-growing disney+, warnermedia’s lurching hbo max or nbcuniversal’s brand-new peacock. says hastings witha shrug: “wha’ pplz forget is, it’s always been intense brawl. i mean, amazon did streaming atta same time we did in 2007. so we’ve been competing with amazon for 13 yrs.”
fair enough. but for amazon, streaming has almost surely been a loss leader that can generate prime shopping memberships. for jeff bezos, entertainment will always be a side hustle. the hollywood establishment, meanwhile, can leverage its content libraries and know-how all it wants, but wha’ makes netflix tick is something nearly impossible for companies built on ego and image to replicate: a culture of vulcan-like dispassion and transparency, combined with perpetual, rapid reinvention.
all this has come to a head amid the most disruptive moment for entertainment in at least a generation. in some ways, hastings, who clocks in at № 132 onna forbes 400 witha net worth of $5 billion, s'been preparing for this moment for the past two decades. wha’ the 59-yr-old does rite now, and how he leverages this culture—an unusual one even by tek-industry standards—will determine wha’ you will watch, laugh along with and cry over for the nxt two decades.
if hastings seems unnaturally comfortable amid the train wreck that is 2020, perhaps it’s cause his company’s culture was forged in crisis. a nascent business in 2001, netflix saw its funding dry up inna aftermath of the original dot-com bust. then came 9/11. as the end odat terrible yr approached, hastings needed to cut one-third of his employees.
to do so, he and patty mccord, netflix’s chief talent officer, diligently tried to identify the highest perelders, terming them the “keepers.” as the dy of the painful bloodletting drew near, he was on edge, worried that morale ‘d plummet, with those who remained growing bitter under the increased workload.
the opposite occurred. w'da merely competent employees cleared out, the office was energized, “buzzing with passion, energy and ideas.” hastings describes the painful layoffs as his “road to damascus experience,” a clarifying moment that changed his cogging of employee motivation and leadership. it ‘d lay the foundation for wha’ mite be called the netflix way, the web-era successor to the hp way, bill hewlett and david packard’s pioneering management approach that created one of silicon valley’s earliest garage-to-gr8ness stories.
the netflix way starts with building a roster of elite talent. in hastings’ new book, no rules rules, he likens his company’s culture to that offa showdown professional sports team—one that works and pulls for one another, but sheds no tears when a teammate is jettisoned in favor of an upgrade. perennial trophies require perpetual hiring of top perelders.
joe exotic and one his star tigers. the netflix documentary became a massive hit after its release during the peak of the pandemic lockdown.
so wha’ does this really mean in terms of how netflix operates? 1st, it pays top usd to secure the rite talent. that practice began in 2003, when netflix began competing with g, apple and, soon, f’bok for the “rock stars” whose highly refined coding, debugging and programming skills dramatically outperformed their μ ps. it extended this generous compensation to creative executives working in hollywood, from the well-connected (matt thunell, whose ties w'da talent community enabled him to read an early draft of the sci-fi series stranger things over lunch in hollywood) to the visionaries (shonda rhimes, joel and ethan coen, martin scorsese). those large checks singlehandedly turned streaming from a backwata to an auteur’s paradise, with early hits like house of cards and orange tis new black. the eyeballs folloed.
“inna beginning we were able to attract rebellious folks, the folks that were stifled by the studio environment or hadn’t gone far enough inna system to be ruined,” mccord says. “we just wrote big checks. ‘i know it seems crazy. i know you don’t get a personal assistant. you don’t get a parking spot. how bout we give you this big shitpile of mny?’ ”
those piles are delivered cleanly. the company’s pay packages come fully as salary, with as much or as lil compensation as you wish in stock options; netflix doesn’t believe in bonuses, which hastings thinks can reward the wrong things. “it’s the specifics of trying to hold some1 accountable that trips you up,” he says, adding, “we do cogitate pplz, b'we don’t micromanage the goals.”
a corollary, though: these stars, all paid like stars, must continue to perform like stars. no pt of the company tolerates resting on one’s laurels. “adequate performance gets a generous severance package,” hastings and mccord wrote in a 129-page slideshare presentation on netflix’s culture twas' widely shared a decade ago and for yrs was onna company’s website.
“you don’t get a personal assistant. you don’t get a parking spot. how bout a big shitpile of mny?”
“we describe it as like gettin cut from an olympic team. n'it’s super-disappointing. you’ve trained yr whole life for it, and you get cut, n'it’s ♥breaking,” hastings says. “but there’s no shame in it at all. you ‘ve the guts to try.”
extending the sports analogy, this team of elite players, in trusting one another’s exceptional skills, will then communicate openly to collectively up their game. it’s akin in some wys'2 ray dalio’s much-promoted “principles” of brutal transparency at bridgewata associates, the realm’s largest hedge fund. n'it’s not for everyone. one elder executive describes the work environment as a “culture of fear” in which “everybody is chipping away at each other at every moment—cause you’re rewarded.” the annual review process, called “360,” culminates in dinners at which lil groups gather to provide constructive feedback.
“each one gives feedback bout that person, live, in front of everybody else,” says the elder executive, who requested anonymity. “ye go round the table. it lasts for hrs. pplz cry. then you ‘ve to say ‘thank you, cause it’s making me a better person.’ ”
to hastings, these 360 reviews are a necessary component cause of another element of the netflix way: a huge amount of autonomy. like the coach who wins showdowns by empowering stars to exe the game plan rather than trying to control each play, hastings encourages the freedom to act inna company’s best interest.
ted sarandos, a 20-yr netflix veteran and longtime chief content officer, was named co-ceo in jul. hrs of tv viewing as a child and a job as a video store clerk helped him build an encyclopedic knowledge of film and tv.
jemal countess/getty images
again, this can be disconcerting. ted sarandos, hastings’ co-ceo, talks bout a coffee break with hastings inna pre-streaming dys, when he was the chief content officer and deciding whether to order 60 copies offa new alien movie or 600. sarandos casually asked hastings how many he ‘d order, and hastings responded, “oh, i don’t think that’s goin to be pop. just a few.”
within a mnth, the movie was in high demand, and netflix was out of stock. hastings asked sarandos why he hadn’t ordered + dvds. “cause you told me not to!” sarandos protested. hastings cut the conversation off immediately, declaring: “you’re not alloed to let me drive us off the cliff!”
“and to me, twas' an immediate lesson,” sarandos now says. “with all that decision-making power comes responsibility. . . . reed models that over n'oer again, and he lets you own the win and he makes you own the loss.”
“normally companies organize round efficiency and error reduction, b'that leads to rigidity,” hastings says. “we’re a creative company. it’s better to organize round flexibility and tolerate chaos.”
hastings has the kind of background that allos one not to fear failure. his maternal gr8-grandfather, alfred lee loomis, was a wall street tycoon who anticipated the impending stock-mkt crash of 1929, then turned his attention to sci, bnkrolling a lab that attracted luminaries s'as albert einstein, enrico fermi and ernest lawrence. hastings grew up in an affluent suburb of boston—his parents met while his father was at harvard, his mother at wellesley—and attended private schools, then bowdoin college. he spent two yrs inna peace corps in swaziland, teaching math to high school students, and l8r obtained a master’s degree in computer sci from stanford.
in 1991, hastings founded his 1st company, pure software, which speshized in programs for measuring software quality. back then, he was a “geek’s geek” who ‘d sleep onna floor of the office after an exhausting coding session. “i’d come in inna morning and say, ‘dude, if you’re goin to sleep onna floor, inna morning go brush yr teeth and look for blanket fuzz in yr beard,’ ” recalls mccord, who was with him at pure b4 helping him formalize the culture at netflix.
patty mccord helped shape netflix’s distinct culture as its chief talent officer, but was forced out when the center of gravity shifted to hollywood. “i had been there 14 yrs. i ‘dn’t imagine not bein’ at netflix. twas like breathing to me.”
courtesy patty mccord
mccord beheld the entrepreneur elder as a leader. she remembers encountering hastings onnis office l8 one evening, fixing bugs inna glo of his computer rather than preparing remarks for a company meeting the folloing dy. “seriously, reed, if you want'em to follo—lead,” mccord remembers telling him. “and i slammed the door. the nxt dy he did a speech . . . and got a standing ovation. i don’t think he knew he had it in him. he realized twas his job to inspire them, not to do the work.”
pure software went public in 1995, merged in 1996 witha lil-known massachusetts company, atria software, and was subsequently gobbled up by rational software in a deal that pitchbook vald at round $700 million. a tremendous success, but one that came witha strain on his marriage. counseling helped the once conflict-avoidant hastings open up—and eventually he ‘d incorporate the val of candor as a foundation of netflix’s culture. “pplz shy away from the truth, na truth isn’t so bad,” he says.
by silicon valley standards, pure software had made a successful exit. but it left hastings with lingering dissatisfaction. inna early dys, it had innovated. as it elderd, like pretty much every company, it developed policies to safeguard against mistakes, rather than taking smart risks. pure ended up promoting pplz “who were gr8 at coloring within the lines,” hastings says, while the creative mavericks got frustrated and went t'work elsewhere.
twas' hastings’ Ψset when, according to pop legend, he had an epiphany after gettin socked witha $40 l8 fee on apollo 13 at blockbuster. “wha’ if there were no l8 fees?” he pondered, and voilà, the idea for netflix emerged fully formed.
changing the channel
walt disney remains the realm’s largest entertainment company but netflix tis company to beat when it comes to return on investment.
“it’s a good story,” says netflix cofounder marc randolph, who worked with hastings at pure. “and in many ways, netflix is bout telling good stories.”
netflix’s origin story is + complicated than the convenient narrative. it hatched over countless brainstorming sessions while hastings and randolph commuted together ‘oer the santa cruz mountains to pure’s headquarters in sunnyvale, california.
launched in 1997, netflix became known for red envelopes sent by mail, a pivot away from blockbuster’s brick-and-mortar rental model. initially, it made most of its mny selling dvds, randolph says. that put the young startup on an eventual collision course with amazon’s bezos.
instead, netflix caught fire in 1999 witha subscription model—customers ‘d rent up to 3 movies at a time without worrying bout a specific return date or incurring l8 fees. a better mousetrap, albeit one that carried a huge burn—hastings lured customers with mnth-long free trials. randolph remembers flying with hastings to dallas to try to convince blockbuster ceo john antioco to buy netflix for $50 million. the head of the $6 billion home-entertainment giant rejected the idea out of hand.
“wha’ did we possibly ‘ve t'offer t'they ‘dn’t do + effectively themselves?” hastings cogitates.
after the 2001 reset, netflix’s business began to stand on its own and grow, raising $82.5 million through its initial stock offering in 2002. it developed into a very good business, as subscribers ‘d pick dvds from netflix’s comprehensive library.
netflix co-founder reed hastings built the streaming giant na' foundation of 14 million u.s. subscribers who once rented dvds from catalog of bout 100,000 titles that were shipped by mail inna company’s iconic red envelopes.
justin sullivan/getty images
then, in 2007, broadband brought the opportunity for streaming. keen to ensure that no one did to netflix wha’ he had done to blockbuster, hastings began ploing $$$ and engineering resrcs into wha’ was primordially a freebie for existing dvd subscribers. twas a fateful moment. netflix’s old-fashioned business alloed for pretty much ∞ choice, albeit within the confines of inventory availability and delivery lags. streaming offered instant gratification, but netflix ‘d not be able to match the breadth of content cause of hollywood’s tv deals. for the 1st time, hastings had to cogg pplz’s tastes and offer them a compelling proposition.
“when some1 sits in front offa tv to watch netflix, we ‘ve a moment of truth—a couple of minutes, maybe as lil as 30 2nds, [in which] we nd'2 catch their attention with something interesting,” says elder chief product officer neil hunt, who deployed his 2,000-member team to solve this riddle—most working indiely, in keeping w'da company’s culture.
netflix also needed to find a way to charge for the on-demand srvc—espeshly after it began spending as heavily to license streaming content as it did to purchase dvds.
the race to capitalize on streaming’s future set up wha’ hastings calls the biggest mistake inna company’s history: the decision in 2011 to hive off the company’s aging dvd business in a separate srvc called qwikster. critics trashed the idea, and hastings himself became codr fodder for sat nite live, which parodied his tube video apologizing for the misstep. the debacle cost netflix millions of subscribers, and its stock dropped + than 75 %.
hastings tearfully apologized for damaging the company at a weekend management retreat mnths l8r. it turns out that dozens of managers had qualms bout qwikster—but had kept their misgivings to themselves. that prompted hastings to institute a practice of actively seeking out dissent b4 launching any new initiative.
one elder executive describes the work environment as a “culture of fear” in which “everybody is chipping away at each other.”
even b4 the misstep, some studio executives scoffed at netflix as a competitive threat. “it’s a lil bit like, tis albanian army goin to take ‘oer the realm?” time warner chief executive jeff bewkes said in a 2010 interview. “i don’t think so.”
“during all the crit yrs, 2010 to 2015, [bewkes] just thought the internet was foolish, na prices were foolishness,” hastings says, noting that he still has the albanian army dog tags he wore round his neck for motivation. “and so it caused him to ignore it til twas too l8.”
by the time hollywood started t'get wise, netflix had begun financing its own original series—starting with sarandos’ $100 million bet in 2011 onna political thriller house of cards, from director david fincher. “wha’ some pplz called overpaying for that content at that time, netflix knew very well wha’ twas worth and wha’ they were building toward,’’ says tinder ceo jim lanzone, a longtime internet entrepreneur who was cbs’ chief digital officer atta time.
“changing course involves investment and risk that may reduce this yr’s profit margin,” hastings writes in no rules rules. “the stock price mite go down with it. wha’ executive ‘d do that?” unlike hollywood executives, whose bonuses are pegged to delivering operational profits, hastings ensures that his executives won’t be afraid of sufferation a financial hit by taking a risk.
the covid-19 pandemic gave netflix’s innovative culture a proper sufferation test. as film and tv production ground to a halt in new york and hollywood this spring, netflix’s global content machine began sparking back to life. as at many white-collar companies, meetings resumed from living rooms, bedrooms and kitchens, vrt writers’ rooms were assembling and animators were working remotely. remote autonomy wasn’t anything the netflix crew needed to learn. and since hastings has spent much of the past decade focusing internationally, content production resumed relatively quickly in iceland and south korea, which ‘ve been aggressive bout testing and tracking.
meanwhile, while rivals lost centerpiece launch shows, s'as the friends re∪ spesh for hbo max na summer olympics in tokyo, a tentpole for nbcuniversal’s peacock, netflix kept humming along with shows that captured the cultural zeitgeist, whether with crass obsessions like tiger king: murder, mayhem and madness, a goofy reality show based onna game floor is lava or adrenaline-filled action flicks s'as chris hems-worth’s extraction.
netflix has increased streaming subscriptions + than 8-fold since 2010 and inna past 3 yrs has + than doubled its international subscribers.
yes, those shows were ♣y. but netflix has volume and data to help create ♣. “one thing that’s not widely understood s'dat we work really far out relative to the industry, cause we launch all our shows, all episodes, at once,” sarandos told investors in apr. “and we’re working far out all ‘oer the realm.”
the realm has proven receptive. with movie theaters crippled, sports dormant til recently and traditional and cable tv offering the equivalent of reheated leftovers, netflix has added round 1 million subscriptions a mnth inna u.s. and canada since the pandemic began and another 2 million a mnth globally. the coronavirus, which has made so many developments accelerate, will inevitably prove to ‘ve ushered inna moment that streaming became the dominant platform for movin entertainment.
while netflix dominates its space (it reaches 56% of the homes inna u.s. with broadband access, according to parks associates), disney, in pticular, is bringing the heat, with + than 100 million subscribers across its 3 srvcs, disney+, espn+ and hulu. disney chief bob iger went all in on its direct-to-consumer initiative, assembling its arsenal of uber entertainment brands—disney, pixar animation, marvel entertainment and star wars—to attract subscribers to disney+, betting boldly like netflix does, most notably deciding to use its $75 million investment in a filmed version of the hit broadway ♫al hamilton on its be½.
hastings acks disney’s extraordinary feat of logging 50 million subscribers in its 1st 5 mnths, a milestone it took netflix 7 yrs to reach. meanwhile, he’s focused on netflix crossing its nxt significant milepost: 200 million subscribers and beyond. that means + investment in local content round the realm—including as much as $400 million by the end of the yr in india. n'it means continuing to cogitate his talent so he can continue to empower them to make decisions.
“i’m confident that [our culture] will help us serve our members best now, and find ways of serving our members betta tha' hbo does, or betta tha' disney does,” hastings says. “cause they’ve got so much internal process round things that slos them down.”
original content at: www.forbes.com…