The Culture That Made Netflix Impossible to Kill | ft. Reed Hastings

We collect this year about eight billion dollars of customers money. What we do is we say that money's in trust to create joy. We think of ourselves like alchemists. We take in money and out comes joy. Most people work because they need the money and they get done with work and they kind of just want to unwind and relax. The possibilities the internet brings for growing entertainment is phenomenal. We're really about trying to find great stories, not so much about locations and buildings. Pure Software was a technical company. We did C and C++ programming tools. And I would say I only had one gear which was working hard, so I had no sophistication. And so anytime things got hard, I would just try to work harder. And so I was programming all night, trying to be CEO during the day, looked and smelled like ----. But I didn't know any way other than that to cope with the stress. I was half underwater. I was not doing a very good job as a manager. I wasn't very honest. I was uncomfortable about being honest with people, so I valued kindness very high in consideration. And it took me a long time to have the courage both to be able to be an example of honesty myself, to receive it, to give it. And when I analyze looking back what happened, one of the major things was declining talent density. And then with declining talent density, you need a bunch of rules to protect against the mistakes. And that only further drives out the high caliber people. And so it was through that experience that I realized, OK, I've tried to run software like a manufacturing plant and reducing error and putting in process. And then that doesn't get high productivity or high talent. In 97, Amazon was off and running, and it was clear that they were likely to dominate buying and selling of things. But rental was a two-way logistics, so looking for a set of ideas. Then a friend told me about DVD, which was very small, and you could mail it for one stamp. And so that turned into our digital distribution network. All those combinations made me think of DVD by mail. As an extremely efficient digital distribution network, that someday the internet would be faster than and cheaper than and lower latency than. It was an unusual, I never thought, I love the mail business. I thought I love network business to deliver. That's why we named the company Netflix is internet movies. And we did have one advantage, which is we were born on DVD and we knew that that was going to be temporary. No one thought we'd be mailing discs for 100 years. So then you have a lot of paranoia about what's coming next, and that's part of the founding ethos is really worrying about what's coming next. If you think of all management teams, how many are too cautious at preserving the current business? And how many are too aggressive at pushing into the new business? Well, obviously everyone's too conservative. So we realized we had to be so aggressive that it should make the hair on the back of our neck stand up. Quickster, for your listeners, was a sad episode at 2011 where I became convinced we really had to go all in on streaming and drop DVD. Unfortunately, most of the customers were mostly using DVD. They didn't like it. Lots of cancellations, stock dropped by 75%. So it was a tough time. And ultimately, it's the right thing to have separated DVD and streaming. How could you get confident that that was actually worth doing? If you got that wrong, it might've been really devastating for the company. Yeah, we weren't confident. I mean, that's the whole tension of it. I can't say that. Yeah, it was scary. We're not trying to preserve the culture. We're trying to make it better. And it was traumatic. It felt roughly like you're driving and you get distracted reading a text and you crash and your kid in the back seat's in the hospital. The people who fundamentally wanted job security over growth were repelled. And the people who wanted growth and willing to trade off job security loved it. And so then we selected a very creative type of person who, again, was into performance and taking risk. And every time someone made a mistake, we tried to put a process in place to make sure that mistake didn't happen again. And the problem is we were trying to dummy-proof the system and then eventually only dummies wanted to work there. And so then, of course, the market shifted. In that case, it was C++ to Java. But there's always some shift. And the company was unable to adapt. And it got acquired by our largest competitor. If you over-manage, for example, a tight process, you filter out performance and creativity. And the looser that you can run, the more creative that the organization will be. So we talk about it as managing on the edge of chaos. But it's getting us close to that edge of chaos where there's last-minute saves and a lot of dynamism as you can possibly tolerate. Adequate performance gets a generous severance package. So 15 years ago, that was a shocking statement to make, that everyone has to fight for their job every year like it is in professional sports. And in professional sports, if you're going to win the Stanley Cup, it's because you've assembled the most amazing group of hockey players that have ever been together. Most managers, they're people managers. They like people. They don't want to hurt people. So it's very difficult for them. And so one of the best things is to do large severance packages, like four to nine months of salary. And so it feels expensive at first, but one is it makes the person who's let go feel a little bit better because they've got a bunch of money in their pocket. Two, it helps the manager do their job because then they don't feel as bad in letting the person go. The Keeper Test is a Netflix shorthand for asking yourself, if one of your employees were quitting, how hard would you work to keep them to stay? Would you try to change their mind? And if you wouldn't, then you should proactively give them a generous severance package and try to recruit someone who you would feel that you would really try to keep them. Everyone would rate Schindler's List five stars and then they'd rate Adam Sandler, you know, the do-over three stars, okay? But in fact, when you looked at what they watched, it was almost always Adam Sandler. It works out much better to please people to look at the actual choices that they make, their revealed preferences by how much they enjoy simple pleasures. At the time, it was $100 million. It was a fantastic investment and it was in competition with HBO. We weren't confident. It's instinct that the thing you've got a partial script, you've got some casting and you have to guess how good is that show gonna be? There's no real data that tells you that was an instinct call. But that really, all of that bravery is due to Ted Sarandos. You know, we stimulate a lot of judgment of people trying new things and sometimes we celebrate the failures that don't quite work because they, you know, again, you gotta be willing to have people try things. And it doesn't really work in entertainment to say, let's do a show just like that. That rarely ends up successful. We serve 190 countries and we try to think of them, you know, all on the same footing, sharing content. And, you know, entertainment does have a magical property of building empathy and it allows you to connect across social class, racial group, nationality, all kinds of things and to experience people's lives that you don't normally see. Western Europe's been incredibly strong. Latin America started difficult for us. We didn't have the right payment systems. We didn't have some key infrastructure. But now Brazil, Argentina, Chile, it's all Mexico. It's all doing extremely well. Asia's the newest market for us there. So we're in about nine months and in some of the Asian markets, like Korea, we're in language. But in Vietnam, we're only in English. So, you know, we're not yet really kicked off in a big way and much. The possibilities the internet brings for growing entertainment is phenomenal. When we went public, which was 2002, we were $50 million in revenue and Blockbuster was $5 billion. And we had this long, long fight that we barely came out of. And so you learn all these defensive, fearful things about hiding information. So we have to just grow up into it and be more open. And then in terms of the culture, it's very big on freedom and responsibility. I pride myself on making as few decisions as possible in a quarter. And we're getting better and better at that. There's sometimes I can go a whole quarter without making any decisions. But the idea is to build a system where amazing amounts of service improvement happen in the marketing and the content and the technology and the user interface without direct intervention of me. And so some companies operate by, you know, the product genius at the top. And we all know these companies and this whole motif of, you know, to be a great CEO, you've got to be the great product person who really, you know, and it's intoxicating and fun, but you're building incredible amounts of dependence on yourself. Don't try to please your boss, okay? Try to serve the customer and fill your boss in on what you're doing. But your North Star has to be to produce great content or, you know, have a great service. AI will help us be more creative. It's an authoring, essentially, accelerant. So we're super focused in the company about using AI and all these aggressive scenarios, as you would expect. Apple Flix. Employees ask me... Hulunet. What am I scared of? The main thing I'm scared of is that employees will focus on competitors. Yeah. There's nothing we can do about them. And the competition, again, it's video gaming, it's YouTube, it's the SVODs, it's linear. And so what we have to focus on is how do we please our members? Typically, we humans, we value being nice and we value loyalty. And yet, in the workplace, that's a tension. Because being nice is in contrast to our intention with being honest. I generally like people that are nice. And yet, I want you in the workplace to be honest with each other so that we're more productive. If you're required to be an ally to one or the other of them, it can force a lot of divisions. So I think we should have always set it up as people thinking for themselves and being able to tolerate dissent internally. But we got to a good place where we can really focus on incredible entertainment as the main aspect of what we do. Strategy is pain. And if your strategy is not profoundly painful to you and uncomfortable, you're not being very strategic. Really, strategy is a list of all the things you're not doing. Now, in the long term, of course, Netflix, like every business, will face a threat. And someday, movies and TV shows will be boring and old like the opera. I wouldn't want to go back and try to do another high-scale internet company. How am I ever going to do better than Netflix? So this is in a completely different realm. It's a very strong sense of purpose to create a place of incredible beauty that sparks wonder and that people are talking about for 100 years. So think of it as a physical legacy rather than a brand like Netflix legacy. What is success for you? I would say success is having a positive impact on other people. You know, doing good for others would be my fundamental, core definition of success. You know, ultimately, we're not trying to predict the future. We're trying to invent it.