Reed Hastings Created the Netflix Revolution With a Culture Like No Other Company

By Scott S. Smith | Friday, 19 February 2021 | Feature, Business, Interviews

In an interview in 2009, Reed Hastings, founder, chairman, and co-CEO (with Ted Sarandos) of Netflix Inc., told me he expected that its two-year experiment with streaming would likely account for half of revenues by 2013. As it turned out, streaming was 80% of its business that year and in 2020 constituted 99%.

Hastings's foresight about public entertainment habits started with the company's founding in 1997. Videotapes from Blockbuster were the dominant way most people watched old movies and TV programs. Hastings knew he couldn't compete by directly mailing cassettes to customers at $4 in postage, but he had heard that the new movie DVDs were about the size of music CDs. He mailed four to himself, and when they were delivered unbroken, he knew he had a business model, even though only 7% of households had a DVD player. Yet he did not name the company DVDsByMail.com: even in the Stone Age of internet videos (YouTube wasn't founded until 2005), he foresaw the streaming future.

The pandemic has closed theaters and eliminated much commuting, so everyone at home has had lots of time to watch movies and TV shows, old and new, on their computers, phones, or streamed to their TV sets. Netflix, based in Los Gatos, Calif., has remained the first choice for this vastly increased audience, despite strong competition from, among other streamers, Hulu, HBO Max, Amazon Prime, and Disney Plus. But they are all competing for attention with network and cable TV, shopping, tinkering with the car, cleaning the house, cooking, going for walks or runs, tending to kids and pets, taking online classes, sleeping, and even reading books (yes, it still happens).

Of course, the lockdowns have not only occurred just in North America: 83% of Netflix's new customers last year came from other countries (though it’s blocked in China). Total revenues jumped 24% from 2019 to $25 billion last year, and the company announced it was sitting on $8 billion in cash, enabling it to declare it would no longer need to borrow to fund new programming.

All this helped to drive the company's share price (NASDAQ: NFLX) from $364 in mid-March to $540 recently (it went public in 2002 at a split-adjusted $1). That helped increase Hastings' net worth to about $6 billion, according to Forbes (he has pledged $100 million for child education and joined the Giving Pledge, started by Warren Buffett and Bill and Melinda Gates, to commit to donating a majority of his wealth).

Creating a Culture of Reinvention

Yet, his prophetic intuitions about the direction of entertainment technology were only one factor in the company's success. In “No Rules Rules: Netflix and the Culture of Reinvention,” Hastings and Erin Meyer explain how its entrepreneurial culture enabled its large HQ staff and leaders everywhere (not hourly workers) to deliver astonishing results. The counterintuitive principles sound like they would lead to corporate anarchy, including:

• Take off whatever personal time you want, as long as the job gets done.
• There is no need for expenses to be approved in advance.
• Radical transparency is required, which includes fostering complete candor in giving feedback with positive intent, rather than the traditional dishonest politeness, followed by undermining.

These "no rules rules," they write, "promote flexibility, freedom, responsibility, and innovation." The 127-slide PowerPoint internal presentation providing the details, called the Netflix Culture Deck, was made public in 2009, and this and a ten-page summary went mega-viral, the most shared presentation in business history, with 12 million views. Facebook's CEO, Sheryl Sandberg, called it "the most important document ever to come out of Silicon Valley."

It is no wonder that in a 2018 survey by Hired.com, tech workers ranked Netflix as the number-one company they wanted to work for, beating out Google, Apple, and Tesla.

But If someone doesn't perform as expected, they are shown the door with a generous severance package, which avoids any squeamishness about letting a friend go. This isn't often necessary because the hiring process screens for the personality and values that would make a great Netflix employee, as I discussed in the chapter on Hastings in my book “Extraordinary People: Real Life Lessons on What It Takes to Achieve Success:”

• Judgment — You identify root causes and get beyond treating symptoms.
• Innovation — You keep us nimble by keeping things simple.
• Impact — You focus on great results rather than the process.
• Curiosity — You contribute effectively outside of your specialty.
• Communication — You listen well so that you understand before reacting.
• Honesty — You only say things about fellow employees you would say to their face.
• Selflessness — You share information proactively.
• Passion — You inspire others with your thirst for excellence.

"Reed Hastings turned the film and television industries upside down with Netflix's global streaming services that now reach over 200 million subscribers," Cyril Bouquet, co-author with Jean-Louis Barsoux and Michael Wade of “Alien Thinking: The Unconventional Path to Breakthrough Ideas,” told Startup Savant.

"He continuously smashed the logic of orthodoxy to create a revolutionary company culture that has allowed it to be run by creative thinkers who never stop questioning the status quo. This means favoring people over processes and accepting a level of chaos and error that other organizations would not be able to tolerate. Netflix achieves extraordinary levels of success because its values and standards are clear and leaders make sure every employee feels a sense of responsibility and belonging that will get him or her to do the right thing."

The Innovation Foundation

Hastings grew up in Boston in the 1960s, where his father was a federal government attorney. He attended a prestigious private school and, after graduating in 1978, took off a year to go door-to-door selling vacuums. He finally decided to go to Bowdoin College in Brunswick, Me., graduating with a B.A. in mathematics. He had spent college summers in Marine Corps officer training, reaching platoon leader, and spent the one in 1981 at boot camp at Quantico., Va.

Instead, he decided to join the Peace Corps "out of a sense of a combination of service and adventure," spending 1983 through 1985 teaching high school math in Swaziland. "Once you hitchhiked across Africa with 10 bucks in your pocket, starting a business doesn't seem too intimidating," he said.

After returning to earn a master's in computer science from Stanford University in 1988, he joined a software company where he said he learned how to focus, then left in 1991 to found Pure Software, which offered troubleshooting tools. He realized his engineering background did not prepare him to be a good manager, and after a merger, the combined firm Pure Atria was acquired in 1997, and he left.

The same year, Hastings founded Netflix with a Pure Software employee, Marc Randolph. In May 1998, they offered a free trial to early adopters of DVDs for $4 rental and $2 postage, but few signed up to pay. A year later, they tried a flat monthly subscription with no late fees. By the end of 2000, they had 239,000 customers. Then the dotcom bubble burst and the 9/11 attacks helped tank the economy, forcing Netflix to lay off a third of its workforce. In December, however, DVDs became a popular gift item.

Hastings and Randolph had met earlier in the year with Blockbuster's CEO when its annual revenues were $6 billion, and it had 9,000 stores. Netflix had 300,000 subscribers and would lose $57 million in 2000, but their price to be acquired of $50 million was flatly rejected. In 2010, Blockbuster went bust, and nine years later, it only had one store open.

Netflix's first experiment with sending films over the Net in 2001 involved a 16-hour download that cost $10 in bandwidth charges. The next year, the company set up regional warehouses to speed mailings. Now, streaming has made binge-watching popular, as well as the ability of viewers to watch anything at any time and anywhere, something traditional media can't compete with.

One of the secrets of its enormous success that hasn't been fully appreciated: its fierce focus on offering just films and TV series, then matching each subscriber's tastes with its proprietary CineMatch program to make recommendations from, for example, the over 5,000 titles available in the US. It draws on 5 billion pieces of data to personalize suggestions with almost psychic accuracy.

Netflix is not only becoming more popular because of these recommendations, huge library, easy access, and ability to terminate subscriptions anytime, but it has also become highly regarded by critics for original programming, attracting discerning audiences. Its first original series, the political drama "House of Cards" and "Orange Is the New Black," set in a women's prison, were released in 2013 and were immediate and long-term hits. "House" would eventually win seven Primetime Emmys and two Golden Globes, while "Orange" earned two Emmys. More recently, "The Crown" earned 10 Emmys and three Golden Globes, "Black Mirror" eight Emmys, and "Stranger Things" seven.

In 2020, the company set a record of 160 nominations from all awards programs, the most for a network in a single year, winning 21. Its work has been nominated 600 times and won 112.

Netflix is just getting started: Hastings recently noted that so far, it has only captured 10% of US television viewers’ time.

About the Author

Scott S. Smith

Scott S. Smith has had over 2,000 articles and interviews published in nearly 200 media, including Los Angeles Magazine, American Airlines’ American Way, and Investor’s Business Daily. His interview subjects have included Bill Gates, Richard Branson, Meg Whitman, Reed Hastings, Howard Schultz, Larry Ellison, Kathy Ireland, and Quincy Jones.