How CEO Reed Hastings disrupted the subscription- entertainment industry and built a $230 billion empire…
By many accounts Reed Hastings had lost his mind. The year was 2011, and the Netflix cofounder and CEO had just made a decision that cost him 800,000 subscribers in one quarter. The company’s stock price plummeted 35 percent. The market was punishing Hastings’ company for raising its subscription prices 60 percent and splitting the streaming and DVD-delivery service into two separate subscriptions. Pundits questioned Hastings’ fitness for the job. The Huffington Post called the move “monumentally stupid.”
A headline on Mashable compared it to the New Coke debacle. This was what anyone would call, in polite terms, a teachable moment, and Reed Hastings was the rare leader who possessed the intelligence and humility to be taught. Within a month he had reversed the decision to split the service in two, but he kept the price hike. It turned out to be the right move: Change course, but preserve the objective. At the time, Netflix stock was trading at US$77.50 a share. Today it’s worth US$330 (January 2019).
Iterative and pivot are clichéd terms in the tech industry, and both moves can be fatal without focus and vision. Reed Hastings, 57, has the uncanny ability to execute on all four fronts consistently. He beat Blockbuster’s location-based, pay-per-rental game by offering to mail DVDs at a flat monthly rate. He took YouTube’s streaming success, paired it with HBO’s premium-content branding and outspent everyone for top talent to become the head of a US$170 billion juggernaut that has upended how we consume filmed entertainment and is now one of the fastest-growing companies in the world. We can thank him for inventing binge-watching, funding much of the golden era of television, and introducing international gems like the slow-burn, surprise-hit Japanese reality show Terrace House. The success of Netflix — by turns data-driven, emotionally resonant and deeply personal — parallels Hastings’ own evolution as an executive.
Hastings grew up comfortably in Boston as the son of a prominent attorney and the cofounder of a nonprofit helping women in the work-force, but he didn’t coast to his current billionaire status. His first job out of high school was selling vacuum cleaners door-to-door; Hastings credits this experience with teaching him the fundamentals of sales and customer service. He enjoyed it so much that he deferred attending college for a year to continue working after graduation. “For me, the thrill is making a contribution by solving hard problems,” he told Fortune in 2010. This impulse exhibited itself early on at Bowdoin College, where he excelled in the math department by winning prizes but also by changing how the department itself was run. One of his former professors, Bill Barker, told the Bowdoin student newspaper that Hastings displayed “confidence without arrogance. He has a desire to make things work right and get them going.”
After taking a self-paced calculus class, Hastings took it upon himself to write up a proposal to revamp the program. “We ran the program for well over 10 years and no student had ever turned in anything like that,” said Barker. “He was already in the mode of planning and doing things.” After college, Hastings briefly entered the Marine Corps officer training program but quickly transitioned to the Peace Corps, working as a high school math teacher in Swaziland, Africa, for two years. In addition to teaching, the restless Hastings also devised a plan to improve the community’s water-gathering system and developed a proposal for harvesting and marketing the honey from local beehives. These entrepreneurial upsides of his education still influence Hastings: He was the president of the California State Board of Education in the early days of Netflix; currently serves on the board of a charter school advocacy organisation and an e-learning company; and recently donated US$7 million to the California gubernatorial campaign of former Los Angeles mayor Antonio Villaraigosa, a staunch supporter of charter schools.
After the Peace Corps, the ever-prescient Hastings went on to study the then-nascent field of AI at Stanford, a period he calls his “lucky break.” While he’d previously thought of entrepreneurs as god-like, spending time with them at Stanford was a nice reality check. “It really helps to be around some of them to see they are regular people with a good idea,” he said in an interview with venture capital firm Foundation Capital. “The thing I took away was, If they can do it, I can do it.”
Early in his career, Hastings saw the power of mutual good faith and effort in a business setting. While working for a startup, he recounted in the same interview, he arrived early one day and saw the CEO washing Hastings’ dirty coffee mug from the day before. Hastings asked the CEO why he was the one washing it, and the answer created a feeling of loyalty he remembers to this day: “It was the one thing I could do for you. You do so much for the company.” Hastings went on to cofound a debugging-software company called Pure Software, which was eventually sold, providing the funds required to start Netflix in 1997. While his nickname at Pure Software was Animal, he proved himself to be immensely human; after years of combative meetings, it was there that he considered how to create a unique corporate culture.
With Netflix, Hastings saw an opportunity to yet again improve an existing system. He devised a philosophy of hiring, management and retention, which he and his management team laid out in a document called the Netflix Culture Deck. Tweaked by Hastings over the years, it’s posted on the company website and is likely the most widely read employee manual in the world, with some 15 million downloads. The Deck prioritises freedom and responsibility: Unlike at most corporations, there are no dress-code rules at Netflix, no vacation limits; radical honesty, full accountability and transparency are paramount. It emphasises the notion of the company being run like a sports team, not a family. Nearly all corporate documents are cross-linked and available to all employees (despite everyone having access to viewership numbers of their programs, there have been few leaks).
At Netflix, Hastings has created what many see as a utopian corporate culture, not because of foosball tables, yoga or amenities (or even the industry-leading compensation packages in which employees are allowed to decide what percentage of their salary they receive in cash or stock), but because good work is the reward. And the good work is working.
Netflix is investing up to US$8 billion in acquiring and creating original TV and movie content, including deals with cultural influencers like the Obamas, Shonda Rhimes and Ryan Murphy. And while its mastery of the high-minded (think The Crown, Godless) is integral to the brand, Netflix also isn’t above producing content like The Kissing Booth, a low-budget teen rom-com that, at press time, was one of the most-watched movies in the world. Why? Because, as Hastings has said, “We want producers and directors to be able to find the right audience, to change the experience of helping people find movies they love.” And if that’s an obscure rom-com and not an Emmy winner, so be it.
Reed Hastings’ success might be buoyed by radical and disruptive execution and singular focus, but the fundamental principle behind it all is as old as the adage “the customer is always right.” The algorithm Netflix uses to interpret viewing data and personalise recommendations influences a reported 80 percent of the choices viewers make. It is a mirror that reflects our desires back to us with content we never knew we wanted. And as Netflix produces more original shows, it’s using that data to select producers and directors who are adept at creating content that resonates — with an estimated 95 percent customer retention rate, the company outperforms the industry standard.
In some countries, Netflix has 40 percent market penetration, but in others it still lingers in the teens; that’s something Hastings plans to tackle with his proven strategy of being radically and technologically empathetic. Earlier this year he told Economic Times, “Given the consumer base, the next 100 million [subscribers] for us is coming from India.” And that’s just India. There’s a whole world of opportunity — and potential subscribers — to be had. While Hastings has been CEO of Netflix for 20 years, it’s clear he’s just getting started. ■
BY HUGH GARVEY
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