Invest Like The Best - Building Netflix

“The big analysis of it afterwards was lots of the executives thought that it was very problematic. But they kind of said to themselves, geez, Reed's made 18 decisions right before. So, you know, I'm probably wrong, and Reed's probably right. So they kind of suppressed their own significant doubts. And what we realized is, if they all knew of each other's doubts, they would have been much more likely to weigh in, to probably just have us do it slower.”— Reed Hastings

Living on the Edge of Chaos · p. 5

Strategy & Decision Making · Leadership & Management · Psychology & Behavior

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Pluralistic ignorance fixed by visible scoring

“This whole idea that a company is a family, it's unintentional, but it just derives from, all the structures of society were family. All companies used to be family companies, and then corporations have grown more recently. All countries used to be family countries and kingdoms. And so, basically, family was the deep organizing unit. So it's natural that that spills into how we think about an organization. But the contrast is a professional sports team. And that's an admired model.”— Reed Hastings

Understanding Talent Density · p. 1

Psychology & Behavior · Leadership & Management · History & Geopolitics

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Family metaphor is historical artifact, not strategy

“That was from the beginning. That's why we named the company Netflix is 'Internet Movies.' It was one digital distribution network, and then eventually we would replace it with another. And we knew that would be a challenge, but we knew the best way to be successful at it was to get big on DVD. And so that became, for the first decade, that's all we worked on.”— Reed Hastings

Good Ideas That Seemed Bad · p. 6

Strategy & Decision Making · Business & Entrepreneurship

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DVD was always a stepping stone to streaming

“30 years ago, I worked at a startup. I was a frontline engineer, 28, so I did all-nighters all the time. I used to have coffee cups spread around my desk and over a couple of days it would get kind of ugly and messy. And the janitor every now and then would clean them all. And I'd come in, they'd be cleaning mugs. And I didn't think about it that much. One morning, woke up early. And in those days, you had to go in the office because of the computers were there. You couldn't take them home.”— Reed Hastings

Team Human · p. 19

Leadership & Management · Psychology & Behavior

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CEO washing cups creates lifetime loyalty

“The contrarian part of it was when we were fundraising in 1997, '98, '99, everyone was excited by internet delivery. And I'm like, but it's not even close. But it didn't matter, they were excited about it and so we were contrarian. And, we had a contrarian thesis that we could build a business with DVD and then transition it to streaming. And it's precisely because of that contrarian thesis that we didn't have much competition in that. Because it worked, we created great value.”— Reed Hastings

Good Ideas That Seemed Bad · p. 6

Strategy & Decision Making · Business & Entrepreneurship

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Contrarian thesis plus execution equals moat

“I think it was probably 20% in the first year. Well, it did spook people, and so it's only fair to let them know what they're getting into. We would say, we're not going to guarantee you a lot, but we'll guarantee that we'll always surround you with great people and have you work on hard problems. That was our core, that you may not be happy, the hours may be long, you know, the food may be okay. But like, the essence of what we can do at work is hard problems with great people.”— Reed Hastings

20% Attrition Rate Isn't the End of the World · p. 3

Leadership & Management · Psychology & Behavior

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Accept 20% attrition to maintain talent bar

“I founded Pure Software in 1990 and grew a kind of typical great software company, doubling. I wasn't careful about it, and I would say talent density declined. That company, we went public in '95, got acquired in '97. And when I analyzed, 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.”— Reed Hastings

Understanding Talent Density · p. 1

Leadership & Management · Operations & Execution · Psychology & Behavior

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Low talent forces rules, rules drive out talent

“I've come to look at it like keeping a pretty broad funnel and hiring a lot of people. And then over the first year, you really get to know them and you can figure out what you want to do. Do you want to keep them or not? Other people have a view like, very hard to get in, but then you can stay no matter what. And I think that's been more of the Google orientation as an example. And it comes from their graduate school background, right?”— Reed Hastings

Understanding Talent Density · p. 2

Leadership & Management · Strategy & Decision Making

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Wide funnel, continuous evaluation beats narrow gate

“If you overmanage, for example, a tight process or specific hours that you have to be in the office, or a wide variety of things, 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. You don't actually want to fall into chaos, okay? In chaos, the product barely gets released. It's full of bugs. People are upset. Payroll's not made. Lots of bad things happen.”— Reed Hastings

Living on the Edge of Chaos · p. 3

Leadership & Management · Creativity & Innovation

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Maximize dynamism without falling into disorder

“I think there's two parts to it to create the competence throughout the company. One is to release the moral thing. 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.”— Reed Hastings

Living on the Edge of Chaos · p. 4

Leadership & Management · Psychology & Behavior · Economics & Markets

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Generous severance removes manager's moral block

“On the terminations is setting a context where it's not a moral issue; you didn't fail. It's just like a professional sports player, we think we can get someone better here. Okay, so it's a pity for the person, but it's seen as natural as opposed to like a failure. So typically I would say something like, hey, I see, Patrick, you're working really hard. You're trying. I'm so sorry to tell you that, honestly, if you quit, I wouldn't try to change your mind to stay.”— Reed Hastings

Living on the Edge of Chaos · p. 4

Leadership & Management · Psychology & Behavior

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Keeper Test: would you fight to keep them?

“I fall in love with ideas easily. Like, I'll see some combination or insight. The original one was that DVD, which was just coming out when Netflix started, was very lightweight. And this was coming out of the AOL mailing CDs to everyone to install AOL on CD-ROM. So I was kind of, like, pretty familiar with mailing because I've gotten tons of these discs through the mail. DVD for movies was just replacing VHS, or just starting. So I kind of like, clicked on that.”— Reed Hastings

Good Ideas That Seemed Bad · p. 5

Creativity & Innovation · Strategy & Decision Making · Technology & Engineering

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AOL CDs plus DVD plus bandwidth math equals insight

“So I would say, first part is board members to realize, okay, I'm not here to add value. They can hire consultants who know the industry and are not conflicted, and that they pay for the advice. So, I shouldn't spend my time trying to give advice. So then what am I doing? I'm here as a board member as an insurance layer. If the company falls apart, I will step in and be part of replacing the CEO. And that's basically the entire job, which is replacing the CEO well.”— Reed Hastings

The Art of Being a Good Insurance Layer · p. 8

Leadership & Management · Strategy & Decision Making

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Board's only job: be ready to replace CEO well

“Probably the related tension was how profitable, how soon. It wasn't a strictly cash one, it was essentially a P&L margin question. And what we decided is let's have low margins relative to cable, which ran at like 35% to 40% margins, so that we can invest a higher percentage of revenue into the content to have better content for our revenue level than we would otherwise. And that became the fundamental lens that we ran the business, and they still run it today.”— Reed Hastings

Netflix's Market Power & Leadership Transition · p. 15

Strategy & Decision Making · Business & Entrepreneurship · Economics & Markets

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Trade margins for content quality advantage

“I think you want to be super careful here, because this is the source of much value. You want to be totally independent in your thinking and not consensus oriented at all. But you want to know what other people are thinking. Otherwise, you're, you know, flying blind. So I think there's a high value on information, gathering opinions, but then not averaging them. We would never do that. We were very clear that the concept was the informed captain.”— Reed Hastings

Good Ideas That Seemed Bad · p. 5

Strategy & Decision Making · Leadership & Management

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Gather all info, decide alone, never average

“So typically, board members want to add value because they're getting paid. It's a human nature thing. And the problem is, by the conflict rules, they don't really know the business. If you run an airline, you can't be on another airline's board. But you're doing that board one day a quarter, for the most part. And on one day a quarter, it is super hard to add value. And so what you see is a lot of directors who struggle to add value. And then management has to be super polite to them.”— Reed Hastings

The Art of Being a Good Insurance Layer · p. 8

Leadership & Management · Psychology & Behavior

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Directors can't add value on one day per quarter

“Qwikster, for your listeners, was a sad episode in 2011, where I became convinced we really had to go all in on streaming and drop DVD, and put DVD in its own company that would drift along, and free ourselves from that. Unfortunately, most of the customers were mostly using DVDs. So, yeah, they were still mailing me the discs. And, so they didn't like it. Lots of cancellations, stock dropped by 75%. So it was a tough time.”— Reed Hastings

Living on the Edge of Chaos · p. 4

Strategy & Decision Making · Leadership & Management

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Right strategy, catastrophic timing and execution

“What I loved about looking at Facebook's business was, ad-supported and everything they did that was on the core, like Instagram, worked incredibly well. And when they tried to do crypto, or when they tried to do other things that were not big ad-supported businesses, it didn't work well. And so that's an example of, companies get good at something, and then if you can add to the core mechanism, that's great, rather than go off to new fields all the time, that helps a lot.”— Reed Hastings

Lessons From Other Tech Giants · p. 7

Strategy & Decision Making · Business & Entrepreneurship

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Extend core mechanism, don't jump to new fields

“What I loved about Microsoft and Facebook's business is they at that point basically had one big product or, you know, maybe two highly related ones. And then it was grow those products to be, you know, $50 billion in revenue on a product. When I started Netflix, I was like, well, thankfully, we can do this as, you know, one really big product, because entertainment is an extremely large market.”— Reed Hastings

Capturing the Public's Eyeballs · p. 11

Strategy & Decision Making · Business & Entrepreneurship

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Entertainment large enough for one massive product

“We humans, we value being nice and we value loyalty. Yet in the workplace, that's a tension because being nice is in contrast or in tension with being honest. I generally like people that are nice, and yet I want to, in the workplace, to be honest with each other, so that we're more productive. So we have to find a way to give each other permission to not be conventionally nice and instead to be focused on the team success, which is being very direct.”— Reed Hastings

Understanding Talent Density · p. 1

Psychology & Behavior · Leadership & Management

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Niceness versus honesty: workplace requires reframing