PHOTO: ROBERT VIGLASKY/NETFLIX/ASSOCIATED PRESS
I knew NetFlix was planning on something other than mailing DVDs around the country by their choice of company name. That choice of name was made well before streaming video was even feasible. But Reed Hastings saw the future and the future was not physical media but digital media – bits and bytes. Netflix wasn’t his first rodeo, he started a software company, Pure Software, previously. After the company was acquired Hastings spent two years planning his next startup and how he could avoid making the same mistakes he had made in his next startup.
As soon as streaming of video to millions of people became technically feasible Netflix did a hard and fast pivot from mailing DVDs to streaming bits and bytes. But Hastings isn’t a one time seer, someone who just got luck.
While the article in The Wall Street Journal Netflix Reports Weaker-Than-Expected Number of New Subscribers is about how Netflix lost 5.24% of its stock value, it correctly hung the problem on forecasting – predicting the future! – as noted in the sub-title:Video site blamed faulty internal forecasting, not business reasons like price increases.
Buried under a barrage of news and statistics about Netflix’s business is yet another example of Netflix’s long term vision:
Ted Sarandos, Netflix’s chief content officer, said he isn’t worried, noting that the percentage of Netflix viewership coming from Disney and Fox library content is “a number that’s been on the decline for several years.” He said Netflix made a bet long ago that big media companies will eventually want to strike out on their own with streaming, and that underpinned its push into original shows and movies.
Its bet that big media companies would eventually discover streaming and thus be very reluctant to license their content to Netflix was behind yet another hard and fast pivot: from licensing third party content – movies and TV shows – to creating its own. Analysts expect Netflix to spend $12 billion on original video series and movies this year, dwarfing rivals like Amazon.com and HBO, let alone the traditional Hollywood studios.
So while Netflix is very large, it’s also very nimble – highly unusual, as most big companies get bureaucratic and sclerotic. I saw an interview on TED with Hastings and he was very proud of the fact that he made no, as is none, as in zero decisions the past quarter! His management philosophy is and has been pushing decision making down to those closest to the customers and closest to the content developers. He not only makes company critical information widely accessible, he empowers his employees to act on it. The key to scaling as successfully as Netflix has been their system of making decisions at the “lowest” level in the organization, unlike most top down, hierarchical media companies.
While Netflix is about as far from a startup as Amazon or Microsoft, these four lessons apply to every startup: one, have a vision for where your market is going. What megatrends – in their case streaming of video – will impact your business and be ready to make necessary changes. Two, share information and opinions aggressively. Three, turn the hierarchical, top down management model on its head – empower those closest to the customer to make big decisions. And four, watch what customers actually do, rather than listen to what they say.
Long-time Netflix users remember it asking to rate different movies. Based on those ratings, Netflix would give recommendations. About a decade ago, Hastings and his company realized that people weren’t honest. “Schindler’s List would always get five stars, but an Adam Sandler movie… would only get three.” However, when Netflix looked at the watching stats of the same users, the former wouldn’t get watched, but the latter would be enjoyed over and over again.
Finally Hastings, as CEO, takes ownership of other’s mistakes rather than placing blame for his mistakes on others:
During the quarter, Netflix fired chief communications officer Jonathan Friedland after he used a racial slur in two work conversations. Mr. Friedland said in a series of tweets that he spoke insensitively and it came up during a discussion of words that offend in comedy. In a memo to employees after the incident, Mr. Hastings blamed his own privilege for leading him to minimize race issues and said Netflix had work to do to improve.