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The pandemic has exacerbated the winner-take-all economy, and Netflix has been a prime beneficiary of the global lockdown. Before the recent tech-stock rout, the company’s stock price had increased by roughly 40% since March, to the mid-$550s, and its market cap of $242 billion briefly exceeded that of the Walt Disney Co., which is no Mickey Mouse operation and has far more in the way of concrete assets and IP. Membership has also increased dramatically for the global streaming service. The company now has 193 million subscribers in 190 countries.
So, how do you get to be like Netflix? In a new book, No Rules Rules, company co-founder Reed Hastings (with co-author Erin Meyer) lays out his management philosophy, which includes paying talent top dollar—while steering clear of brilliant jerks—pumping up candor and taking lots of vacations. Hastings, 59, a former Peace Corps volunteer, acknowledges that his approach is not designed to work at all companies, particularly “safety-critical” businesses like operators of nuclear power plants. The Netflix approach, previously codified in a 127-slide PowerPoint presentation that has been widely circulated in Silicon Valley, works best for creative enterprises, where the biggest risk is lack of innovation.
Hastings recently joined TIME for a video conversation from his home in Santa Cruz, Calif., to discuss Netflix’s singular corporate culture, his view of the media landscape and how he feels about the phrase Netflix and chill.
(This interview with Netflix co-CEO Reed Hastings has been condensed and edited for clarity.)
Do you remember that there was a time when people received movies on little plastic discs in the mail, in red Netflix envelopes?
That’s crazy! [Chuckles.] We still have 2 million DVD members, because on DVD you get comprehensive selection. We have all the HBO stuff, every movie ever made. And then of course it works in deep rural areas where we don’t yet have broadband.
You built a company that transformed the global media landscape, yet you wrote a book on corporate culture, not on the future of entertainment and technology. Why?
We don’t want to give away our secrets in entertainment, how we make shows and how we do casting. But corporate-culture stuff is useful to a broad range of nonentertainment firms. This book is really designed to be an antidote to 300 years of industrialization. For 300 years we’ve been factory, factory, factory. That’s influenced our management paradigms to where the boss is top down, there’s no errors, there’s lots of process. That does work well for factories. But for innovative or creative organizations, it’s really much better to go with flavors of creativity and freedom and responsibility. We want to inspire people instead of supervising them.
So you have a second book, the secret sauce on how you run the business, that you’re not going to write and publish?
By saying adequate performance gets a generous severance package, only very confident, very successful people join us.Exactly.
When you were still building the company in the 2000s, I interviewed you once and you were pretty combative, maybe even a brilliant jerk.
If I came across that way, then it’s just personal failings, it’s not intention.
Many of your rules, like have a talent-dense company and pay top dollar, may work well at a company that’s minting money. But it’s sort of like writing a coaching book and saying, “Get Tom Brady for your quarterback.” It’s not possible for many companies in many industries.
For most of our corporate life we’ve been nearly broke, losing money, and not the Yankees or the Patriots. And so whatever our budget is, though we’d rather have the talent density.
So don’t try this at home?
It is hard to change a company’s culture. I doubt that many large companies will read this and then say, “Let’s become Netflix.” It’s just too hard. But they’ll take aspects of it, they’ll have off-sites to discuss it, they’ll think about what does it mean to stimulate creativity, rather than supervise to avoid errors? And each business will have different risks. If you’re a safety-critical business, you don’t want to manage like this. So it’s very specific to a class of the economy, which is growing and is important.
Can you just be a little more explicit on what class of the economy?
Where the biggest risk is [lack of] innovation. I feel like we’re contributing to that overall discussion, which is how do you tap into human creativity and create an organization that really supports employees flourishing and having great, relevant ideas?
One of the things that I think will get a lot of attention is the unlimited-vacation policy. But the second aspect of it is that leaders actually have to take big vacations and then talk loudly about them. How much vacation did you take last year, and how loudly did you talk about it?
Five to six weeks. I’m definitely European in my habits now. And you know, send a picture. I’ll make it clear that I’m in this great place on vacation. In our field, we do vacations and then we sometimes come up with our best idea while skiing. Because you’re kind of just gently background processing what do you do about these things?
Any chairlift moments?
I was hiking in Desolation Wilderness—it’s up in California near Lake Tahoe—two years ago. And it made me think about when you don’t use a subscription for a long time, could we afford to give up all that revenue? And if we could, would we eventually get it back in positive reputation and have it be sort of an enlightened capitalism where it ultimately did generate more growth, even though in the short term it was gonna be painful? And so those are the kinds of things I’ll think through back and forth when I’m hiking.
You’re referring to Netflix’s policy of canceling subscribers that haven’t used their subscriptions recently. For forgetful people in the world of auto renewal, that is a great, consumer-friendly move. Can you go deeper on what drove that decision?
As the world goes more subscription, there will be a set of companies that embody the way consumers want to have subscription services work. And we want to be one of those consumer leaders, and I think you’ll see other firms adopt similar practices to win consumer trust and to be a leader.
The lore is you developed the idea for Netflix after bristling at a $40 late fee at Blockbuster, after you misplaced a movie. Any similar motivations here?
It was my personal pet project. One of my great frustrations 10 years ago: I had a second line to T-Mobile, and thought I had canceled it but maybe I didn’t. And then it was like a year and a half, two years later, and they wouldn’t give me any refund and it was just—they could see I hadn’t used that line. So there’s somewhat personal experience in it.
For a CEO, you have an unusual take on making decisions.
A good quarter would be one where I made no decisions, a no-hitter. I haven’t had that yet. But mostly my job is to inspire people, excite them: How can we serve the customer better? I’m sort of educating, coaching, cheerleading, guiding. But I’m not making decisions.
So not a control freak?
There are other CEO archetypes: the Steve Jobs, Elon Musk, unbelievable geniuses, the nano manager. And that worked incredibly well for them. I mean, what Elon Musk has done for society and for shareholders, it’s otherworldly.
The book also stresses owning mistakes. If you Google the words Netflix and fiasco, you get a lot of hits, which is never a good thing.
I made a major error in splitting the DVD and streaming services and increasing the pricing in 2011, called Qwikster. The stock went down 75% over four or five months. It was a big error. And we lost subscribers, etc.
And certainly I took ownership of it, and we eventually healed with consumers and now DVD and streaming are separate, but I was just going too fast. And the lesson that we got out of it is not the obvious one of the arrogant CEO who just shoots from the hip. That’s an age-old story. The more subtle one is that all the leaders around me thought it was a bad idea, but didn’t know the other ones thought it was bad and didn’t speak up enough. And their rationale was not fear, the rationale was, “Well, Reed’s made all these hard decisions before that have gone well, so I must be wrong, and I’ll bet Reed is right.” So it was over-deference.
So there was a failure of radical candor. How hard is it to pull off, and how big a problem is the culture of most companies, the unwillingness to be direct with people out of a concern for not hurting somebody’s feelings?
A good quarter would be one where I made no decisions, a no-hitter. I haven’t had that yet.Let’s think of two extremes. So one extreme is to be so polite and concerned about feelings that you never get the truth about whether that idea is accepted, rejected, etc. And then the other extreme is someone is just spouting their id, and they’re running around the place saying, “You’re ugly,” “I’m attracted to you,” all kinds of totally professionally inappropriate things. So you neither want a total id, nor do you want a sort of super-polite fake. You’re looking for constructive feedback, what we call with good intent. It’s quite nuanced.
And do you observe new hires that come to the company? How long does it generally take them to get comfortable with that approach?
A lot of variation. So I would say some people take to it within two months: they’re like, “Oh my gosh, I love this. This is exactly what I was hoping for.” Some never get there, and they leave within a year.
Netflix sounds like a harsh place for B students.
By saying adequate performance gets a generous severance package, only very confident, very successful people join us.
What grade would you give your search and discovery features right now?
Well, internally, I say we suck, compared to how good we want to be in three years. It’s hard. It turns out that human taste is hugely variable.
How many people do you have working on improving your discovery function?
It depends on the boundaries, but I’d say roughly 1,000 people.
Are those humanists or data scientists?
You need a mix. You have a bunch of humanists sort of generating hypotheses, but they don’t know exactly what’s possible. And then you have a bunch of data scientists who are really good at what’s possible.
In the DVD days, one thing that struck me as a consumer was there was a discrepancy in my approach: I would always order high-minded movies like Bergman’s Cries and Whispers or some such, and then Friday night would roll around and all I really wanted to do was watch Legally Blonde, so Bergman would just would sit there for weeks.
We used to refer to it as the conflict between the ideal self and the real self. That’s true with DVD ordering. But with on demand in our current service, you just flick over and watch on demand. Last night I was in one of those moods, and so I watched How Do You Know with Reese Witherspoon, a 10-year-old movie, romantic comedy. And it was like totally fluffy and light and they all looked so young.
Are you interested in owning movie theaters?
No, we only have bought one, the Egyptian, which is the one right next to our [Los Angeles] office. We’re really focused on being a great Internet service around the world.
What are you thinking hard about these days?
How do we share content around the world? Usually the linear networks, the HBOs and ABCs of the world, are very nation-specific. And we’re trying to do something where we have great French movies in America, great German movies in the U.K. We’re trying to share the world’s content, and it’s challenging. You’ve got very specific issues like dubbing, and then general issues of understanding taste.
On dubbing, it seems like that’s something you’re making headway on. The early seasons of Fauda, the dubbing is just atrocious. But in Money Heist it’s pretty good.
Yeah, those are great examples. Fauda was early. So we’re definitely getting better and better at it, as you would expect, as it becomes more commercially important for us.
How many people are working on improving dubbing at Netflix?
At least 100.
How much are you spending on content annually these days?
In 10 years, where do you see that number hitting?
Are you as impressed as the rest of the world by TikTok?
In the earnings letter, I talked about it as there’s lots of innovation left in the world, and TikTok’s growth against YouTube and Facebook is quite remarkable.
What developing technology are you paying attention to that you think will have the most immediate near-term and then medium-term impact on your business?
Display technology. Evolution of screens is important to us. To the degree that there’s new types of TVs that are incredibly beautiful and inexpensive, that helps because then people buy more of them and spend more time with the television screen. Augmented reality, where you’ve got a screen in your glasses or maybe even in your contact lenses, eventually could be pretty impactful.
Will you ever crack down on shared passwords?
You know in the end we do want to serve, we want every household to have an account. And so we want to try to use more carrot than stick in getting people there. But it really does work better when every household has one. But there are tricky issues like when your kids go to college, is that a different household or not? When you’re traveling for business, is that different or not? So you don’t want to go too hard on it and become like the old cable networks.
If you could add anybody new to your board right now, who would it be?
It would be great to have someone from Africa, Asia or Latin America, none of which we have currently.
I’ve been warned that you don’t like being lumped in with the FANG stocks. Why does Netflix not belong in that group?
Disney is our main competitor. We have more people in L.A. than Silicon Valley. We’re fundamentally a global entertainment service as opposed to a general tech company.
Let’s do a round of corporate word association. What’s your one- or two-word reaction to the following companies?
Stable and networks.
Family and fun.
Cable, cable, cable.
Amazing and scary.
Big and powerful.
Useful and free.
Conflicting and enjoyable.
Enjoyable and broadening.
How big is the pie for Netflix? As they say in business school, what is your target addressable market?
Humans on the Internet who enjoy entertainment.
Modest goals. Netflix and chill has become part of the popular lexicon. How do you feel about your corporate name being part of a euphemism for sexual activity?
It’s not a campaign we created. We love it that we’re important enough to people’s lives that they use us in various references. But we neither built that nor do we exploit it. I would say it’s recognition of how significant we’ve become for many people.
BUSINESS BOOK: Jim Collins, Beyond Entrepreneurship.
AUTHOR: Richard Powers. I just finished Richard Powers’ Overstory.
WORKOUT: The Seven Minute Workout.