The Netflix Culture Code That Changed Entertainment Forever | Reed Hastings Interview

To me, the most interesting thing about studying Netflix and talking to Reed is that it is as a business probably the single most relatable example since we all watch Netflix of two really simple ideas that everyone talks about but are very hard to do in practice. The first is this notion of finding a simple idea and taking it extraordinarily seriously. Netflix has effectively been scaling up its core original model since its inception. Reed talks in our conversation about how even the DVDs were nothing but a stepstone towards the streaming future that they envisioned at the very outset of the company's founding in 1997 and simply letting that idea play out over decades without getting distracted and how powerful that can be. And the second is this notion of talent density. This is a term that now gets thrown around every major company and really it was Reed and Netflix that pioneered this concept of what can happen if you set and keep a talent bar exceptionally high. We get into why that's difficult, what Netflix did to make that talent density bar work and sustain itself over decades. This conversation really is an ode to those two simple concepts. And of course, in this case, it's fun to learn about because it's something that we all watch every day.

I want to go back to your first business and the sort of origin story of this notion of talent density that you've become very famous for. We'll talk about talent density for sure. It's one of these ideas that's now ubiquitous in most technology companies. I think you were sort of the originator of the concept, but I want to hear how you came to learn that lesson in the first place, presuming that your very first team wasn't just incredibly talent dense and perfect. What was the early origin story of that concept?

So I founded Pure Software in 1990. We grew kind of typical great software company doubling. I wasn't careful about it and I would say talent density declined. Later, when I analyzed 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 and so it was through that experience that I realized okay I've tried to run software like a manufacturing plant and reducing error and putting in process and then that doesn't get high productivity or high talent and we should manage software much more artistally with inspiration rather than management.

So typically we humans we value being nice and we value loyalty. And yet in the workplace that's a tension because being nice is in contrast or intention with being honest. I generally like people that are nice. And yet I want you 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.

Similarly with loyalty we come to see loyalty which is something in your family like you would never fire your brother if you were tight on money. Okay, you would share and and that's what we admire and yet in a company what we do is we lay people off. And so this whole idea that a company is a family, it's unintentional but it just derives from all the structures of society were family. You know 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 in to how we think about an organization.

But the contrast is a professional sports team and that's an admired model. It's really focused on achievement and everyone understands that you change players as you need to try to win the championship. It's changing the language that you use and don't use things like we're a family. I treat you like my family. Okay, which is like a little bit true but not true enough. and instead we're a professional sports team and we all got to fight every year to keep our position because if we can upgrade we must to achieve the winning of the championship which is producing a great company.

How do you protect against the natural way that companies seem to bleed down towards lower talent density over time like there there seem to be very few organizations that get it high and then keep it at that same level especially with scale. What are the ways that you learn to keep talent density as high as possible as the company grew so big?

Well, as the companies grow, you may be able to pay people more. So, that will help. If you think of the sports team in the biggest markets, they can afford the highest compensation and like the Yankees or the LA Dodgers, they often have the best players. It's not direct onetoone on how much you spend and quality but there is a strong correlation. I think the second thing you can do is continue to really evangelize the benefits of talent density over like total quantity so that more and more of your leaders get adept at managing for density.

I would love to talk about each stage of the funnel to creating talent density in in a business starting with how you found people in the first place. what the most reliable ways were of finding people and then also how you evaluated them and then I want to talk about you know further down the funnel but starting just with like top of funnel what were the most effective ways of finding people that had the potential to be extremely talented inside of one of your businesses

I've come to look at it more like keeping a pretty broad funnel and hiring a lot of people and then you know over the first year you really get to know them and you can figure out what you want to do you want to keep them or not you know other people have a view like keep uh very hard to get in but then you can stay no matter what and I I think that's been more of the Google orientation as an example and it comes from their graduate school background right it's really hard to get into Stanford graduate school and then it's hard to get pushed out too and so it's just natural that they mapped themselves onto that model and there's some benefits of that but that's a different model and mine is more have relatively open doors. We'll interview broadly and try to select what we think is the best person.

And it stands to reason that maybe your one-year attrition rate was higher than say Google's or somebody else's.

Oh, quite a bit. Um what was it like? Do you do you remember the 20% in the first year? And so give that's pretty high. Um what would you tell people on the way in or tell the organization about that rate itself to make sure it didn't spook people that lots of people would leave after?

Well, it did spook people. And so, I would say we want, it's only fair to let them know what they're getting into. Yeah. 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.

You think of it, if your primary orientation is around job security and you're willing to put up with working with uneven levels of talent, then there are other companies that are a better fit. And there's some benefits of that, you know, which is you you have stability in your life. Um, if you're more of a performance junkie and the thing that makes you vibe the most is working around incredibly talented people and running fast and loose with great teammates, then you're willing to put up with the job and security. Nobody likes it, but you're willing to put up with it to get the performance density.

You said fast and loose. Can you say more about loose?

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. Okay. But it's getting us close to that edge of chaos where there's last minute saves and a lot of dynamism as you can possibly tolerate as opposed to say a semiconductor factory which is trying to reduce variation and reduce error to get rid of variance.

And if you're going to be a creative organization, you want to be high variance, high creativity, and again managing on the edge of chaos.

I'm curious with the 20% attrition rate, what you learned about letting people go well and the right way. How did how did you get really good at that specific part of the life cycle?

Well, I think there's two parts to it. 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. Um 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. Two, it helps the manager do their job because then they don't feel as bad in letting the person go. And then you know it just sets up a much better mutual feeling.

And then the third 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 you know, Patrick, you're working really hard. You're trying. I'm so sorry to tell you that, you know, honestly, if you quit, I wouldn't try to change your mind to stay." Okay? And the the reason I wouldn't change your mind to stay is I think I could get someone in in your role that could do what you're doing, plus even more. And here's why. And that the way the company is set up is if I wouldn't work to keep you, I'm supposed to let you go. In that way, we're sort of executing on an agreed upon framework, that whole keeper test framework.

How did the keepers test literally work? Like how was it rolled out across the company?

Well, it was always there that, you know, in the original slide deck, you know, it was adequate performance gets a generous severance package. Okay. So, it's really just starting up front and that the test that we encourage people to use is if someone were quitting, would you try to get them to stay to keep them? Um, because that turns out to be a good test relative to, you know, all the relief we sometimes feel when someone not great moves on.

Was there an episode in Netflix's history that you can remember where you were on the edge of chaos and it like really it either did or very nearly cost you very dearly during the you know uh Netflix 25 years?

There's a couple small things that we did wrong and one big one being the the Quickster separation of DVD and streaming.

So maybe taking the Quickster example, what is it like to see high talent density operate against something like that?

So, Quickster, for your listeners was a sad episode at 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. Disagree. So, so yeah, they were still mailed me the discs. Um, and so, they didn't like it. lots of cancellations, stock dropped by 75%. So, it was a tough time as we had to and ultimately it's the right thing to have separated DVD and streaming, but we did it too fast.

But the 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, you know, 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. And we instituted a much more collective information process on decisions going forward where everybody weighed in 10 togative -10 on decisions and it's all in a big shared document so everyone sees what everyone else thinks. So that way if we had had that decision process in place then I think I may well have thought well these are all fantastic people and they're all horrified at this idea. So I may be right but let's at least go a little bit you know uh more gently to figure out that and we wouldn't have had as deep a hole.

If you think about all the value creation that you've been a part of or the leader responsible for, was most of that the result of a of a fairly non- consensus idea because that seems like a consensus process or at least um if not decision by consensus at least being aware of what the consensus is and I'm curious the about that tension there. It seems like very often non-conensus is the is where the value comes from. Is is that generally true in in your personal history of decisions that you made that created most of the value?

Well, 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 consensusoriented 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. So we wanted to make it like the captain of a ship. Okay, the captain of the ship makes a decisions but it's good for them to collect a lot of information. And so we were very strong on no committees, individuals make decisions, but we want them to be informed about that decision. Um and then it's up to them to make it.

I'm so interested in the bucket of seems like a bad idea but turns out to be a good idea because there's just less competition if it sort of seems bad. What is the what has been your process of coming up with good ideas in the first place?

I fall in love with ideas easily. Yeah. Um and so like I'll see some combination or insight. So uh the original one was that DVD which was just coming out when Netflix started uh 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 just through the mail. DVD for movies was just replacing VHS or just starting. So I kind of like clicked on that. And then the classic computer networking thought experiment you do is kind of what's the bandwidth of a FedEx of a taped you know a tape through the mail and it turns out you calculate it and it's like terabits per second at low cost you know to send a backup tape by FedEx. So you start thinking about networks a little bit differently. So all those combinations made me think of DVD by mail as an extremely efficient digital distribution network that someday the internet would be faster than and cheaper than and lower latency than it was an unus I never thought I love the mail business. I thought I love network business to deliver me.

The contrarian part of it was when we were fundraising in 1997 989 everyone was excited by internet delivery and I'm like but it's not even close u but didn't matter they were excited about it and so it was very we were contrarian and we had a contrarian thesis that we could build a business with DVD and then transition it to streaming. So um and it's precisely because of that contrarian thesis that we didn't have much competition in that and um because it worked um you know we created great value.

When did streaming first enter your mind as like clearly this is the place that we're going to have to ultimately go?

Oh that was from the beginning. From the very beginning that's why we named the company Netflix is internet movies. Yeah. And so it was it was really just about managing the transition even from day one.

designing the efficient system for DVDs was just a notch on the timeline getting to streaming.

Correct. It was one digital distribution network and then eventually we would replace it with another. Um and 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. Um and so that became for the first decade that's all we worked on.

One of the other really cool things about your background is that for a long time you were on the boards of I think Facebook and Microsoft. I don't know if you're still on those two boards or not.

Um, no I'm not. But today I think you're around the Anthropic board and the Bloomberg board. So you've had this sort of, of course, Netflix itself at the center of technology. You've had this very cool 360 view of the probably the most interesting era of technology development ever. I'm curious from those seats what the technology landscape looks like to you today. Like what are the key considerations, things that you have your attention on that you that seem the most important to you from those vantage points?

Well, first of all, because of exponential phenomena, it's always the coolest time ever to be in computer science. I mean, you know, in the 1980s, I thought, "Oh my god, so much better than the 1960s." So, I just think that's a it'll always be true. It'll always be true. I would say as a CEO at Netflix, I learned so much being on the boards of Microsoft and Facebook. You know, they had quite different businesses. Um, but uh they made very interesting trade-offs the way they thought about things. I mean, both of them were very long-term oriented in what they thought they were willing to lose money in certain new areas for a decade.

What I loved about looking at Facebook's business was, you know, ad supported um 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 um companies get good at something and then if you can add to the core mechanism uh that's great. So we've always wanted to add content to the Netflix subscription to make it more and more useful uh more and more enjoyable you know but kind of keep it like one big model as opposed to also do theatrical movies or you know also do something else as a way to expand revenue.

So to answer your question, I would say trying to find simple large models that if they work um you can continue to expand and expand on the kind of core monetization engine that you've already got. Um or if you look at Microsoft's case, you know, it's building high-scale software. And then I'm on the board of Bloomberg, which is owned by Mike Bloomberg. It's a trading stations of Wall Street and uh media around that. and he's been incredible at kind of this long-term orientation to having this intimate relationship with the customers like becoming a trusted utility uh for the industry that's been very powerful and so big Moes uh you know for that business um that are really customer loyalty that he's been serving you know in multiple dimensions for a for a long time and then Anthropic I've only been on the board for a year and it's a you know a wild uh story because you know it's growing so fast.

What have you learned from Mark? You mentioned what you learned from Facebook, but what did you learn from him specifically?

You know, super committed like when you look at uh the metaverse and the you know convinced that there's going to be something beyond the phones maybe that'll be a glasses format and not wanting to be dependent on it, wanting to be really the invention of that layer which is you know extraordinarily ambitious. Um, I probably would have just been like the ad giant if I was doing that business and try to like go after Tik Tok. Um, but he wants to do bigger and broader things for society. It's great because he does amazing amounts of innovation funded uh with what would otherwise be the profits of the company.

You've been on these great boards. You had a board yourself, of course. What advice would you give to people to either be a great board member or run a great board process themselves?

So typically board members u want to add value. The problem is by the conflict rules they don't really know the business. They're not you know if you run an airline you can't be on another airlines 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. management can't tell them you don't know what you're talking about. Okay? Because they run the thing. And so you see this dysfunctional thing where board members ask hard questions and management, you know, ducks and weaves and it's not very functional.

So I would say um 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. Okay? 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, okay. And um and to do that and to have the confidence to do that, you have to learn the business. So you can't be asleep. You've got to really ask a lot of questions and learn what drives the profit streams, how does the business work, um what are the issues with it. But again, you're not trying to solve those problems. You're trying to get a grasp of the business so that you can determine, you know, who might be the best person to run the firm. And if you get that right, as say Microsoft shareholders or board did with Satcha Nadella, then the business takes off and all the advice in the world, you know, doesn't matter compared to that.

If you're on a board, uh, don't measure yourself by did you give a suggestion. Measure yourself by did you get more and more prepared for the small chance that you will have to take big action. And so it's a lot like a firefighter who drills and drills and drills and, you know, hopes that there's never a fire. Yeah. Okay.

When selecting for people that would be that insurance layer for your own business, what did you select for? because a lot of these boards are full of very fancy people like you that are great names to have on a you know website as a board of directors and that seems to be a selection criteria versus like this person's actually going to be good at this insurance layer thing. How did you select board members?

Yeah, people who I believe will be wise in a crisis um and so uh you know we talk through the the board model you know we call it uh extreme duty of care. Okay. So duty care is one of the responsibilities of a director and we amp it up that they really have to know what's going on. We ask directors to come to management meetings so they can watch what's going on, watch the sausage being made. Um again, not so adding value, but so they're highly informed. Um and so we look for people who are wise in crisis. And so a board interview process would be those kinds of things. Tell me about different, you know, business crises that have happened. and uh in case that happens that they would be wise.

How much of your time when you were running the business full-time was systems structuring and thinking around the business versus like the marginal, you know, strategic initiative or something?

I never like booked hours on my calendar to like, you know, think about the culture. you you end up just trying to make things better and then watching kind of what's going well and what's not and making observations and then here's an example from maybe 2004 on we had open compensation so uh basically the top 100 or 500 people of the company could see all the comp throughout the company and the rationale was then they could keep like similar people in a similar vein and uh and there would be more trust around uh gender, around other dimensions that could be discriminatory because the data was all out for everyone to see. That was all true. Um but it also created a lot of petty rivalries. You know, I make a, you know, huge amount of money, this other person makes a huge amount plus $10,000 more. And um and so it got pretty distracting. And ultimately we put it to a question of the VPs about 10 years later, 2016. uh and they decided to take it away from themselves and from everybody else and do the traditional uh you know you know your direct reports and their teams but not the whole company. Um so I would say that was an experiment in human nature which got resolved pretty decisively to be less mavericky but it ended up working a little better. So again, we would take on an experimental view on things and that's a good example because then you can see like we're not um you know geniuses. We're just willing to question things and try them. So we did open comp for a number of years and then uh decided that it's net costs were negative.

Another strategic question that always fascinated me about Netflix was how you determined how much to spend on originals and original content.

as much as we possibly could and and yeah, so say say more about just like the the core calculus or thinking there um I'm sure there would be some directors that would accept an unlimited amount of your money to make

well there's there's how much on any one show that's a different question but in terms of the total budget we would always try to shovel money into that uh on the hopes of creating the great next you know K-pop demon hunters um in terms of any one show then the question is you know what's the likelihood um based on what we've seen um that this is going to be big and it's also a competitive market and the very first original series that we had that helped make our reputation was House of Cards and we had to bid that away from HBO. So as Media Rights Capital was making it, they had bids both from HBO and us and we were not we were a DVD company. Okay. So, we had to overpay um relative to HBO and uh and then they went with us. Um and we had to overpay by a bunch because, you know, it's a it's a lot of risk. Yeah. Uh and then they came through and made a fantastic show. Um and then we were off to the races and original content.

And it's a simple way to think about it almost like one would think about a venture capital portfolio or something that you want to make lots of bets and you don't know exactly which one's going to be K-pop Demon Hunters, but that there being a K-pop Demon Hunters is the thing that matters that you have some dominant massive franchise.

Um, very much so. Uh, but it's similar to venture capital if every A round were 100 million and there was just an A round. So it tends to be pretty much a single round to fund the construction. You do get sequels and other things you have option rights too. Yeah. Uh but that would be the big difference from venture.

If you think about the portfolio of content, what else would surprise people about the conversations happening inside the business as you especially in the early days of developing that portfolio? The key the considerations that matter to you as you expanded it so that it's a combination. I mean, now it's so many things, but in the early days, you know, you're obviously making choices. It's House of Cards. It's not something else and there's trade-offs. What what would surprise people about the conversations that led to the portfolio that that you ultimately chose?

I mean everything for us was around reinforcing the brand and trying to figure out what should the brand be. So the cable networks um by necessity were narrow brands because they got one cable slot. Yeah. Okay. And so FX and Hallmark were both interesting doing different types of content but the handle on the brand gave you the type of content which was inherently pretty niche because it had one network slot. and we were doing something that had all the network slots. And so then we spent a lot of time thinking about how much of the programming do we want to be Hallmark uh soft easy romantic stories feel good versus uh FX and be sort of cutting edge and violent and dark um uh versus uh the comedy central. Okay. So, you know, our main issue relative to the industry was that we had this incredible breadth of content to choose from. And on any new film or series, unless it's completely derivative, uh you know, there's just so many variables compared to other things. So, it ends up, you can do asset allocation, which is how much in comedy, how much in drama. Okay. But in terms of the stock picking, it ended up being intuition and people's judgment. And then we promoted those people with great judgment um who got this right again and again and had we called it great taste but they had more than taste. They had taste and judgment about you know would the people deliver um would this come together and all kinds of ways. So it became just people picking and so then it's trying to figure out uh how much money to put in each area and then the people in those areas would figure out how to best spend it.

The other side of the equation of course is the beauty of the business model is fixed cost for a piece of content and then a growing subscriber base across which to spread those costs. But that requires that you grow the subscriber base. How did those two interrelate? Like what did you learn about what sorts of fixed spend on content would create you know great and reliable and high subscriber growth.

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. So when I started Netflix I was like well thankfully we can do this as you know one uh really big product because entertainment is an extremely large market. Basically, every human on the planet watches television, okay, to varying degrees, but uh it's a deeply human thing to watch stories. Uh and so then the question is, okay, what percent of that could we capture? And so, you know, even today we're only about Netflix is about 10% of US television. We've got a long way to go and internationally it's less than that. generally plenty of in terms of how do we think about uh subscriber growth. We knew that if we could produce better television, make it lower cost and more enjoyable being on demand that there would be a huge market for it. So is it was kind of constrained on essentially product quality. What kind of shows do we have? Now the streaming is kind of flawless and not differentiated between competitors. But for a decade we did it much better than our peers.

That other 90% is that defined as just traditional television or does that include like YouTube watched on

No, YouTube uh is about 12%. I mean you know so so includes everything includes everything sports video gaming it's uses of the television screen. I mean we compete for time uh on mobile phones too but we're very small there. it's not a big use case. Um and television were a big use case but still um you know again under really it's under 10%.

If you think about that percentage as an important thing for Netflix the business what are the competitive frontiers or fields on which you feel like you're competing against something like YouTube. It's more easy to imagine versus cable cable or network shows or something like this but versus something like YouTube that's sort of a a pure UGC platform. Do you think about it that way? like we are competing against them and therefore we want to do certain things to win.

Well, they're growing and we're growing. Um and traditional linear is shrinking. So, you're right that um mostly we both compete with linear TV. Um but we do worry about uh YouTube because it's sort of a substitution threat. Does it get better and better with AI creators and it just becomes, you know, more and more of people's time? uh and that that's the user generated world and it's not really user generated it's on spec that is there are some very professional people who make content for YouTube but they don't get paid on it in advance then they put it up and they see what kind of ad revenues they get so in our case you know we preund the programs uh which gives them a bigger budget they don't have to do it on spec um and that's really the biggest difference in the business model um but it's ultimately do we produce produce uh content like The Perfect Neighbors, a a documentary that just came out, won all these awards and it's been the number one documentary this last month, you know, clever, fresh perspective um content like that. Uh or K-pop Demon Hunters, which was our hit this summer. So, you know, it's ability to create those hits.

What is that magic like? what what what is shared amongst the people like Ted and others that have been able to reliably and consistently create be a part of creating those big hits over time?

If only it were reliable and consistent. I I mean I think K-pop was probably our 30th animated film. Fascinating. Okay. So it's not at all uh reliable and consistent again it no it is a lot more like that of art and seeing the contrarian edge and what's the story I mean imagine the pitch for K-pop demon hunters right you know uh so it doesn't fit a set of formulas um so in that way it is a lot like venture um and also that a few of the companies will generate outsized returns

what do you think will be the most interesting impacts of AI on on the Netflix business specifically and this could mean from the perspective of cost to create the content. It could mean for the service, it could mean for any. How do you how do you where does your mind go as you think about the raw capabilities of of the technology?

Well, visual effects is one um where uh there's a lot of that workflow that can be automated. But in terms of like recognizing a K-pop demon hunters at a script stage uh you know or or pitch stage, which is the biggest value creator, you know, which things do we back? um that will be a far distant uh skill. So you know eventually AI might eat up everything and be better than humans on everything. But you know in terms of the sequencing so think of a when uh AI is not particularly incented and the companies are not to do long form character development but at some point they may