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Reed Hastings won by studying Amazon — then running in the opposite direction

CNBC International 2018-06-13 20:41:28
Getty Images Amazon founder and CEO Jeff Bezos and Reed Hastings, CEO of Netflix.

Netflix is an unassuming insurrectionist.

CEO Reed Hastings is known for the endearing sweaters he wears during his investor calls. Past and present co-workers say he's respectful and hands-off. Netflix's culture is famously lenient: Employees have freedom to work on projects they find important and get unusual perks, including unlimited vacation, no set schedules, and the choice to be paid in cash, stock options or any combination of the two.

From Netflix's earliest days, executives prepared for how it would adjust to rapid growth. Netflix knew DVDs would be anachronistic years before internet streaming was invented, said Joel Mier, Netflix's director of marketing from 1999 to 2006 and a lecturer of marketing at University of Richmond.

"The constant question asked at Netflix has been how do you deliver what customers want today while building for a different tomorrow — organizational ambidexterity," said Mier. "I remember talking about phasing out the DVD and the internet driving content consumption at my first interview in 1999."

The company's ambitions were higher than typical start-ups, partly because Hastings was already a millionaire when he started Netflix.

A former Peace Corps volunteer who once taught high-school math in Swaziland, Hastings sold his first company, Pure Software, in 1997 for $750 million. Netflix executives such as former Chief Product Officer Neil Hunt and former Chief Talent Officer Patty McCord, who worked at Pure with Hastings, spent time focusing on culture to ensure Netflix could grow without losing talent.

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"He brought in former co-workers from Pure," said Michael Rubin, who joined Netflix in 2006 as the company's director of product after working with the company in an informal manner years earlier. "They started trying to answer the question 'how do we build a company that can sustain massive growth without becoming a lousy place to work in the process?' They started looking at why other companies failed."

Hastings relentlessly emphasized strategy and culture to his employees, culminating in a 128-slide reference guide that was released to the public.

The anti-Amazon

While media companies are freaking out about Netflix, the feeling is not mutual.

Instead, Netflix pays its closest attention to native digital streaming services that limit Netflix's potential market reach. Those include Amazon and even Chinese services that don't yet compete.

Hastings was concerned about Amazon as early as January 2013, when he prepared a quarterly business presentation on the subject, according to a person who remembered the slide deck Hastings made. Hastings saw Amazon as relentlessly motivated by delighting the customer — a stark contrast to the traditional cable companies, which always finished near the bottom in customer satisfaction polls.

"There are a fair amount of similarities in the way Reed and Jeff [Bezos] run things," Enderwick said.

You can see this relentless customer focus in Netflix's long-term strategy, which it updates each year on its website.

"We strive to win more of our members' 'moments of truth'. Those decision points are, say, at 7:15 pm when a member wants to relax, enjoy a shared experience with friends and family, or is bored. The member could choose Netflix, or a multitude of other options."

But Hastings believed Netflix could win by doing one thing well, instead of aping Amazon's strategy of doing everything from books to cloud computing infrastructure to grocery stores.

Netflix has toyed with different tactics to win these "moments of truth" over the years. The company considered allowing its customers to buy and own new releases of movies and TV shows, similar to Amazon. Netflix has considered allowing advertising on its site. It has thought about investing in live sports and news. It once sold used DVDs and showcased movie screening times at theaters on its site. It dabbled in producing independent films and original movies (dubbed Red Envelope Entertainment) for DVD distribution. It nearly launched a Netflix set-top box, which would have brought the company into the hardware business.

A prototype streaming set-top device that Netflix designed. Reed Hastings killed the project weeks before launch.

Ultimately, Hastings scrapped all these ideas.

The set-top box idea was killed just weeks before launch, as Hastings realized it might inhibit other manufacturers from wanting to integrate Netflix.

"Reed said 'streaming is our market, we're not doing that,'" said Tom Willerer, a partner at Venrock and formerly Netflix's vice president of product innovation. "His idea is, strategy isn't about what you say 'yes' to, it's what you say 'no' to."

"Jeff Bezos seems to put his fingers in everything," said Willerer. "Reed wants to do one thing exceptionally well and that's it."

"We realized we could compete with Amazon as long as streaming was not in their top three or five things they focused on," said Gib Biddle, Netflix's former vice president of product management. "In the early days, video certainly was not. It probably still isn't."

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This focus comes through in Netflix's long-term strategy document:

"Netflix is a global internet entertainment services network offering movies and TV series commercial-free, with unlimited viewing on any internet-connected screen for an affordable, no-commitment monthly fee. Netflix is a focused passion brand, not a do-everything brand: Starbucks, not 7-Eleven; Southwest, not United; HBO, not Dish."

If Netflix is to justify its grand valuation and not come crashing down to Earth, one of two things must happen — either it has to dominate the global media landscape, or it has to use its scale to go after new markets.

It's clear Netflix has already decided expanding into adjacent markets isn't the strategy. Instead, its only way forward is to win in media.

See also: 

How Netflix sent the biggest media companies into a frenzy, and why Netflix thinks they're still getting it wrong