The Transformation of Netflix

Netflix is the world’s leading subscription streaming entertainment service. Today, it has over 183 million paid subscribers across the world. The entertainment they provide includes TV series, documentaries and feature films across a wide variety of genres and languages.

Netflix launched its streaming services in 2007, it is the pioneer in the streaming entertainment industry.

As at 17 June 2020, the market capitalization of Netflix was at $196.93 billion and the net revenue for FY ended Dec 31, 2019 was at $20.16 billion. The subscribers for Netflix have continued to surge. During the COVID-19 lockdown, Netflix has seen an increase of almost 16 million subscribers as billions of people across the world were staying at home with nothing to do but to stream.

Source: Youtube
Reed Hastings, the co-founder of Netflix

We have listed a few important points from Reed Hastings podcasts as below.

The Netflix Culture
Reed Hastings founded his first company, Pure Software in 1991. It was a company that produced products to troubleshoot software. He was a product guy in Pure and he never really gave any thoughts about management. That did not turn out very well. Pure became more bureaucratic as it grew. They were focusing on adding more processes whenever mistakes occurred and were ensuring that the same mistakes did not happen again. That in turn caused the average intellectual level of the employees to fall and they became less innovative on their creative processes. Things were too stringent, and the workplace was not fun anymore. So, Reed Hastings vowed that he will not make the same mistakes
again for his next company.

The core philosophy for Netflix is people over process. They avoid having rules. Freedom and room for mistakes are given instead. With these, the dream team can be more creative and more original content can be created. In Netflix, they try to give their people lots of opportunities and grow them to be ready for all ranges of outcome.
They also encourage the dream team to always provide each other with honest feedback so that they can always check on their performance and improve accordingly. They use a range of tactics to stimulate conditions where it feels safe and productive to give each other feedback. Dinners within teams are organized at times to encourage the employees to speak up.

They believe in keeping highly effective people only. They focus on managers’ judgement through the ‘keeper test’. Those who do not pass the keeper test are given a generous severance package so that the position can be replaced by someone else, and a better team can be formed. He gave an example about family businesses. He mentioned that he did not buy the idea of unconditional support or a lifetime employment given to someone without regard to how they perform. This does not make sense to organizational excellence nor does it contribute to the society.

Reed knows that things are dynamic in the current world and this is especially true within the tech industry. The underlying rate of changes in the tech industry has been so fast.

So, in Netflix, they do not preserve their culture, they keep it alive and constantly try to improve it. However, he also mentioned that this may be different in other industries and culture may play a big part in their practices.

Focus on improving your core
In Netflix’s earlier days, Blockbuster was their main competitor. The two companies were both offering DVD rental services at that time. He realized that they have won the battle by focusing on their core and not being distracted or psyched out. They spent little time on thinking of how to win the battle but instead focused on how to improve their services. They were constantly finding ways to improve everyday excellence and focused on having operational excellence. One of the things that they did was to ship their DVD to customers on time as that was their core business.

For Netflix, the number one pillar for them is customer personalization. They make use of algorithms to capture what each individual customer likes, which enables them to curate a set of content created for each customer. HBO is their closest competitor and they have been growing as well. He said that these two companies are not substitutes for each other and they both have their individual target markets. Reed believes that their future lies in how great their services are, and it should not be affected by what their competitors are doing. They will certainly focus on how to create amazing content and how to stream the content perfectly all over the world for their customers. He believes that it is their job to turn the money
received from the customer into greater joy for them. Netflix should play it maturely and not blind themselves with their own sense of success.
However, he did mention that it can be hard to figure out the right strategy for different businesses. It also depends on your confidence of the longevity of your business. Rate of innovation has been increasing over the years and humans are inventing much quicker these days. Typical business models have shorter live spans these days.

For instance, Kodak, they did focus on their core and continued to produce better quality films. However, that did not work out for them. Digital products have since reshaped the photography market and now, the internet and services like Instagram have changed the entire photography industry. So, it is difficult to figure out the right strategy as things could change in just one generation and big change can be unobvious.

Staying Ahead and Anticipating What is Likely to Happen
Reed Hastings mentioned that the lack of imagination amongst leaders can be very high. He thinks that being great at business is like being great at chess. Business leaders should always be ahead and should always anticipate what is likely to happen in the future. That doesn’t mean that business leaders should be paranoid and be distracted by the wrong threats. He quoted Andrew Grove – “only the paranoid survive”. He thinks that the quote encodes the truth in a way but it also oversimplifies things. He said that paranoia can cause delusions, and paranoid people could be distracted with the wrong threats.

One example of him anticipating changes and making a right move was when Netflix decided to go vertical and to produce their own content. Prior to Netflix creating their own content, they were mainly buying licensing for their content. Around 2011 and 2012, they realized that many firms that they were buying their content from was building their own streaming services. At that time, Netflix did not have a reliable supply, so they decided to go vertical and create their own content as well. They have steadily
succeeded since then.

It is possible to master a new skill
Reed also mentioned that one can develop a new muscle if it is essential to your corporation. It is possible to master a new skill if we focus and if we put in enough effort into it. However, we will fail to do so if we only dabble into it. It will not work if a non-tech company goes into the tech industry with a little effort and by doing it on the side. On the contrary, if a company has a good management team and is willing to put in at least 1/3 of their effort to focus on it, they will be able to figure a way out. That may
include the creative barriers as well.

Advertising scene has changed
Netflix has stopped advertising on linear TV a couple of years ago. The advertising done now is all on the internet. Doing online advertising also allowed them to target individuals by using algorithms. There is definitely shrinkage in linear TV ads around the world. Linear TV has been amazing for the past 50 years but the internet is taking over in today’s world. We have witnessed the same for land line phones as well, which have been largely replaced by mobile phones over the last few decades. So, going forward, everything will be on the internet.