Netflix’s rise and nearly cult-like corporate culture

Hosted by

Netflix now has about 200 million subscribers. Co-CEO Reed Hastings has said he wants 1 billion subscribers. Photo by Pixabay.

The birth of Netflix wasn’t just the death knell for video stores like Blockbuster. It reshaped how the world watches TV. It forced big companies like Amazon and Disney to adopt the streaming model it pioneered. 

The latest season of the podcast “Land of the Giants” looks at the “Netflix Effect,” and whether the company can maintain its streaming supremacy. 

KCRW speaks with Peter Kafka, co-host of the podcast and senior correspondent at Recode. 

KCRW: How did Reed Hastings come up with the idea for Netflix?

Peter Kafka: “This is in many ways the sort of archetype Silicon Valley startup. You've got two guys [Reed Hastings and co-founder Marc Randolph] who've been successful, to varying degrees, in other tech companies, and they're .... trying to figure out what they want to make. They don't really have a good idea there. They want to ship something over the internet like Amazon is doing with books. And they eventually end up with movies primarily because DVDs have just come out, and they're very thin, and you can mail them easily. … Had it been videotapes, there would be no Netflix.”

Blockbuster initially dismissed Netflix. Former Netflix human resources chief Patty McCord told you, “One of the analysts asked Jonathan Antioco, the CEO of Blockbuster, ‘What do you think of Netflix?’ And he was furious. He's like, ‘Do not ask me about that stupid little company. They’re a gnat. They're nothing. They're nobody. And people are never going to give up their video stores.’” Why was he [Antioco] so angry?

“He was angry because Netflix was this tiny little company that had no hope of overtaking Blockbuster. But it showed up and said, ‘This is what we're going to do.’ And because it was an interesting story, people started paying attention. 

It was not a big service. It was very much a coastal service. It was kind of a novelty. And John Antioco is both frustrated about hearing about Netflix, but there's an interesting twist. He is actually interested in what Netflix is doing. And he thinks eventually that Blockbuster can do it themselves. 

Blockbuster actually did a very, very good job, up until a certain point, at actually fending off Netflix, and looked like it was going to win for a long time.”

Netflix didn’t topple Blockbuster. Blockbuster toppled Blockbuster. They had internal problems and a lot of debt. 

“They had a lot of debt and used to be owned by Viacom. Viacom shoved them out of the company and said, ‘Here's a billion dollars of debt while you go on.’ 

Most people who have heard this story, or told parts of the story, including Reed Hastings, say the big problem that Blockbuster had was Carl Icahn, the corporate raider, had bought a bunch of their shares, and influenced the company, and generally distracted them, and made them do [sic] a bunch of terrible decisions, including basically stopping the most effective tool they had used to fight off Netflix. 

Reed Hastings rubs his hands together and says, ‘We were really lucky because Carl Icahn showed up, and that was bad for them and good for us.’”

Why was it just Netflix versus Blockbuster?

“In retrospect, it makes sense that someone would come in and blow up a service that people have a fondness for now and nostalgia for, but was really disliked by its customers. They didn't have a better choice. 

Blockbuster rented you movies, but they really made their money charging you late fees. It was like 70% of their profits, assuming that you would not come back in time and they could charge you. And they also knew that you weren't going to get the video you wanted when you showed up,  that only 20% of the time when you showed up [you’d find the video].

If you imagine a company today, operating in the age of the internet, where you didn't get what you wanted, and then you had to pay more than you thought, those companies have a much harder time surviving today because there's no sort of geographic moat around them. You can just go to the company that has the thing you want, and that's what Netflix figured out.”

How did Netflix transition from mailing out DVDs to the internet? Was that a rocky transition?

“This is something Reed Hastings was talking about forever. He’s got a Stanford engineering degree. He’s really nerding out about the idea of transferring lots of data around the world. He was someone who would always sort of light up talking about one gig of fiber and what you could do with that. So he wanted to do this forever. 

Netflix started streaming in 2007. They have really nothing to show in 2008. They back into a deal through Starz to get Sony and Disney movies, and all of a sudden, they have a very good streaming service. It's still kind of a niche thing. It's hard to get video onto your TV or streaming it on your laptop. But by 2010-2011, he's got 20 million people streaming and it's starting to take off. And then he screws that up a little bit. 

Reed Hastings is very smart. He's seen around many corners. But he got one thing wrong — it was called Qwikster.  ... It's both a terrible name, and a bad idea, and a bad rollout. But the net effect was he wanted people to basically give up on DVDs and move to streaming. He was trying to push them there by effectively raising rates 60%. He didn't quite say it that way, and they never spelled it out that way. But he was making it much more difficult for you to get DVDs than streaming. He really wanted you to move into streaming. 

Customers hated it. Stock tanked. … Eventually he got what he wanted, which is Netflix as a streaming service. You can still get DVDs from them, but you have to go to a site called DVD.com. 

But this is when Netflix was sort of not used to being wrong. And Reed Hastings wasn't used to being wrong. And it was a difficult six or seven months while they figured out how badly they screwed up.”

Netflix corners the streaming model, uses other people's content, and realizes companies are going to clamp down on sharing with them. They decide to create their own content.

“This is the most fascinating part of the story. Netflix, again because there are smart people running it, says, ‘We're paying AMC, and NBC and Disney a bunch of money for their stuff. And they're kind of looking at us like we're the suckers who are overpaying for their content. But we're doing a better job than they are, of showing people their stuff. And we know that eventually they're going to figure out that this is not a good plan for them, that we’re training people to watch TV shows and movies on Netflix.com instead of nbc.com,’ which eventually gets you ‘House of Cards.’”

They throw an unprecedented $100 million at David Fincher [executive producer of “House of Cards”] and have this hit on their hands. What did that say to the industry?

“Netflix is intent. … [Ted] Sarandos [Netflix Co-Chief Executive Officer and Chief Content Officer] famously said this in a GQ interview, ‘We want to become HBO faster than HBO can become us.’ They were very much oriented around comparing themselves to HBO and sort of measuring themselves by HBO.

The idea of ‘House of Cards’ was to say, ‘We are not in the internet video business. We're not this weird tech company. We're making stuff that is as good as TV.’  But making their own stuff is the plan from here on out.”

The pandemic must be great for them. People are stuck at home.

“They don't use words like great. But yes, they've had an amazing couple of quarters. … They signed up 26 million people in the first half of this year. Last year, in the same time, they did 12 million. That extra 14 million is all people being sent home, having nothing to do, and ordering Netflix.”

What is Netflix afraid of, and what can undo them?

“Wall Street's been going after them forever. They're always one of the most shorted companies in corporate history. That goes back to when they were delivering DVDs. The shorts were betting against the company. The shorts would call me when I was working at Forbes and say, ‘You know, the U.S. Postal Service is going to raise rates, and that's going to doom Netflix.’ 

So now the argument is Disney is going to doom them. Or more often you hear, ‘Hey, they have all this money they're spending. They don't make enough to cover it.’ Blockbuster got sunk because they had $1 billion in debt. Netflix has $15 billion. And what happens if the economy tanks? Well, we've seen the economy tank. Netflix still looks pretty strong. 

But honestly at this point, it's sort of up to the Disneys, and AT&Ts and Apples of the world to prove that they can catch Netflix — more than Netflix has to worry about stumbling.”

The internal culture at Netflix is almost cult-like. For example, the $100 million that Ted Sarandos spent on “House of Cards,” he didn't clear it with his boss, right?  

“That is the story he [Sarandos] tells. Obviously, he did not create the entire thing out of thin air in one day, and show up and tell Reed Hastings they had decided to move into original content. Reed Hastings knew they were going to do that. But ... in Sarandos’ telling, they didn't clear the purchase. 

The Netflix culture is broadly we're going to give you a ton of flexibility and freedom. We're also going to pay you really well, we’ll pay you above market. The downside is there's all sorts of limits and expectations around your behavior. You have to submit yourself to constant criticism from your colleagues sort of at all times. There's a lot of vocabulary you've got to use. There's also a constant fear of being fired. 

The idea is if you've performed really well over the course of your time with us at Netflix, that's great. But if we can replace you with someone who does a better job now, we will. You were a great quarterback for us two Super Bowls ago, but now we can find a better model.”

The co-founder and HR head Patty McCord were fired.

“Marc Randolph was let go, Patty McCord was let go, they all say it's fine. Other folks close to Reed Hastings have been let go. I asked Reed Hastings about this. He said, ‘Well, you know, at first it was difficult for me to fire people. And then I sort of realized you had to stop bringing these human emotions into it.’ 

When you hear someone say that, you step back for a second and pause. But he's got a very sort of logical mindset. ‘This is the best for the company. It's best for you. You'll be better off in the long term.’ I think he believes it when he says that.” 

When he’s firing people, he says you’ll be better off? 

“Yeah. You have worked somewhere, where someone had a job above you who probably wasn't great at their job, and they were stuck there forever. And you didn't like working there because that person really was not pulling their weight and kind of keeping you down. In the Netflix version of the world, that person doesn't exist, and you get to rise up.”

Is that actually true? Because human beings are political animals. 

“Human beings are absolutely political animals. And you will talk to people there who say, ‘Yeah this idea of ... looking for replacements for people who are underperforming — the worry is what if your team is great and you don't let go of anybody? Are you not doing a good enough job as a manager then? So maybe you should let go of somebody anyway.’ 

And every culture has its built-in and baked-in flaws. And I've absolutely talked to people who say, ‘I really don't like it here, I'm definitely going to leave. On the other hand, when I do leave, I'm never going to get paid this well again.’

They have their own words like “sun shining?”

“Yes. Sun shining is when you have made a mistake. You're supposed to sort of go up in front of your peers. And if you're Reed Hastings, that includes a big chunk of the company, and publicly admit what went wrong, and explain what went wrong. 

… Their idea is like you're learning from this. Your peers are learning from this. You're not being punished for screwing up. We have maximum transparency. We're all learning it together. 

By the way, there's hundreds of top level Netflix executives who can see the salary of everyone they work with. And at one point, Reed Hastings wanted all 7000 people in the company to be able to see each other's salaries. That one did not go through.”

Netflix is not very transparent when it comes to their ratings or how much money they’re paying for certain properties.

“One of the things that I found really fascinating is they do share really, really important numbers really widely throughout the company.

I think pretty much anyone in the company can see their daily subscriber count, which would be enormously valuable. Hundreds of people get to see their quarterly numbers before they're released, which does not happen at any other big company. Those things are really closely held. 

Their transparency does not apply outside the company. Although I will say in talking to Reed Hastings over the years, he's been fairly straightforward about what they want to do and what they're going to do. It drives Hollywood and the remaining parts of New York media nuts that they don't have that transparency.”

Reed Hastings’ goal is for Netflix to take over the world as one of the biggest media companies?

“He talks about a billion subscribers. They're around 200 million now. So they’ve got a ways to go. I think they're a fascinating company. I've been trying to find an example. But I can't think of any other global media company that has direct access to their customers over the internet. 

YouTube is the obvious analog. But YouTube insists that it's not a media company. It's a programming business that happens to display videos and they don't program stuff themselves. And obviously big global content brands like Disney, but they don't have direct access to their consumers. I don't think we've ever seen anything like Netflix before. 

It may still not work. It may be that the world actually can't be programmed — that what people want in France and what people want in India and what people want in Indiana are too radically different. And this is not going to work. But they are trying to prove that it can. We’ll see.”

— Written by Jennifer Wolfe and Amy Ta, produced by Angie Perrin

Credits

Guest:
Peter Kafka - Recode and co-host of “Land of the Giants”

Host:
Madeleine Brand

Producers:
Sarah Sweeney, Michell Eloy, Amy Ta, Rosalie Atkinson, Brian Hardzinski, Angie Perrin