This is session 16 of Technology-enabled Blitzscaling, a Stanford University class taught by Reid Hoffman, John Lilly, Allen Blue, and Chris Yeh. This class features Reed Hoffman interviewing Reed Hastings, the Co-Founder and CEO of Netflix.

As a quick intro, Reed Hastings is widely known within the Valley as being 1 of the most principled, purposeful, rigorous in his analysis and intelligence about being a founder and being a CEO.

He gets requests all the time to join people's boards, including mine, you know, 8 years ago, or whatever that was, which he was like, yeah, yeah, yeah, I'm focused on education, go away.

Which is a, you know, part of focus is 1 of the things that makes Reid unusually strong.

So we are extraordinarily lucky to have him with us here today.

And, you know, I think what I will open with is another piece of something where you are famous for, which is the Netflix culture and the culture deck.

And how did the first culture deck end up coming about, getting published?

There's version 2, which we'll get to, but what led to that creation of that deck, the publication of it, what was that as an act of management, thought leadership?

It's not a, wasn't a pre-read, So there's no pressure on it, but how many people have already read it?

So is that kind of Netflix culture there?

So about 8 years ago, we were getting tired of new employees joining, and I would meet with all the new employees and go through this 100-page slide deck, and 2 out of 3 really got it and understood, and their managers had properly described it on Netflix, and 1 out of 3 were in shock, because the deck has some aggressive statements, like adequate performance gets a generous severance package, and we're a team, not a family.

And so, if you know that going in, you can love it.

But if you don't know it, and you didn't expect it, you feel bait and switched.

And so the big driver was we realized every candidate should get it, and then of course if every candidate's gonna get it, it's gonna be public, so let's just make it public.

And was the construction of it a way to essentially, you know, as you're doing scale, to kind of keep a cultural norm as you scaled?

Was that 1 of the central tools for doing that?

Yes, I wouldn't quite say keep a cultural norm, but it was to share and debate.

1 of the great things about putting things in writing is that it makes it more debatable.

And so it's not just hearing a sermon, and it's like, okay, that's nice, but you can comment on, you know, this part here that we wrote down doesn't really seem appropriate, or doesn't seem what we do, or, you know.

To some degree, it's a bill of rights for employees, which is here's a set of things that we, the company, want to and aspire to operate by.

And if we don't, you can call us on it, and then We'll either fix the articulation, because it's too easy to misunderstand, or live up to what we want to.

And then by putting it in writing, which probably started 5 years before that, It allows all the people in the company to collaborate on it and to suggest improvements.

And what other things do you do to keep a healthy culture at scale?

What are the other kind of techniques in addition to the deck, addition to the onboarding?

Yeah, I mean I would say in our first couple years, so we were founded about 20 years ago in 97, to when we went public in 2002, all we were concerned with is not going bankrupt.

Because the first big internet recession was 2001, and so we had built up a big expense rate and contingent on future financing, and NASDAQ fell 75% that year, and all the venture capitals felt over-leveraged.

They were barely gonna be able to support their existing investments.

Certainly no 1 wanted to take on new ones.

to raise money was as easy as taking a tin can and shaking it, and you know, like 50 million dollars would show up in the can, it was incredible.

Never seen anything like it until last year.

And then the following year, after the crash, you know, you take your tin can out and shake it, and someone would steal the can.

And so it was an enormously sharp and short change, which is why you see so much talk today about bubble, is the memory of, no 1 cares about the bubble, they care about the fall.

So suddenly we didn't have enough money, we had to lay off a third of the company in

and we eked into profitability and survived, but until that point, we really spent all the time just on how are we gonna get the business to be, We were DVD by mail at the time.

So it was how was it going to be profitable.

And only after 2002 we realized, wow, we're going to survive.

That we started to think, well, it would be awful to not want to work here.

So we should try to figure out what cultural attributes were there of what we wanted to work in.

We didn't set out to try to say, like, what's the most theoretically efficient culture?

What's the, you know, and in some abstract sense, it was literally about us.

And we realized that what we valued most, even more than success, was working with really talented people in a productive way.

That that joy of excellence was incredible.

And of course, if you can get that joy of people excellence and talent density, then you're very likely to win.

But at the core, it was about having dense talent.

And part of it was, after we did this 1 3rd layoff, it was 120 people to 80.

We had expected to basically grind to a halt and really not be able to make any improvements because it would take 80 people just to keep the lights on.

But in fact, we got more done with only 80 people.

And we tried to figure out why, and we realized now there was no more, there was no dummy-proofing necessary, and so it was just everybody was going fast and everything was right.

And so we realized with the right density of talent, you know, there's very little process needed, and that that was the joyful thing.

So at first we said, well, let's do a 1 3rd layoff every year, that that was the key.

That's a long-term winning, it might be, you know, back to the blitzscaling thing.

Blitz shrinking, we're gonna not add that.

So then we figured, no, let's not do a layoff every year like that, let's just do continued focus.

And the big evolution we came to is for managers, they have to each year testify for each of their people that if that person were trying to quit, they would try to change their mind.

And so it's up to the manager to decide, yes I would want to change their mind, but sometimes you find that you have people working for you and if they quit, you'd be like, oh that's pretty good.

And that's the case we wanted to proactively, not wait for them to quit, but proactively give them a generous severance package.

Yep, and that's how it got into the culture deck.

And what, in addition to kind of performance, because this is, actually I'm to some degree leading the witness on this, or leading the question, but what were the key things about establishing that culture which enabled you to scale?

Because this is the highly aligned, loosely coupled part of your version 2 of the deck.

So I think, you know, when we went public, we were 150 people by then.

People worried internally, now that we're public, everything's gonna, you know, go to shit.

And because so many companies had done that, put in a lot of process, be very cautious, et cetera.

We've made great progress, really, every year of pushing back on that and doing something either symbolic or real that increased employee freedom, Essentially incented more variance in what we're doing.

And we realized if we're gonna run really loose, like very little rules, then you do want to set a broad context.

So we set context, and this is what Reid's referring to, which is we added essentially a chapter to our slide deck, which is context, not control.

And so we try to get managers to inspire and lead people rather than micromanage them.

And they inspire and lead them through setting the context.

You know, is it a really big problem or a little problem?

Or are we doing approximate version and fix later?

There's a lot of context to any problem area.

And if you get good at setting context, then you don't have to direct the micro-specifics.

So there's context about the problem, and then there's context about behavior, which is really the culture, which is what are the behavioral norms in terms of honesty and sharing and forthrightness.

And in terms of setting the context, I mean, 1 of the things when I read, we actually never talked about the version 2 of the deck, and when I read that and compared and contrasted and looked at it, I was like, alright, well, 1 of the key things is, you know, people usually want command and control, and you have an exemption slide on control, but people usually want to be able to do something like a bold new innovation, usually requires somebody going this is my idea, I'm driving it home.

How does setting the context and that kind of innovation, how do those line up, and what do you do about that?

Well, I think you might be mixing, the manager shares a lot of context, but a lot of people make decisions.

We definitely have decision owners, there's almost nothing by consensus.

But you've got to know the context and then you make decisions.

A lot of things happen that I don't even know about, about different deals or different things or hiring.

You guys are gonna get lucky and meet with Marissa in a week or 2.

And 1 of the things that saddened me when she went to Yahoo, which was very brave of her to do, was this idea that she was going to review every resume, you know, to raise the bar on hiring.

And to me, that's a suicidal methodology for a senior executive, because you've got a thousand people and you're so tactically buried trying to, you know, do a thousand resumes.

And I think what she was going for, and you can ask her, is a symbol of, I care about the details.

But would you, a better way to do, there are better ways to do symbols.

And so, like, I don't review resumes, I don't block hires.

I look at it as my job is to evangelize the benefits of super great talent density.

But we don't even try to hire perfectly, because when you are interviewing at 6 or 8 hours with someone, it's something.

But you know them so much better after they've been in for 3 months.

So I'm like, you know, if you have an instinct, you want to try, try.

If it doesn't work out, we'll give them the severance package and we'll move on.

You know, and it's not the end of the world.

So we're experimental with people in the same way you might be experimental with a product feature or something.

And it's important to be honest with a person when you're doing that.

And that's essentially an adaptation to the growth.

Well actually, I think what Marissa's trying to do is a little bit, because we had Eric in here a couple weeks ago, 3 weeks ago?

Anyway, and part of what Eric was expressing about how they built the Google culture was you can actually only hire people with certain kinds of degrees from certain kinds of universities where they were actually in fact reviewing every resume, every CV before.

I think she's like, okay, we gotta get to that kind of setting in the bar.

And that actually kind of leads naturally to kind of 1 of the questions.

But that's like mistaken in so many ways.

First of all, it's trying to do it the Google way, which, you know, anyway.

Well, that's precisely the question I was getting to, which is, like, there are other, you know, attempts at building strong cultures.

How would you kind of compare and contrast so that people understand that there isn't just Netflix is the only strong culture, but here is some way of understanding the variances between strong cultures?

Well, I think the key thing, and it's a great point, is there are many different cultures, and As long as you're really clear about your culture, you can get the employees who love that culture, and not everyone will be the same fit.

There are some things like integrity that are pretty universal, but there are other things of how to deal with dissent, where there's perfectly reasonable different ways and effective different ways of dealing with things.

And so the literature on culture is pretty clear that strong cultures work, and weak cultures are diffuse.

So in a weak culture, it's really a diverse culture.

You get many people acting very differently.

And then they don't understand each other and they feel undercut and political.

Even in a, let's take a Hollywood studio that many of you would not like to work in, they have a very clear system of how to operate in terms of how they manage the politics, and it's internally consistent.

Everybody knows it, and the people who get good at it love it, and a lot of people don't.

That's just a different it's not inherently awful or ineffective.

And so that's why I think culture's an expression of what you and your senior team want to be.

Do you have a, is part of the interviewing process, do you have essentially a culture check?

Culture's always something that we interview for, of kind of curiosity, and it's easy to find people who say, oh I read the Neffos Culture Deck, I love it, I really want to be there.

You know, what's harder is what are the main things you disagree with and why?

You know, and When we get a blank stare, we're like, okay, not really a first principle thinker.

And when they say, well, I thought the way that you didn't talk about how to acculturate, and if I'm not great on day 3AM I out?

Or is there, do you look at it like an athlete where it's over some time period to prove yourself, and if so, what's that time period, and why haven't you clarified that?

And we're like, oh yeah, that's a good insight.

So we're looking for people who are curious, typically self-confident, and they're questioning everything around them.

Last culture question before we move on to some of the other interesting lessons from Netflix.

So I think you can only have a strong culture when you actually have a mission in the company.

How do you define the Netflix mission, and how is that kind of embodied in the strategy and the work play?

Well, I would say I've always believed that a strong mission statement's really important, and I have to say we've never succeeded at it.

It's like this odd thing, you know, we've had them every year for 15 years, and they're constantly different, and now we're all so cynical, we're like, come on, We're trying to make people happy.

I mean, that's the fundamental thing in the consumer service.

You know, we're trying to be better, and us and Disney and Mission aren't that different.

There's a bunch of different tactics at it.

We cater to the things that are important, but not necessary.

And I love that part about it, because when you're selling milk or penicillin, you're selling something somebody needs.

And we get to sell something you want, that you choose to do, because it's really cool, as human, to be entertained and connect to people over entertainment.

And so we celebrate that a lot, and we want to change the industry, but in terms of a mission statement like so many companies have, Facebook talks about a more connected and open world.

And you see that phrase again and again and again.

And I think we probably would have been stronger if we do.

In the early days, it was to connect people with movies they'll love.

And it's okay, but it's kind of like the long, kind of awkward phrase, connect people with movies they'll love.

And then so like we used it, we had t-shirts.

And then it didn't really motivate anyone, didn't really stick.

But we knew we were trying to make people happy with DVDs, and then eventually with streaming and original content.

So let's go to some of the lessons from Netflix.

So if you were to call a younger version of yourself and tell yourself to do, what key lessons that you would do differently through Netflix, through the history of Netflix.

Obviously you've been a founder of companies before, you're rational, et cetera.

But what were the key lessons, This is an inflection thing that I wish I had done differently.

So we were growing, we went public in 2002, growing nicely in 03 and 04, and Blockbuster, which then was 20 times larger than us, finally counterattacked, And a very...

How many people, raise your hand if you know what Blockbuster is?

accurate question was, you remember actually renting a DVD?

And Redbox is still quite popular, so, you know.

We came up with a number of ways to counter attack.

And remember that everybody's got every DVD.

So you've got basically the same, Blockbuster and us had the same content offering because it's non-exclusive licensing to get DVDs.

So we could differentiate on our service fulfillment levels were 99% and theirs were

But that's like really abstract for a customer, you know, thinking of signing up doesn't mean anything, right?

And then they discounted massively, so it was like half our price.

So, you know, we were struggling with what to do about it, so we did 3 or 4 big efforts.

we added Netflix Friends, which was our own social network.

Remember in 05, Facebook's just on a few universities.

It's our own social network amongst our members, and if you enabled each other, you could see what each other were renting and rating.

And we thought, wow, the viral effects of this would be really powerful, et cetera.

Back in the day it was like Yahoo type banners.

We sold banners above the choosing interface.

We added used DVD sales on our site to consumers.

Of course we had some excess DVDs from 4 years ago, so we added an operation to sell them for 4 bucks a pop, and it's a different logistics, but we added all that.

And we added Red Envelope Entertainment, which was a group that we brought in to buy DVDs, buy films out of Sundance and similar festivals to then publish them on DVDs, so getting into content.

And each 1 was a dozen people, 15 people, and made us feel great.

I mean, the employees loved them, because here was a tangible thing that was not just 98% versus 89%.

Here was a thing that they couldn't do or weren't doing, and it was a differentiator, right?

And We went through these waves of battles in 06 and

They ended up closing down their online thing, and 2 years later, going completely bankrupt.

But we looked back, and none of those 4 efforts made any contribution to our victory.

And 1 by 1, we had closed them down along the way.

And so, in hindsight, we realized When attacked, we should retreat to do the core better and not try to broaden the surface of attack, essentially.

Now when people say, aren't you getting into news or sports?

You know, and we're really confident of our answer.

Like movies and TV shows on a global basis, enormous market.

And so, we're much less subject to being prone to go off and chase the shiny object, to try to have something in a checklist to differentiate, and to trust, and in hindsight, if we had just gone from 98% perfect to 99.9, we would have done a lot more for the business.

And it's hard work, it's operational, logistics, how to get DVDs not to break, I mean, the amount of polycarbonate analysis we had to do is all this stuff.

We would have beaten Blockbuster sooner than we did.

And so that's 1 of the great lessons out of that time.

Yeah, Quickster we got some lessons out of.

So we looked at, so I'll give you some context on it.

It's a hybrid plan, you got DVDs and streaming.

we launch in Canada as a test in a way of both international and streaming only because there's no DVDs.

And We expected X and we got 10X, it was 10X bigger reaction in customer sign-ups than we expected.

Even though it was just streaming, no DVDs.

We realized, oh my God, you don't need DVDs.

Well, we were always going to use them as a hybrid way.

This was our differentiator against Hulu, because Hulu was about equal size at the time.

We're streaming and DVDs, which was going to be compelling, was compelling to half the market, but was going to be compelling to a shrinking percentage of the market every year.

So it's not what you want your brand image to be around.

So we realized, wow, we cannot afford to use the crutch of DVD now because pure streaming works, and so we want to win as the best place to do pure streaming, not be the best place to do hybrid, because that wasn't a long-term benefit.

So I think correctly, we separated the 2 businesses.

we're in the middle of a recession, still pretty deep.

As we said, well, $8 is a good price for the DVD plan, it's a good price for the streaming plan.

So the combination, which is $16, is the new price.

From the customer's standpoint, 1 day the price went up 60% in the middle of a recession, and Now they had to deal with 2 user interfaces instead of 1.

And if we had done grandfathering on the price for a couple years, it would have been fine.

Now Fortunately, we realized, wow, we've got to make amends.

But now, a lot of people have left us, and changing the price would be hard.

But the symbol of Quickster was much hated, even though the name tested quite positively before we did this.

So if we kill the symbol, maybe people will forgive us.

And so that's why we killed Quickster, and people mostly forgave us, and we moved on.

And 1 of the things I thought, I learned from that from you when you were doing that is I actually thought that your letter to the public on the blog was actually masterfully done.

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Blitzscaling 16: Reed Hastings on Building a Streaming Empire