← How I Built This with Guy Raz
How I Built This with Guy Raz
Netflix: Reed Hastings. “We’re Not a Family.” The Provocative Idea That Helped Build a Streaming Giant
01:24:59
Loading summary
Transcript241 lines
- [00:01]
Guy Raz
Say you've always wanted to take that trip to Copenhagen just to soak up the design scene. Here's the thing. If you get smart with your money, you could do things like that. With Empower, you can start making the most out of your money so you can go out and live a little. Isn't that why we work so hard to have some fun with our money? Like building out that immersive, cutting edge media room or surprising your partner with a one of a kind weekend getaway? So use Empower and get good at money so you can be a little bad. Join their 19 million customers today@empower.com not an Empower client, paid or sponsored. This episode is brought to you in partnership with Airbnb. One of the coolest things I did last year was take my family to Berlin. We explored the city, ate incredible food, and soaked up the history. And one of the things that made the trip so special was the home we booked on Airbnb. We had a beautiful apartment with big windows, a full kitchen, and we were walking distance from everything we wanted to see. It didn't feel like we were visiting, it felt like we were living there. And that made the trip so amazing. And when you take your own vacation, that's actually a great time to host your home on Airbnb. Your swanky art collection and handy kitchen gadgets might be just what someone else needs to feel right at home on their next trip. Plus, you your earnings from hosting could help offset the cost of your next trip. Your home might be worth more than you think. Find out how much@airbnb.com host hey, just a quick message. If you're building a business right now, imagine getting advice from the founder of Tarte Cosmetics or Airbnb or even Sir Richard Branson or Mark Cuban. Well, you can get that advice. Every Thursday, we drop an episode of the How I Built this Advice line. It's where I bring back a previous founder we featured on a past episode. And together we help real entrepreneurs. People selling skincare, dog toys, pottery, food, whatever. We help them work through the challenges they're facing right now. And the best part, this kind of advice, world class, battle tested, is completely free. All you have to do is call 1-800-433-1298, tell us what you're building in under a minute and you might be the next guest on the advice line. So give us a call or send us a Voice memo to hibtid.wondery.com and tell us how we can help you. There's a story that I've heard you guys tried to sell the business or to try to merge with Blockbuster to become Blockbuster's digital art. But tell me what. What is the story, roughly?
- [03:06]
Reed Hastings
The idea was, did they want to bet on us to do the online? If we could have become blockbuster.com, we'd grow a lot.
- [03:15]
Guy Raz
F. I mean, it's amazing to imagine that that could have happened. Like, you were prepared for Netflix to become Blockbuster's digital arm in 2000. Like, you would have been happy with that outcome.
- [03:27]
Reed Hastings
Yeah, no, exactly. We had not much confidence that we could grow, period, and then particularly grow against them. We were probably feeling pretty desperate.
- [03:44]
Guy Raz
Welcome to How I Built this, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built. I'm Guy Raz, and on the show today, how Reed Hastings built Netflix, a business that began as a DVD rental service and wound up transforming home entertainment forever. Netflix should not have survived. In fact, it should have been crushed within the first few years, because when it launched in 1997, Blockbuster dominated the home entertainment market in the U.S. the basic outlines of the story are pretty well known. Netflix bet on DVDs when Blockbuster was still all in on VHS tapes. Netflix believed people would rather pick their movies at home rather than go out and fetch them. And Netflix also knew that most people hated the late fees that Blockbuster charged. But still, four years into the business, Netflix was on the ropes and, in fact, would have been happy for Blockbuster to just buy them out. What happened next seems almost predictable from today's vantage point, but wasn't so clear cut back then. Netflix adopted streaming video much faster than Blockbuster, and by 2010, Blockbuster filed for bankruptcy. At its height in the early 2000s, Blockbuster had 9,000 stores around the world. Today, there is just one single store left in Bend, Oregon. Now, one of the reasons Netflix prevailed was because of the decisions its leadership made, and in particular, the culture of high performance that its founder, Reed Hastings, put in place. Reid saw the company almost like a championship basketball team, that everyone needed to be performing at peak level. And for those who didn't, well, they were swiftly let go with no lengthy paperwork, no second chances, and a generous severance package to soften the blow. Now, a lot has been written about this culture over the years. Some people see it as cutthroat and ruthless. But others, most importantly Reed Hastings himself, argue that it's actually transparent and honest and, well, humane. In fact, Netflix has an incredibly high employee retention rate, despite the fact that around 9% of its employees are reportedly asked to leave each year. But no matter what you might think of the work culture, Netflix changed how we consume entertainment. And the person widely credited with making Netflix what it is today is Reed Hastings. What's interesting, among many things about Reed, is that he isn't a film buff at all. He's not that guy who talks about Fellini and Truffaut and Akira Kurosawa. In fact, when he started Netflix in 1997, he and his co founder, Marc Randolph, had spent nearly a year brainstorming a bunch of different business ideas. Video rentals just happened to be the one they thought had the most potential. But running Netflix didn't come easy. And as he will describe in this interview, Reed learned, sometimes painfully, how to become a better leader and a better manager. Reed Hastings grew up in Boston in the 1960s and 70s. His dad was a lawyer for the federal government, and as a teenager, it took him a while to find his footing.
- [07:18]
Reed Hastings
I was a late bloomer kind of kid, so no JV or varsity sports. You know, we had to play sort of freshman stuff. No girlfriend, no big academic achievements, not that high a gpa.
- [07:34]
Guy Raz
So in high school, nobody would have looked at you and said, oh, this kid. Watch out. This kid's going to go places.
- [07:40]
Reed Hastings
Correct. No one would have said that.
- [07:42]
Guy Raz
So I know you went. You studied at Bowdoin College in Maine, and you describe yourself as an unexceptional high school student. What happened there? I mean, you majored in math, right? Did you sort of all of a sudden, kind of just everything opened up.
- [07:59]
Reed Hastings
My guess is what happened is physical brain maturity and the kinds of abstractions that we deal with in math came quite easily to me. The moment that I was surprised at was taking an advanced algebra class. And the professor showed us in some kind of graphic, you know, all the scores of the class unnamed. And I had gotten 100, and, like, the nearest other score was at 80. So that really built my confidence that I could do math well.
- [08:43]
Guy Raz
And I think that after you graduated college, you went right into the Peace Corps, right? This is like 1982 ish around then, right?
- [08:51]
Reed Hastings
Yep. They signed me up as a high school math teacher, and the country they sent me to was Swaziland, which is between South Africa, Mozambique, and this was all pre Internet. And so, you know, I went off to the Encyclopedia Britannica to try to learn something about, you know, Swaziland. And it is and was a very small place, 500,000 people.
- [09:17]
Guy Raz
So, I mean, early 1980s in Swaziland. God, I mean, no Internet. And I Can't even imagine. Like you probably talk to your parents, your family, like once a month maybe if you were lucky, like if there.
- [09:29]
Reed Hastings
Was a payphone around, I think once a year. Yeah, there was no payphones. You have to travel to the capital to do that, to call. So yeah, very isolated, beautiful country. Came home once during that for my sister's wedding. And that was very hard because you get to Johannesburg and you fly, I don't know, 18 hours to Boston and then it's a three day wedding that's elaborate in champagne and dress up and a lot of just magic. And then you jump back on the plane another 18 hours back and then you're in the classroom and the wind's blowing and it's quiet, there's no electricity. Yeah, the contrast was hard. And when I came back from that week, I came close to quitting. But you make your incredible connection with your kids and I ended up sticking it out. But that was the only real hard time in it.
- [10:35]
Guy Raz
Yeah. So I guess after a couple years there, you decide to come back to the US and you went and did a degree at Stanford. You did a degree in computer science.
- [10:45]
Reed Hastings
That's correct.
- [10:46]
Guy Raz
And then I guess pretty soon after that you got a job at a startup in the Bay Area. What was it? What did you do?
- [10:55]
Reed Hastings
Yeah, we were doing AI for customer support systems and I was working on the underlying operating system essentially for this. And we had a super compelling CEO and he had a great vision and I was the 28, 29 year old engineer, worked all the time, you know, loved doing all nighters and you know, was prolific in writing lots of code. And ultimately one customer ever bought the software and that customer never installed it. So it was this scarring lesson because, you know, I had worked so hard and written all this beautiful code that basically was now getting thrown away. But the CEO I learned a lot from. The thing I learned from the most was humility and the value of that. And one day I came in very early, you know, four or five in the morning, and I used to have a lot of coffee cups spread around my cubicle, you know, from the last four or five days. And every now and then the janitor would wash them all and leave them cleaned on my desk. I didn't think much of it. And then that morning I came in early, four or five, I go into the toilet and I see my CEO there, also in early, and I see a lot of coffee cups. And I realized suddenly he's been the one washing them all year.
- [12:30]
Guy Raz
This was Barry Plotkin I think that was his name, right? Yeah.
- [12:34]
Reed Hastings
And I said, you know, Barry, have you been washing my coffee cups all year? And he said, yes. And I said, why? And he said, you do so much for us and this is the one thing I can do for you. And I would never have discovered it but for coming in so early that morning. And that just made me feel like I want to follow this guy to the ends of the earth because he was so admirable personally. And unfortunately he led us to the ends of the earth, that is to build a product that nobody wanted. And so I realized in leadership that there's both being trustworthy and admirable, which he was in spades. And also astute about where the markets were, that if the team builds the thing that you think they should build, that there will indeed be a successful path there. And so you have to both not lead all these great troops into a box canyon where you all get killed, but you also need to set a great personal example and that those were sort of the big aspects of leadership.
- [13:51]
Guy Raz
Okay, So I guess after the startup failed, you decide to start your own company. You called it pure software. And I wonder, I mean, did you feel ready to do that at that point? I mean, clearly you'd made connections at previous startups and maybe in your previous job and, and at Stanford, but like, how did you start to build a team and to start to build a company?
- [14:17]
Reed Hastings
I was under prepared for sure. But I would say one of the things about being around Stanford is all these pretty normal people create companies and you meet them and so it doesn't seem so impossible at all. But I didn't know specifically how to do it. I didn't understand what incorporation was or how to get a lease or anything. The first year was trying to do a proof of concept. So I spent a year in a cold cabin in the Santa Cruz mountains in La Honda where we just had a wood fireplace and had bought a Sun Microsystems computer. And at the time that was like as expensive as a car.
- [14:59]
Guy Raz
Like eight megabytes of RAM or something.
- [15:01]
Reed Hastings
Or more. Yeah, exactly. And you know, it was a cutting edge computer that only corporations bought, so.
- [15:07]
Guy Raz
And not connected to any Internet or at that time.
- [15:11]
Reed Hastings
No, you could do a little bit of dial up, but it was like, you know, 9.6 kilobits. It was very.
- [15:19]
Guy Raz
It was just plugged into the power in the wall.
- [15:21]
Reed Hastings
Yep. Okay. And I spent a year prototyping and learning how to do the software and do the proof of concept. So that was the beginning of pure software. And we released a product, you know, within a year, year and a half of starting.
- [15:39]
Guy Raz
And that product was a debugging product, basically.
- [15:42]
Reed Hastings
That's right. It was sort of like inventing an X ray machine. And no one had been able to see a broken bone before, and suddenly they could. And so it exploded across the industry, and everybody wanted it. And so it was a small breakthrough.
- [16:00]
Guy Raz
Yeah. And you went from, like you to like, five people and then 10 people, and then eventually hundreds of people. Tell me about how you. Because you were a young guy when you started this, you were like, 31, 32. How did you start to manage that side of the business? Because you were making this thing, writing a paper, explaining it, thinking deeply about it. But there's another whole other side to it, which is a business, which is the people that you bring in and then that you have to manage.
- [16:32]
Reed Hastings
Yeah, that was my mba, essentially, was pure software. And luckily the products were amazing because my management was not. I only really had one gear, which was work hard. And so whenever things got harder, you know, difficult or challenging, I would just work more. So I would, you know, be coding at night and then, you know, trying to be CEO in the day. But I looked haggard. You know, I smelled. I hadn't showered. You know, it was sort of not a very inspiring look. Typically, you know, your salesforce and that kind of business is very important. And unfortunately, I had little grasp of who's the right type of person to run the salesforce. And so I kept hiring the wrong people and then taking a year to figure that out. And so we had a new head of sales every year, five years in a row, which is chaos in enterprise software. And yet despite that, we doubled sales every year in that time. So again, that was the strength of the products. But to say it was unevenly managed would be generous.
- [17:48]
Guy Raz
The product was so good that you were actually able to kind of get away with not being a great manager because everybody was happy, the sales were growing, people were making money. And so maybe it kind of inadvertently allowed you to not have to, like, figure that out, that part of the job out.
- [18:07]
Reed Hastings
I don't think it. First of all, it was not that everyone was happy. So it was a lot of chaos. And I looked at a company like a semiconductor manufacturing plant, and when you find an error, you put a process in to avoid that error happening again. And the challenge of that is, in the field we were in, and in most tech fields, you have to be very creative and constantly changing. The product of five years ago is not going to sell in the current climate. And what we did is kind of systematically drive out the mavericky people who didn't follow process or rules. And we were always trying to organize processes.
- [18:55]
Guy Raz
Do you think at that time you had an opportunity to kind of reflect on what it meant to be a good manager? Or was it just so crazy and the growth was so fast that you, it wasn't even. There wasn't time to just stop and breathe.
- [19:10]
Reed Hastings
There's a management phrase that someone's too busy chopping wood to sharpen the ax. Yeah, and I was definitely guilty of that. I never took time to reflect. As a small example, I was invited during that time to join ypo, the young president's organization, which is a very mentor oriented organization, which in hindsight would have been very valuable now that I know about it well. But at the time I thought, oh, it's way too indulgent a day, a month, you know, not doing the work. That's crazy.
- [19:44]
Guy Raz
So this business eventually merges and then is acquired. And so you're, you're in your late 30s and you know that you're not going to stay on with this company and you're not going to sit around for the rest of your life and just go, you know, from vacation hotspot to vacation hotspot like you want to do something else. It's 1997. Tell me a little bit about, take me back to that, that place in your life.
- [20:12]
Reed Hastings
So I had more money that I knew what to do with. And so it wasn't. And I didn't think I would do another tech thing. I did think the guy who had been the chairman of Netscape was Jim Clark. He had carved out a life doing seed investing. And I thought, okay, that's what I'll do is I'll be an angel investor. So along from a commercial standpoint, I started making seed investments, of which one was Netflix.
- [20:46]
Guy Raz
Okay, so we'll get to that in just a moment. But I'm curious when you were around some of some of the, you know, particularly VCs and some that I know, I think their talent in many ways is their charisma, you know, their ability to create relationships and forge bonds and get people to like them and trust them. And you may have all of those characteristics, but you strike me as a bit more introverted. And maybe I'm wrong. But is that right? I mean, how did you kind of interact with that world of like more sort of extroverted and more.
- [21:25]
Reed Hastings
I would say it's an astute observation. But I would say my skills are sort of analysis rather than connecting in relationship all the time. But people saw that I was sincere and so they kind of forgave me the awkwardness.
- [21:45]
Guy Raz
So you wouldn't. Because you don't strike me as a small talk person. That. That doesn't come easily to you.
- [21:51]
Reed Hastings
Correct. I would say the. I don't know if it's easy or not. It's just not that interesting. If we're talking about, you know, the weather or the superficialities. I find that in certain circles or topics, I find them incredibly exciting and that's very engaging. But in terms of flattering people and making them feel listened to like the politicians do, that's definitely a different skill set.
- [22:17]
Guy Raz
Yeah. All right, so let's jump into Netflix. There are many apocryphal stories about how it came about. But let's start with a guy named Marc Randolph. Who is Marc Randolph? Who was he and how did you know him?
- [22:32]
Reed Hastings
He was VP of marketing at one of the companies that pure acquired. So that's how I got to know him. He's a very fresh thinker, creative. And then we made him head of marketing of the whole company and then the whole company got acquired.
- [22:53]
Guy Raz
Right.
- [22:54]
Reed Hastings
So suddenly we were both freed up and we said, you know, let's try to find. Let's look at some interesting things to work on together.
- [23:04]
Guy Raz
From what I understand, he lived in Santa Cruz as well. And one of the ways you connected was you would commute together into work sometimes.
- [23:12]
Reed Hastings
Yeah, absolutely. So it was a half hour drive, maybe 45 minutes. So we got a bunch of time just brainstorming on different ideas.
- [23:23]
Guy Raz
What do you start to talk about?
- [23:26]
Reed Hastings
So the general thing was E commerce. So that was the hot story. Amazon had gone public. There was everything from pets.com, which sold pet food online, to 50 other. You know, there was the CD. Now there was.
- [23:41]
Guy Raz
Oh yeah, I remember that. I bought CDs from them.
- [23:43]
Reed Hastings
Exactly. So there was every new category. You know, you kind of got the URL. So think of it as E commerce was like AI is today, which is everyone's doing.
- [23:56]
Guy Raz
Everyone's throwing everything at it. Yeah.
- [23:59]
Reed Hastings
And you know, like everyone of the era, I had my frustrations with video rental partially by living when we lived in La Honda, far away from video stores and had gotten a big late fee. And again, it's not that remarkable because lots of people had them. But it always bugged me and seemed a painful consumer experience. And if it could be done by mail like Amazon, then it could be improved.
- [24:30]
Guy Raz
Yeah.
- [24:31]
Reed Hastings
But it turns out that VHS cassettes, which was the way movies were distributed, weighed about a pound and cost about $4 to ship. So if you got shipped a VHS cassette and then shipped it back, that was $8 on top of the three or four dollar rental. So that didn't make a lot of sense. So it ruled it out as an interesting category.
- [24:57]
Guy Raz
Why did you think video rentals was like a blue ocean? I mean, and Blockbuster? I remember going to Blockbuster. It sucked. You go to Blockbuster and there'd be like a hundred boxes for a movie you don't want to see. And the movie you want to see, you couldn't get. And then you'd pay late fees.
- [25:16]
Reed Hastings
They had out of stock and various problems. One advantage is that relative to Amazon, the nice thing about rental is because you got to return the good. It's a very different logistic path than selling things. So then it makes less sense for Amazon to invest in because it's only one category that does this. You don't rent computers or bicycles or other things where they get shipped and shipped back. And it was a large enough business to be interesting. Blockbuster was about 5 billion in revenue, but not so large as to attract Amazon and others into it.
- [25:58]
Guy Raz
So.
- [26:01]
Reed Hastings
That crosshairs made it potentially interesting from an E commerce standpoint.
- [26:05]
Guy Raz
All right, But VHS tapes were not going to work because. And that was what everybody used well into the 2000s. But that wasn't going to work because the shipping costs and also they could get damaged and they were very expensive.
- [26:18]
Reed Hastings
But in the middle of 97 or fall of 97, a mutual friend of Marx and mine, Steve Kahn, who had it was an audio file. And up on all the latest things, said, hey, there's this thing, DVD coming out that was like a CD format but held a movie.
- [26:40]
Guy Raz
Okay, and that was interesting to you?
- [26:43]
Reed Hastings
I would say it was an instant, like, oh my gosh reaction. Because at the time, AOL was mailing around startup discs everywhere and so on. I was well aware of AOL discs in the mail. And so I thought, okay, they must be tough enough to go through the mail. And I rushed out and bought a bunch of CDs. You couldn't buy DVDs at that time. And started mailing them to myself to see, you know, would they arrive broken, you know, in pieces or all altogether. And I remember we were living in Santa Cruz by then. The next day, getting the five discs in various types of envelopes. And if you put enough padding and packaging on it, of course, it's going to make it. But the question is how little. And this was practically an air mail envelope. So very thin paper and all five CDs arrived at my house in good shape. And so at that moment, that was for me. This can work.
- [27:49]
Guy Raz
Why did you have any confidence in the viability of DVDs? I mean, laserdiscs existed. There were Betamax tapes before, there'd be way later.
- [27:59]
Reed Hastings
Yeah, I didn't. So I thought there's some chance the DVD will take off across the industry. And if it does, then there's a dislocation which makes it viable to build a business around. But it may be that DVD will fail, in which case the business is dead. So it was not a guarantee at all. But we said if this is successful, then there's an opportunity because it, you know, when three people in a city have the DVD players, it doesn't make sense for Blockbuster to carry them.
- [28:34]
Guy Raz
Yeah.
- [28:35]
Reed Hastings
And so that they will be late to the game. And so that's where the buy mail for their early DVD adopters would make sense. And then we had to race to get good enough so that once Blockbuster carried rental DVDs in the store that we could sustain ourselves. So that, you know, there was many challenges.
- [28:57]
Guy Raz
Yeah. And tell me a little bit about just, just the, the kind of the, the basic, you know, nuts and bolts here. Did you get a warehouse? Did you. How did you acquire the DVDs? Was it hard to just. Did you just buy a ton of DVDs? Because I think in the first year most of your money came from selling DVDs. You weren't actually making as much renting them.
- [29:19]
Reed Hastings
Let's see, we started in the fall of 97 and so I put in the initial $2 million and was chairman. And then the site launched in like May of 98, roughly. And it may have been selling at the time, but the real focus was on rental. And you know, was there a consumer demand for rental by. Maybe.
- [29:44]
Guy Raz
So how are you going to. I mean this is pre search engine optimization. It was, people would discover websites. I mean, it was a time where a new website would generate like an article or like a story on cnn. So did you get attention when this website went public?
- [30:01]
Reed Hastings
We did, but at that time maybe 1% of US households had a DVD player. Yeah, in hindsight we were too early. Okay. We should have waited a couple years to launch. So it was a very small business and we were okay with that. And you asked earlier, where do we buy DVDs from Costco. We just go down to Walmart, Costco, et cetera, and buy 20 DVDs of a given title. And there weren't many titles on DVDs because the studios were tentatively publishing the catalog.
- [30:41]
Guy Raz
Yeah. So, I mean, if you want to screen a movie. Right. Like, let's say I want to screen, you know, on Golden Pond. I just. First thing came to mind, I don't know why. And. And I set up a screen in my local park and I charge people five bucks to come see it. I have to get a license to do that. Right. What were the regulatory hurdles to, like, buying DVDs at Costco and then putting. And then putting them in an envelop and mailing them to people, but getting paid a fee to borrow them? Did you have to get permission from the studios? Was that tricky? Did they just not even notice? What did you have to do to make that work?
- [31:23]
Reed Hastings
In the US you can buy and sell DVDs. Like you can buy and sell a car. So I can buy a car and I can use it as a taxi service that I don't have to tell gm. In the US it was treated that way. The public display, which is charging, like running a movie theater. That was not a right that came with the dvd. But we could ship them, we could buy them, sell them, resell them. They were not treated as intellectual property. They were treated as a physical good.
- [31:58]
Guy Raz
And you could rent them.
- [31:59]
Reed Hastings
Yeah. You couldn't copy them.
- [32:01]
Guy Raz
Yeah.
- [32:02]
Reed Hastings
Right. That's copyright.
- [32:03]
Guy Raz
Right.
- [32:03]
Reed Hastings
You couldn't do public display, but you could buy them and sell them.
- [32:08]
Guy Raz
So you could basically, you know, buy a film, any film in 1990, Good Will Hunting, and send it out and for rental. And the studio couldn't say, hey, why are you. You're making money off the film. You've got to give us a cut of that rental.
- [32:24]
Reed Hastings
Yep. I mean, mostly dvd. You know, there weren't that many titles on dvd.
- [32:30]
Guy Raz
Yeah.
- [32:31]
Reed Hastings
Because they had to go through and remaster them one by one. And the best titles they wanted to save for. When 50 million homes had a DVD player and then more people would buy.
- [32:43]
Guy Raz
It or rent it, did anybody in 1997 or 1998 think this was a viable business that you knew?
- [32:52]
Reed Hastings
Very few, you know, but that was more tied to. We weren't streaming. So the threat there was, when are you going to deliver over the Internet? You know, Cosmo and other people were doing amazing things. Overnight delivery or same day delivery.
- [33:10]
Guy Raz
But that was food, right? Cosmo was doing food and snacks and stuff.
- [33:13]
Reed Hastings
That's right. But in their plans and in their Conversations they talked about being Blockbuster also. Right. So that was perceived to be an Internet based threat and then the other is just downloading. The movie was going to take over.
- [33:27]
Guy Raz
Right. Okay, but that, that, I mean we're still, you know, real audio and real video just starting and streaming was still, I mean people didn't have, some people had fast connections. Very few people did in 1999. I think that's true.
- [33:40]
Reed Hastings
But the, the model back then was.
- [33:42]
Guy Raz
Downloading, downloading it and then you people downloaded music. But it would still take forever. Like you know, bit by bit would be going, floating through.
- [33:50]
Reed Hastings
You know, we were asking about or talking about barriers to people invest. The biggest barrier for them was it seems like a temporary business.
- [34:02]
Guy Raz
Right.
- [34:03]
Reed Hastings
And I wasn't sure that it was going to work, but I think it had the advantage of I wanted to use it. And so you hope there's other people like me because I was living an E commerce life buying a lot of things on Amazon. Now I could do movie rental online. So it was kind of a natural extension. I was pretty confident the business would exist renting movies online. But I wasn't sure that we were going to win.
- [34:33]
Guy Raz
When we come back in just a moment, a brief flirtation with Blockbuster and a merger that thankfully does not happen. Stay with us. I'm Guy Raz and you're listening to How I Built this. Hey, welcome back to How I Built this. I'm Guy raz. So it's 1999 and Netflix has been in business for about two years and since launch Marc Randolph has been CEO. But that's about to change because Reed is starting to think he could do a better job. You decide to take over and run the company. Mark has talked about this, that you had approached him with a pitch deck to explain why. It's very matter of fact and he described it in a very generous way. Not like he's mad about it, but just very matter of fact way pitch deck explaining why he wasn't the right person to run the company. Which I think is. We're going to get into that radical candor. Tell me about, about that approach you took.
- [35:56]
Reed Hastings
You know, I, I don't remember how we talked about it. So whether it was a pitch deck or a memo or something, I would have done it in person, not just send them an email or text. But I may have written it out, you know, on some slides or on a memo or something.
- [36:15]
Guy Raz
So for you it's not personal, it's just a very kind of. Because a lot of people and I've had some of the best known founders in the world on this show. They still have a hard time demoting people or firing people or letting them go. It seems like you see it in a very different way, that it's not about feelings or emotions. It's really about facts and data and that's it.
- [36:43]
Reed Hastings
Well, definitely that's true now. But I would say at Pure Software I was very bad at letting people go and I introduced a lot of my own emotions. You know, it's natural for the manager to feel guilty or, you know, you like the people generally and then letting them go, they're upset. You don't like hurting people. So I had gotten better, I think by the time of early Netflix, but I would say I'm much better now than I am then. So it's an evolution of something you get from practice.
- [37:20]
Guy Raz
And in 1998. Right. Or 1999, when you really start running operation, how many employees are working in Netflix?
- [37:30]
Reed Hastings
30.
- [37:31]
Guy Raz
30. Okay. And it was based in Santa Cruz or was it already in?
- [37:36]
Reed Hastings
It was in Scotts Valley where Mark lives, which is partway between Santa Cruz and Silicon Valley.
- [37:43]
Guy Raz
I guess I'm trying to figure out, given your background and everything you had done up until that point, which had nothing to do with consumers or consumer products, this was going to be a brand, a consumer products business. What was attractive about that to you? What do you remember about thinking, this is the company, I'm going to drop everything and I'm going to run this thing?
- [38:05]
Reed Hastings
So I think you're phrasing the question like an MBA would, which is sort of what are the properties of the business that made you think you had a differential advantage and how did this come about?
- [38:17]
Guy Raz
More like what's interesting about it to you? That's, that's really.
- [38:20]
Reed Hastings
Well, I will, I think, fill in the picture, which is I realized in myself, oh, I'm a crossword puzzle solver. So I like an interesting challenge which, with a bunch of challenge and constraint and then seeing if I can figure out the crossword puzzle. Got it. And Netflix was a big crossword puzzle in many ways for 25 years. So I think that's the underlying theme. It almost doesn't matter what the domain is. It's mostly, is it a, is it a puzzle to figure out a hard problem to solve? Yeah, but that implies that it's like 20 little problems. It's not a hard problem like Fusion, that's a hard problem. Yeah, but it's a hard problem with many different aspects of the puzzle.
- [39:15]
Guy Raz
Okay. And so the business model was going to be based on a monthly subscription, Right? Like a fixed monthly fee.
- [39:27]
Reed Hastings
No, in the early days when Mark was running it, you pay four bucks for a rental, and that was for five days. And then if you kept it longer, you paid another, essentially a late fee so you could return it by mail to make it convenient to avoid the late fee, because you didn't have to go to the store, but you still had late fees.
- [39:51]
Guy Raz
And just getting on this late fees. I mean, Blockbuster at this time, I read something like, like 15 or 20% of their revenue came from late fees. Like, this was a huge part of their business model.
- [40:04]
Reed Hastings
Just think of it as an extended rental. I mean, in other words, if you rent a car and then you extend it for three more days, you can call that a late fee. And their marketing was poor, so it got named as a late fee. Like you're supposed to. Like, it's a moral issue. And it should have been if they had just gotten to be called a double rental or an extended rental instead.
- [40:28]
Guy Raz
Of being a punitive. Right, right. Yeah.
- [40:30]
Reed Hastings
Yeah. So in any case. So the initial Netflix model was a single rental. You know, it was a $4 rental. And what we found is that there was less and less repeat business. So people did it for a little while, three, four or five rentals, and then didn't really come back. And then when I came in, I wanted to convert us to subscription and to this idea that when you returned a dvd, we automatically sent you the next one from your list. And so in September 23rd of 99, we launched the subscription service. 20 bucks a month for unlimited DVDs.
- [41:18]
Guy Raz
Got it.
- [41:18]
Reed Hastings
And we had no idea what would the retention be. In other words, once you started it, how long would you stay with it? You know, we waited day by day to see who would cancel. And you have to proactively cancel.
- [41:31]
Guy Raz
Yeah.
- [41:33]
Reed Hastings
And then it was unbelievable, the elation, because the first two days came in, it was like 85% retention. And we were like, oh, my God, this is going to work.
- [41:44]
Guy Raz
Did you have trouble raising money?
- [41:47]
Reed Hastings
Well, yes, but the Internet bubble was expanding and expanding. In early 2000, we closed around with LVMH.
- [42:00]
Guy Raz
With LVMH, the consumer luxury brand.
- [42:03]
Reed Hastings
Correct. So we closed that round of them investing 50 million. I don't remember the valuation, but it was a good valuation. And that was February of 2000. And then March of 2000 is when the bubble broke, and it was a shitstorm of everybody retrenching. No more investment for anybody. So by pure luck, we got that.
- [42:31]
Guy Raz
Deal done by pure luck for you and lvmh. So right before the dot com bubble bursts, you get this funding and you're not a public company, so you're not going through the same challenges. But it means that, you know, at that point you're not going to be able to raise more money for a while.
- [42:49]
Reed Hastings
Yeah. March and I had to think through, okay, how do we give ourselves the best chance of success? You know, how can we grow, get enough customers in that we become cash flow positive? And so that was the crucial thing is getting to cash flow positive.
- [43:10]
Guy Raz
Do you remember what you. How much revenue you were doing in 2000 or 99? Like a few million.
- [43:17]
Reed Hastings
A few million. So when we went public two years later, we were at 50 million.
- [43:24]
Guy Raz
Right.
- [43:25]
Reed Hastings
So I'm going to guess it was sort of, you know, 10 million of revenue and 10 or 20 million of losses of cash losses.
- [43:33]
Guy Raz
And were the losses in those early years mainly because of marketing costs or was it literally just the cost of.
- [43:41]
Reed Hastings
All of the above? So we had to pay to acquire customers marketing, we had to Pay to acquire DVDs, and then we had our fixed cost, which was all the people, and then we had the mailing cost. How much did it cost to package something? So, you know, we lost money on every shipment because we were inefficient at packaging. We knew we could fix that, but we had to, you know, do a lot of scale to fix that.
- [44:10]
Guy Raz
There's a story that I've heard and might be apocryphal, maybe your memory of it is different, but something to the effect of, in 2000, you guys tried to sell the business or to try to merge with Blockbuster to become Blockbuster's digital art. I don't exactly know. But tell me what, what is the story?
- [44:32]
Reed Hastings
Oh, we had been wanting to talk to them for a while and roughly the idea was, did they want to bet on us to do the online? Because if we could have become blockbuster.com, we'd grow a lot faster. So we talked to them and they were, you know, pretty gracious, but we were kind of naive about, you know, we wanted the blockbuster.com brand. Right. Because if we had that brand, everyone, we wouldn't have to build our brand. You know, And I think they were. They looked at us, you know, as.
- [45:10]
Guy Raz
You know, we're a fly spec.
- [45:12]
Reed Hastings
Curious. Yeah. Yeah. And I don't remember them actually making an offer or. But I think we probably would have taken any offer, but it didn't result in any deal, transaction probably all we did is make them watch us more.
- [45:29]
Guy Raz
I mean, it's amazing to imagine that that could have happened. Like, you were prepared for Netflix to become Blockbuster's digital arm in 2000. Like you would have been happy with that outcome.
- [45:41]
Reed Hastings
Yeah, no, exactly. We had not much confidence that we could grow, period, and then particularly grow against them.
- [45:49]
Guy Raz
I mean, it sounds like it was a Hail Mary in a way. Like, okay, it's a dot com. Bubbles burst. You're not going to get any new funding. You've got this 50 million in cash, but you're watching that run rate pretty closely. You can see where things are headed if you can't bring money in. And Blockbuster could be the savior.
- [46:08]
Reed Hastings
Yeah. We had a similar thing with Amazon, but I think it was earlier. I think that was in 99. But in both cases, you know, they particularly Amazon have 100 companies they could.
- [46:20]
Guy Raz
Buy and Blockbuster had like 14,000 stores in the U.S. i mean, I think that year alone it made $800 million in just late fees.
- [46:29]
Reed Hastings
Right. We were the size of one store. Yeah.
- [46:32]
Guy Raz
Also they could have looked at you and said, we can do this ourselves. We don't need you. We can, we can replicate your business and put you out of business.
- [46:39]
Reed Hastings
Yeah. I'm not sure their exact thought process, but I agree with you that it was naive of us to think that there was possibly a deal. But we were probably feeling pretty desperate.
- [46:49]
Guy Raz
All right, so that doesn't happen and you are surviving the dot com crash. Cause you're not a public company. And do you remember being really disciplined about conserving cash? I mean, you were losing money every month. But was it, did it become top of mind?
- [47:07]
Reed Hastings
Well, we did a big layoff shortly after the crash. So yes, we were conscious on that. We had this amazing 50 million in from LVMH. And then we're going to have to make that last.
- [47:25]
Guy Raz
All right, so today when a startup goes public, they do a roadshow and people look for profitability and there are all kinds of things that happen. You took Netflix public in 2002. It was still an uncertain business. Did you take it public because that was the only way to raise money as far as you were concerned?
- [47:47]
Reed Hastings
I would say we took it public because that's what companies did. We didn't really question it that much. We took it public as soon as we possibly could. But in hindsight, I tell other entrepreneurs that don't be in a hurry to go public because it gives your competitors a lot of information.
- [48:06]
Guy Raz
Yeah.
- [48:07]
Reed Hastings
And that was certainly the moment. I think that Blockbuster said, oh, that's bigger and more profitable than we thought and we should go start competing. That was 2002, and in 2004 they launched against us. So, you know, in perfect hindsight, I wish we had stayed private for another two or three years.
- [48:29]
Guy Raz
Yeah, I mean, that year you went public. Based on, on my reading, Walmart also announced that they were going to do a subscription DVD service in November of that year. Your stock was down to like two and a half dollars, $2.50.
- [48:43]
Reed Hastings
The big storyline is we went public, it was fine for a quarter. Walmart announced Walmart.com that they were going to do DVD rental, which made no real sense. And then Blockbuster had bought a tiny little DVD rental company. And so they were clearly interested. And so those two facts created a lot of fear about our revenue, but our revenue never dipped in that time frame. It was only once Blockbuster did the big launch in 2004, 2005, that there was a real competitive battle.
- [49:20]
Guy Raz
Okay, so now you've got the biggest brand, you know, in the rental business. Getting into this space, you have a leg up. You guys have been doing this for six years.
- [49:31]
Reed Hastings
Blockbuster was the main one we were worried about because for them it was, you know, kill us or die. And we knew the biggest companies like Walmart were not going to focus on this tiny little business. They had a big competition with Amazon, so they never worried us. And we in fact played up David versus Goliath relative to Walmart to get us more attention. And I remember New York times articles in 2002 about what's with Netflix? And it's got the biggest company in the world, Walmart, the biggest rental Blockbuster coming after it. Amazon's lurking, but it was the little engine that could. And so that got us kind of more press. And with Amazon, we're always kind of worried because they have such high confidence, but it just was too niche a business for them.
- [50:27]
Guy Raz
What's remarkable is that Blockbuster launches this service in 2005, right, to compete with Netflix. And in 10 years, Blockbuster's gonna be dead. Right. And did anybody know that?
- [50:40]
Reed Hastings
Oh, we knew it, but they were a very good store operator. They had rolled up the whole business. They'd beaten everybody else. They were highly skilled at running stores. And I think that selective intelligence, you know, can blind you to other models. Yeah, you know, you, you take away 20% of the revenue from every store and that takes away the profit. Right. And our customer base was highly distributed, you know, across the US So we knew that if we got to a certain size that it was like, you know, a billion. It was painful for the store based model and we always anticipated the store based model would collapse if online got large enough. And then it was who's online? Ours or Blockbusters. But the inevitability of stores going away was pretty clear.
- [51:36]
Guy Raz
So as Netflix hits profitability and is growing and is really dominating by 2005, is dominating the male rental market. And everybody remembers those red envelopes. Not everybody. Everybody a certain age. I certainly do. Binging, binge, watching the Wire, I remember those red envelopes and I just send them back and get them more and send them back. Tell me about your sort of involvement in the branding. Right. Like the red envelope and the sort of the just building the brand of Netflix. Right. Because that was also part of its success.
- [52:16]
Reed Hastings
So Mark, bless his heart, put his ego aside when I came in and then he was head of marketing and merchandising up until the ipo. And just before then we got in ahead of marketing. Leslie Kilgore, who was out of Amazon, but before that was Procter and Gamble and central casting for marketing. Yeah. And she really drove the red envelope and the iconic branding that we had. And you know, I at that by then was articulating the freedom and responsibility model. And so it was very consistent for me that I was not involved in the branding iconography, the all of that and that she ran it and, and ran it incredibly well. And now 20 years later, she's a board member at Netflix.
- [53:16]
Guy Raz
Okay, let's talk about the freedom and responsibility model here because this is a reference to this, what's known as the Netflix culture deck. And I want to dive in here because you make this public in 2009 and this would eventually become the basis for a book that you wrote a few years later. But when it was released, it was released to mixed reviews. Some people were just blown away. And for people who don't know what this is, it's 127 slides. It explains Netflix culture and how they, how the company motivates performance and evaluates employees. And some people saw it and were just, you know, sort of recoil this because basically it demands high performance.
- [54:01]
Reed Hastings
And.
- [54:02]
Guy Raz
Also it shows how you, when people aren't performing, you push them out. Tell me about developing this model because, you know, I asked you earlier about your previous companies. You said sometimes, you know, when you're chopping wood, you can't sharpen the ax. In this case, clearly you took the time to sharpen the ax. So how did this sort of approach to building culture and building an environment around excellence. Some people would say mercenary culture. How did you develop that?
- [54:37]
Reed Hastings
The core of it was if you had incredibly talented people, you didn't need a lot of process and rules. Netflix was anti process and rules and pro talent density. And then to get talent density, we modeled it on a championship sports team and they had to swap out players. And that was a normal part of the ethos. And so that contrasted with the notion of company as family. You're all like my family, that kind of CEO talk. But then you go and lay someone off, which if you were on hard times, you wouldn't say, we're going to lay off your sons, your daughters get to eat. And our ethos and family is around undone. Undying loyalty. That's what we admire. And so I realized, oh, it's really that we want to organize as a professional sports team and not a family. And lots of people were operating their Silicon Valley business that way, but none of them admitted it or not. Many. And so the shock was this. The sort of. It resonated because it was the truth of the. What we aspired in much of the competitive ecosystem of team, not family. But no one had said it so directly.
- [56:01]
Guy Raz
And not only did that run counter to the direction that corporate America was heading in, it still does. Right. I think it's changing a little bit. But for the last 20 years, many companies, certainly tech companies, were talking about their employees like family. And that model can work, and it can work really well. But you think that that model is. It sort of naturally results in inefficiency and in just waste and lack of productivity.
- [56:32]
Reed Hastings
Well, families are dysfunctional in many ways. And so, yes, I think it's an inferior model. And again, team is not cold. A good team really has highly functional people with good relationships between each other. They pass the ball well, sacrificing their own opportunity to score because the other person's got a slightly better shot. So, you know, you need incredible cooperation. And we said, you know, today many people want to be team players, but not everybody has the skills to do a blind pass. So a blind pass in soccer or basketball is throwing the ball without looking at the player. Because you've worked so well together, you have a high confidence where they're going to be. And so we would talk about that as the skill of teamwork, which is building trust proactively, letting each other know about things, all kinds of close cooperation that were a joy to be part of. I think people did focus. We had a line in there that adequate performance gets A generous severance package. So that was sort of the acid line. The typical model is the job is a property. Right. And you have to screw up and the company has to prove that to take away that property.
- [57:56]
Guy Raz
Right.
- [57:57]
Reed Hastings
And what we were saying is, no. On a sports team, it's very clear that adequate performance generates a cut and someone else gets a chance to try to be extraordinary in that position.
- [58:09]
Guy Raz
What's so interesting about that model? It's like when you think about, let's say a professional baseball player and they are on a team that wins a World Series, they're committed to the mission of the team winning the World Series, and they're playing as hard as they can, and they celebrate it. And then the off season, they get traded. And the thing that you hear again and again from a player is, look, that's business. That's the business. You know, very rarely do players take it personally. Sometimes they do, but very rarely do they take it personally. They're traded to another team. They're not needed in that position and anymore. And so how do you find a star who's also understands that business is business and that at some point they might be cut loose?
- [58:54]
Reed Hastings
I mean, broadly, there's two types of people. One, for whom job security is very important and they're willing to tolerate uneven quality of colleagues. That's just an acceptable price to pay.
- [59:06]
Guy Raz
Yeah.
- [59:07]
Reed Hastings
And then there's others who, who are willing to tolerate job insecurity. Nobody likes it. Okay. But they're willing to tolerate it because all of their colleagues are amazing at what they do. And it's so much fun to work in that high talent dense environment. So I would say the original deck was, in hindsight, didn't balance enough the love and the care that we have for each other. So it came across as competitive that we were internally competitive for the positions.
- [59:38]
Guy Raz
Right.
- [59:39]
Reed Hastings
Which really was not the experience of employees inside. So we should have warmed up that deck with a lot of intense positive emotions about teamwork. But in fact, the story behind publishing that deck was too many people were surprised when they came into the company, the way we operate, and it wasn't fair to them. We wanted to be really good, clear about who we were so that we differentially attracted the second type who was willing to tolerate job insecurity to get talent density.
- [60:11]
Guy Raz
How would you make that assessment, though? Like, it has to be sort of coldly rational. Right.
- [60:17]
Reed Hastings
And so, no, it's not rational when you let someone go. I mean, you want to think it through, but it's an instinct that you could get someone. Someone better for that role. So that the test we use is called the keeper test. Would you fight to keep that employee if they were leaving on their own?
- [60:37]
Guy Raz
Like, if I worked for you and I said, hey, if I was going to leave, would you fight to keep me? And if your answer was no, then I would know I'm not probably, you know, the right fit.
- [60:47]
Reed Hastings
Then it's time for a generous severance package. That's right. The generous severance package helps in a couple ways. Ways, if there's a generous severance package, it hurt less because the person had a backstop. And then second, then we didn't have to do, like, performance improvement plans and document that we had tried and all those things, which eats up a lot of time and energy and money anyway.
- [61:10]
Guy Raz
Yes.
- [61:11]
Reed Hastings
So I don't think it actually cost us money because it got managers to act more quickly, and it made it easier on the person who was let go because they got what they perceived as a generous severance package. So then, you know, we can be letting go of hundreds of people and have no lawsuits.
- [61:29]
Guy Raz
Reid, how did you make sure that people were honest with you? Because you presumably are expecting people to also evaluate you based on this model. Now, you had a great record, you built Netflix. But so. So maybe you're, you know, you sort of are kind of. It doesn't apply to you, but I guess to be consistent, it has to. It had to.
- [61:52]
Reed Hastings
Yes. I mean, I would ask the board of, if I were, you know, quitting or retiring, would you want to change their mind? You might. You stay. So, yes, it applies to me also.
- [62:04]
Guy Raz
But I have to imagine that if I'm, you know, an employer manager of Netflix, and there's Reed Hastings, the guy who. Who went up against Blockbuster and believed in this thing when the stock price was a quarter and, wow, look where we are now. I would probably be intimidated to give you feedback. And that, actually, I think, in part, did happen. Right. You've described this kind of debacle that happened around 2011. Maybe it's time to talk about this, because I think part of, at least from your view, part of the reason why that happened is because nobody really pushed back on your idea.
- [62:44]
Reed Hastings
Let's set that one up, because it's a good one. I became in 2010, with the rise of Hulu, which was a straight streaming play by the industry, I became obsessed. If we cling to dvd, despite the fact that it's growing and is profitable, we may not succeed in streaming and that we should wean ourselves from The.
- [63:06]
Guy Raz
DVD business, DVDs o rentals was still growing in 2011.
- [63:10]
Reed Hastings
Yeah.
- [63:10]
Guy Raz
Okay.
- [63:12]
Reed Hastings
And so. And streaming was quite small, but it was clearly the future.
- [63:16]
Guy Raz
You saw that that's what it was going to be.
- [63:17]
Reed Hastings
That's right. And one step in that was to separate the businesses into the old DVD business was going to get spun out as Qwikster and then Netflix was going to be the streaming business, like Hulu. That this was going to be the dramatic, you know, painful in the short term, but, you know, in the long term thing to do.
- [63:41]
Guy Raz
And there'd be two sites, Qwikster.com and Netflix.com. okay.
- [63:45]
Reed Hastings
Yeah, that's right. And two pricings. And two. Yeah, you just separate the business.
- [63:50]
Guy Raz
And it was more expensive if you wanted access to DVDs and streaming.
- [63:54]
Reed Hastings
Correct. Okay. Both were good deals, but it was more expensive.
- [64:00]
Guy Raz
Yeah.
- [64:00]
Reed Hastings
So everyone knew it was scary. But as you said, everyone said, well, Reed's been right. Sony has before. Let's do this. We did it. We got a number of things wrong. In particular the pricing. We should have grandfathered in the existing base. But big picture, it was too early. So most of the customers didn't care that much about streaming and they didn't want all this change and the split. So we were ahead of the customers by several years. So it was a blow up. Customers very upset, stock drops by 2/3. We did a layoff. All we had to reset our revenue expectations. It was a disaster.
- [64:43]
Guy Raz
When we come back in just a moment, Qwikster gets demolished and a house of cards gets built. Stay with us. I'm Guy Raz and you're listening to How I Built this. Hey, welcome back to How I Built this. I'm Guy Raz. So when we left off, Netflix was in the middle of a crisis. Reed had launched a spin off company strictly for DVD rentals, which raised prices and made everyone really, really mad. By the way, how long did this disastrous period last? Was it. It was more than a year, right?
- [65:32]
Reed Hastings
It was probably three years. Really. The launch of House of Cards and Arrested Development that kind of got us out of it in 2013. So two years.
- [65:39]
Guy Raz
Right, because you had to. You had to eventually. I'm only smiling because I've seen the Saturday Night Live parody. But you had to apologize for it. I'm sorry if that's. If I.
- [65:48]
Reed Hastings
Which did only made it worse. So you know, know that didn't. That didn't. That was a desperate technique that didn't work.
- [65:53]
Guy Raz
You went on, you, you did a video sort of acknowledging that this was just a YouTube.
- [65:59]
Reed Hastings
Yeah, that's right. But. And then SNL parodied it.
- [66:05]
Guy Raz
Jason Sudeikis.
- [66:06]
Reed Hastings
Yeah, exactly.
- [66:07]
Guy Raz
Brutal. It's quite funny. It's quite funny.
- [66:09]
Reed Hastings
Exactly. A bit of history. Okay, so we dug our way out, and that's good. So a year later, roughly, we spent some real time analyzing, okay, what went wrong, wrong, how do we avoid it? And that's when I realized that many of the executives, top 50 people, thought this was very risky and unwise, but they all deferred to me because they thought, well, Reid's gotten so much right before, and they didn't know that the other people in the room were also scared. And if they had known that, they would have spoken up more forcefully, and we probably would have taken a slower, more cautious approach. So the thing we instituted on big decisions is everybody publicly weighing in, you know, on a 10 to negative 10. Is this a wise decision? So that would affect, like, going into Europe, going into original content, pricing changes, so that everyone knows where everyone else stands.
- [67:11]
Guy Raz
Who got a vote on that? Like, if you were to make a big decision or wanted to, who got to vote on whether that was the right.
- [67:17]
Reed Hastings
Roughly the top 50 people. Sometimes it was top 100, but something like that.
- [67:22]
Guy Raz
And so negative 10 to positive 10, and you would sort of use their responses to guide your decision. Like, let's say you were really convicted that this was right.
- [67:34]
Reed Hastings
We talked about it as the informed captain. The leadership model is to be the informed captain. So the captain of a ship is the absolute ruler of that ship and makes decisions. Yeah, we want our leaders to feel like they're the captain. It's not a democracy, but they needed to know what everybody else thought.
- [67:54]
Guy Raz
If you knew that there was discomfort or uncertainty about this Quickster idea, do you think it would have changed? I mean, you wanted to shift the business?
- [68:04]
Reed Hastings
Absolutely. It absolutely would have changed if everybody was like, well, we can figure this out in two steps. If we do it here with, say, grandfathering the price, okay, so, you know, there was no price hit. And then if it works well, then we can, you know, raise prices over time. So just as an example, there are many ways to do it less aggressively and still do it. And ultimately we did it. The thing that was DVD became dvd.com. and so, you know, it happened. It just happened less dramatically. And then we eventually closed down the DVD business in roughly 24.
- [68:43]
Guy Raz
Did you. I mean, given that Hulu was going to start streaming stuff.
- [68:48]
Reed Hastings
Oh, they started in 2007, so they already started streaming.
- [68:51]
Guy Raz
That also probably Created a potential threat in that some of these content creators would not give you the rights to stream stuff. Right. Like you could. DVDs was one thing.
- [69:03]
Reed Hastings
Nobody ever gave us rights. We bid for them.
- [69:07]
Guy Raz
Right.
- [69:07]
Reed Hastings
So it was an open market in buying the rights. And if we paid, you know, enough more than Hulu, we would win the bid. Yeah, but Hulu was a pure play. It was all about streaming. That's all it did. That was the risk was that they would become the symbolic center rather than Netflix, which, you know, had the DVD heritage.
- [69:32]
Guy Raz
So how did the idea to make original content come about was that in response to where you saw the. This sort of whole industry headed that if you didn't do that, you would just. And you were just a rental. Streaming, rental service, then your business wouldn't survive.
- [69:50]
Reed Hastings
Well, every cable network, which is a subscription business, had started on other people's content, build some audience and then start to add their own content. HBO was built on other people's content and then got good at original programming. So again, it was a very well trod path. And when Ted Sarandos came in, which he joined us in 2000, he was the one who sort of articulated, you know, eventually we're going to want to do original content. And then we actually started in 2005 doing original content on DVD and we didn't have a big enough subscriber base. And so after two years we closed that down. That was Red Envelope Entertainment. We closed that down in 2007 and then we reopened it essentially with House of Cards, I believe we commissioned that ted did in 2010 and then it came out in 2013 and was a.
- [70:51]
Guy Raz
Huge success, massive success, which is all.
- [70:54]
Reed Hastings
Ted's programming judgment of. There was many scripts floating around. And then he swung for the fences. We had to bid against hbo. This was not kind of junior content. This was first, you know, league content. HBO was thinking of it and we came in with a higher financial bid, even though we couldn't justify it at the time and in the hopes that this would be our breakthrough. And indeed it was.
- [71:22]
Guy Raz
And you, like you personally, would you say that you had a good eye or a good sort of the ability to judge what was going to be good or did you kind of defer that to people who had a better instinct for it?
- [71:38]
Reed Hastings
I don't. And I still don't. When I read a script, it's very hard for me to translate to why 1 and 1 didn't. I would say that's a unique skill which Ted and his team were very.
- [71:50]
Guy Raz
Strong in and let's talk about Ted now for a moment. Because you would Serve as co CEOs, you have a very strong point of view. You also like feedback, you also give it. What was it about him? Because you were running the business for so long, what was it about him that you thought this is somebody I could split this job with and actually totally work really closely with.
- [72:20]
Reed Hastings
You know, by the time I did that, which was, I'm going to guess 2020, we'd been working together for 20 years. So we grew up together. You know, we are both quite young in doing Netflix and at every place in the growth, you know, we learned more and relied on each other. So it was a pretty easy non traumatic thing that only changed the business slightly.
- [72:50]
Guy Raz
I mean 2013 you've got this original content really starts to become a huge part of Netflix's business model. And by 2018, 2019, 2020, really there's now just a ton of money coming into this, into content with the other big players competing in that space. Tell me a little bit about how that sort of impacted what you guys put bets on. Because I mean there were, I think in 2018 spending on content was like $12 billion. You know, just that year alone.
- [73:32]
Reed Hastings
What we did in original content was very well executed. But it was conventional wisdom that that's what we needed to do. So it wasn't that radical. It was just you got to do it. Well, the thing that was radical is being direct to consumer around the world. So every other network, let's take HBO as an example, but FX the same, they built shows for the US market, they had their own distribution here and then they sold the shows off to the BBC or Kanaplus or different networks in different countries. They were not direct to consumer outside of the US and we were the first to say, hey, with the Internet we can be direct to consumer in India, in Japan, in South Africa, in Brazil, in France. And this was seen as ludicrous in the industry that we would never be able to break in, that we would never get successful. Our first market was Canada in 2010 and that didn't have DVDs, so that was streaming only. And that's part of what gave us content confidence, that streaming only could work. Then we did Latin America and then country by country in Europe. And then in 2016 we did the whole world x China. And we gained increasing confidence year by year because the markets that we had gone into early continued to grow and eventually became profitable.
- [75:02]
Guy Raz
When do you remember thinking, okay, we're going to win or be near or at the top of this competitive environment. I mean, over time, you know, there's. You mentioned Hulu and then Disney gets into this and HBO and Paramount and Apple and Amazon. Were you always, do you always remember while you ran Netflix, do you always remember being on like a war footing and always paranoid about you could actually be defeated or, you know, or did you, were you confident that you guys were going to emerge victorious or whatever words you want to use?
- [75:38]
Reed Hastings
Well, if you look today at TV viewing in the United States as an example, Disney's ahead of us. YouTube is. This is combining linear and on demand. YouTube's ahead of us. They're the largest. Disney's ahead of us, even Paramount's ahead of us because they all have big linear cake capabilities. So we still have a long way to go. We're less than 10% of US television.
- [76:05]
Guy Raz
Watching, but that includes terrestrial television.
- [76:09]
Reed Hastings
Yeah, it's all. In other words, it's the television viewing is television viewing. You know, you pick up your remote control and you choose where you're going. That's the moment of truth that we're battling for. And do you choose Netflix or do you choose YouTube? And I would say the, the big challenger is YouTube because they have doubled in the last four years their share of television viewing somewhat in the US but dramatically around the world. People call it user generated, but it's not really users. It's kind of semi pro. It's people putting all kinds of different content on. There's a little bit of user gen too, but it's the incredibly broad selection, podcasts, everything you know that's on YouTube is very popular. So we're definitely a surprisingly small player in the US and around the world. Again, being less than 10% of television viewing and having YouTube be the past us and be the fastest growing. So we're, you know, again, trying to win more share by having better and better programming.
- [77:17]
Guy Raz
I know that you, you, you stepped away from the operational side. You're still the chairman of the board. And so you may have a, I don't know, sort of outsider insider perspective on it, but how does a brand like Netflix even maintain its position when you've got all this competitive pressure? And for years people are saying people are not going to want multiple subscriptions. They're not going to want to pay for Apple and Disney and Paramount and Hulu and YouTube and Netflix. In fact, many people do.
- [77:49]
Reed Hastings
Yeah, I mean that you're right, that it's a market structure of individual subscriptions that's very fluid and so competing for it is having the best content. So this summer we had an amazing movie, K Pop Demon Hunters.
- [78:03]
Guy Raz
Yeah.
- [78:03]
Reed Hastings
That for, you know, eight year olds became like the stunning thing. And, you know, adults could watch it two or three times. Kind of like Shrek was when we were growing up. And so it's our first big animated hit. After maybe 40 different animated movies, we finally had a monster hit. So it's an artistic execution business. And if we can improve those ratios from 1 in 40 to 1 in 20 to 1 in 10 to 1 in 5, we'll be a monster. But it's hard.
- [78:36]
Guy Raz
Netflix has invested tons of money in content over the last 10 years. Right. And there's all of this technology. I'm sure you've seen Sora too, and all of this technology. And just as you could see that the world was gonna go streaming. Do you look at AI? Cause I look at it and I think, I don't see how I can imagine a future where there aren't human actors, where it's all done using AI actors. Do you think that is a realistic scenario?
- [79:08]
Reed Hastings
Well, think about sports. Do you think if there's two teams of robots playing basketball, it's going to be interesting?
- [79:15]
Guy Raz
I think some people would say yes. I think a lot of people would.
- [79:18]
Reed Hastings
I think that will be a very small market, so I'll take the under on that. And there's something about watching humans compete that makes it interesting. I think we humans care about what other humans do, and that kind of puts some limits. And that's why we have anti steroid rules, because we don't want to change the competition too much. And I think in the same way, films will have human actors, not because it can't be something else, but because other humans won't be that interested. So think of it as the Booker Prize is a big prize for the best novel of the year. The year that AI wins the Booker Prize, then it's starting to really change the entertainment business. But up until then, it's kind of tactical about what's on screen.
- [80:13]
Guy Raz
Reid, it would be irresponsible of me not to ask you this. I mean, when this airs, this whole thing may be an old story because this won't air. You know, we're talking now in December of 2025. This will air in 2026. But obviously there's. There's a lot of news around Netflix and acquiring Warner's streaming service, or their film division, I should say. And then Paramount coming in with another offer, and there's a lot of There's a whole, you know, sort of. I don't know if I should say mess, but there's a whole big story here. Tell me about just your kind of. And there may be things you can't talk about, but what's your overall impression of the acquisition offer and then now sort of the challenge from Paramount?
- [81:04]
Reed Hastings
Well, I'm super excited that the. My replacement CEOs, Greg and Ted, which have been running the business for two and a half years, they've tripled the stock since I left, so they've been fantastically successful, and I'm thrilled to be supporting them in this next chapter in acquiring Warner Brothers. But that's about all I can say about it as a board member.
- [81:30]
Guy Raz
All right, as you mentioned, Ted Sarandos and Greg Peters now share the CEO job, and you've moved on to become the chairman of the board. And in 2023, the year you stepped down, I think that year, you acquired a ski resort resort in Utah, which I have skied at before, years ago. It's a beautiful place near Ogden in Utah called Powder Mountain. I think it's called Powder Haven now. Tell me about that. I mean, you had plenty of money to do it, obviously, and I'm assuming you like skiing. So probably a lot of people just assume, oh, you know, this is a fun little side project for Reid. I mean, can you explain this? What was the motivation to. To manage a ski resort?
- [82:13]
Reed Hastings
We had a home there, so we were skiers there, but we were one acre customers. And I had noticed that the resort was not very successful. And so I started to get to know that spring the owners to see where I might be able to help. And in April, one of the two owners sold to me, and in November, the other one did. And so for me, it's a passion play of creating a real estate place of beauty. Real estate's a different skill set. You know, you build a neighborhood, you put in roads and sewers, and then you try to sell the lots, and that's the basic play. And this year we had a big success and we sold out. So, you know, think of it as a big resort, like Heavenly in TAHOE, for only 650 families and their guests. And then we're also running the public resort, which is a normal public ski mountain with season passes and et cetera. The public ski resort's good, but it's not an exciting business. It's a hard, you know, it's like running a restaurant or something. The private side is, you know, much higher revenue, much more exciting. And so I think of it like my friend Steve Ballmer, who bought the Clippers. You know, it's kind of like buying a sports team. You know, it's a passion, but it's not fundamentally around the profits. It's around competing and winning and succeeding. And for me, this is totally different than running Netflix, but, you know, it has a lot of interesting puzzles.
- [83:48]
Guy Raz
Yeah. When you think about. About the. The journey you took. Right. And I mean, age 35 already, you were very successful financially. But then, of course, it would go on to build Netflix, which is not just a company. I mean, it's one of the fangs. Right. It's a huge technology stock. It's a huge brand. It's a cultural touchstone. How much of what happened to you do you attribute to the work that you put in and your. Your skill and your approach? And how much do you think had to do with getting lucky?
- [84:28]
Reed Hastings
Well, I wouldn't put them opposed to each other. So we got lucky at a number of places. We Talked about the LVMH50 million investment could have easily been bankrupt. We got lucky that DVD came along and lots of people worked on that, and then it won. We got lucky that a lot of competitors did or didn't do certain things, but there was a lot of hard work. For 25 years, I was always trying to be the first one up in the morning, the first one reading the metrics, and it was a very wonderful, intensive time. So I would say we made the best of what the luck offered, and it might not have worked out like you said. And if it hadn't, I'd like to think we would feel like I would feel like the same person and that the success of Netflix hasn't changed me. That's probably a little bit naive, but I think it's fundamentally true that you can't underestimate the role the luck plays.
- [85:29]
Guy Raz
That's Reed Hastings, co founder of Netflix, by the way. And this will come as no surprise to many of you. The most watched original Netflix film of all time is K Pop Demon Hunters. As of last December, it had amassed more than 500 million views worldwide. Hey, thanks so much for listening to the show this week. Please make sure to click the Follow button on your podcast app so you never miss a new episode of the show. And if you're interested in insights, ideas, and lessons from some of the world's greatest entrepreneurs, please sign up for my newsletter@guyraz.com or on substack. This episode was produced and researched by Sam Sam Paulson with music composed by Ramtin Arablouei. It was edited by Neva Grant. Our engineers were Patrick Murray and Robert Rodriguez. Our production staff also includes Alex Chung, Elaine Coates, Nora Gill, Casey Herman, John Isabella, Katherine Cipher, Chris Masini, Carrie Thompson and Rommel Wood. I'm Guy Raz, and you've been listening to How I Built this.