The driving force behind the success of Netflix.
IF Reed Hastings didn’t have a healthy fear of the uncompromising wrath of his wife, he might not be sitting on a $2bn personal fortune.
It was 1996, and Boston-born entrepreneur Hastings was driving to the video store with a copy Apollo 13 on the passenger seat. It had been due to be returned six weeks before, and the 36-year-old was anxious about telling his wife there was a $40 fine for the late return.
“I had misplaced the cassette – it was all my fault,” he recalls.
“I didn’t want to tell my wife about it, but then I asked myself if I was really prepared to compromise the integrity of my marriage over a late fee?”
The curious guilt over not confessing to Mrs Hastings hung over him for the rest of the day as his mind drifted into his next business idea (his previous venture – Pure Atria – had recently been acquired, and its stock value fell off a cliff, dropping some 42% within weeks of the takeover by Rational Software). Thoughts lingered as he went to the gym where, sitting in changing rooms after his workout, he realised that the video store and the gymnasium both had the answer he was looking for.
Staring him in the face was a subtle, yet ground-breaking improvement on the video rental pricing system.
“You could pay $30 or $40 a month at the gym and work out as little or as much as you wanted, and I realised they had a much better business model,” he said.
So, less than a year later, he set about creating his own video rental service, but with a different approach to how tapes were hired, based on the gym’s subscription method. Hastings freely admits the whole venture was a gamble, and had little clue about how it would be received by the public.
“Netflix was originally a single rental service, but the subscription model was one of a few ideas we had so there was no real ‘aha!’ moment,” he says.
“Having unlimited due dates and no late fees has worked in a powerful way – and now seems obvious – but, at that time, we had no idea if consumers would even build and use an online queue.”
On reflection, some two decades later, the initial application of the Netflix business model seems like it should have been thought of by dozens of the big players already in the VHS rental market. It wasn’t, and Hastings only stumbled upon it by a chance of circumstances. The rest, as they say, is history.
Meanwhile, here we are, months away from celebrating Netflix’s 20th year, and the company is in a commanding position as a leader in its field. Its genesis may have come about by chance, but its place at the top of the entertainment food chain is by an act of precision business chutzpah from its CEO.
During its first year as an enterprise, Netflix flourished. It took off, ascended at speed, and never really looked down at the rapidly-shrinking runway that had been its modest baseline. The years rolled by, and the business continued to grow as Hastings made his first million, then another and another. There was seemingly no stopping the surge of Netflix.
Plenty of businesses were deemed unstoppable in the run up to the 2007 financial crash which brought many industries to their knees, and the film hire market had no hiding place. It was already fading into a shadow of those glorious years of rental where a Friday-night trip to the video store was almost a ritual on both sides of the Atlantic. People’s habits were changing. The consumer-led shopping experiencing was experiencing a shift towards ordering online and having goods delivered to the door – businesses like Netflix needed to rapidly understand where things were going, and how to adapt in order to survive.
The combination of changing customer habits and a global financial meltdown stirred up a perfect storm which engulfed several of Netflix’s peers – Blockbuster being the most high-profile casualty. Hastings had to change things, and fast. He took himself back to 1996 – on his way to the video store to perform a walk of shame through the shop with a $40 dollar fine… that’s where the Netflix revolution began, and that was the mindset he needed call upon to ensure his brainchild would survive.
Just as he had done at the threshold of launching Netflix, he decided to gamble. More and more people were using the internet for their entertainment needs. It was clear that the novelty of DVD subscription – by delivery or pick-up – was wearing off at a pace. So Hastings and his senior management team decided to throw the dice and begin streaming content through the internet.
Call it genius, call it luck, call it being in the right place at the right time. Call it what you will, but that gamble – taken in the context of falling revenues and the backdrop of a catastrophic global financial meltdown – was one of the best decisions Hastings made since he discovered he was terrified of his wife.
The Netflix coffers started to swell once more as the new way of watching TV and movies began to sweep across Planet Earth. Other companies followed suit, plenty started up and continue to thrive in a vast open market, but Netflix is undoubtedly the dominant force, racking up some 75 million members to date.
Yet, as jaw-dropping as the figures may be, perhaps more surprising is Hastings himself. He is a thoroughly fascinating, humble and remarkably warm human being brimming with all the quirks and curiosities one might expect from one of the world’s uber-successful business leaders.
Born in a quiet suburb of Boston, Massachusetts, Wilmot Reed Hastings Jr spent much of his early life flitting from one hobby to the next. At school he would find it difficult to stay interest in any one subject. As soon as he had mastered one thing, he was keen to move on to the next as quickly as possible. It was a trait that would stay with him for much of his life.
In 1981, a 21-year-old Hastings spent his summer at the Officer Candidate School in Quantico, Virginia, after showing great promise as a leader during his training with the US Marines. It came as some surprise to the Army when he suddenly decided he no longer wanted to be a Marine, and he left to join the Peace Corps. It was quite a contrast, but something that would become typical of Hastings’ behaviour.
Graduating from Bowdoin College, he headed off to Swaziland to teach mathematics as a Peace Corps instructor from 1983… until he became bored and began the search for a new adventure in 1985. His two years in Swaziland, however, gave him a level of self-confidence that may have been otherwise lacking had he not thrown himself headlong into the service.
“Once you have hitchhiked across Africa with ten bucks in your pocket, starting a business doesn’t seem so intimidating,” he smiles.
A further career contrast was to come after he unpacked his bags from Africa and headed to Stanford University, graduating in 1988 with a Master’s degree in the fledgling subject of computer science.
He was snapped up by the high-flying Audrey MacLean who, at the time, was CEO of software giant Adaptive Corp. MacLean took Hastings under her wing, and even helped to fund his start-up Pure Software. Quarter of a century on, he still pays tribute to her guidance.
“From Audrey MacLean I learned the value of focus and how it better to do one product well than two products in a mediocre way,” he says.
It was a lesson that would serve him well further down the line when Pure began to grow beyond his control, spiralling from a dozen or so employees to 640 in less than two years. He began to question his ability to be responsible for such a huge organisation.
“I was definitely under water and in it over my head,” he shudders.
“I tried to fire myself – twice – as I was increasingly losing confidence.”
The board refused to entertain his pleas to be succeeded. It was at that point, Hastings says, where he learned to be a businessman. He steeled himself, and successfully steered Pure into a merger with Atria, before the takeover by Rational, and the now infamous incident with a video of Apollo 13.
Fast forward to 2016 and you’re looking at one of the most successful companies on the planet. It is by far the most dominant internet TV service, boasting more than 100 original series and a colossal movie database. Already at 76m worldwide users, it expects to add a further 10 million by the end of this year as its market cap touches $41bn. It’s a true phenomenon which has planted its flag firmly on the timeline of great milestones of entertainment history.
Yet, despite almost unrivalled success year upon year, Hastings is continuing to fight, constantly looking to the changing horizons and preparing to adapt his business model to an ever-shifting marketplace where the whims of consumers will always dictate where the next revenue trend lies. In his mind, Netflix must always be the number one choice in its field.
“It seems crazy ambitious unless you think about these big inflection points that come about every 50 years or so like the invention of radio, free-to-air TV, and cable or satellite television,” he says with authority.
“People have built major new networks around that transition because everything is up for grabs.”
He’s got the bottle for a fight. No doubt about it. If you were to find yourself in the trenches with him you’d probably gravitate towards Hastings knowing that he’d be your best chance of survival.
Bizarrely, this constant warrior game plan doesn’t entirely sit well with the way he conducts himself around the Netflix offices. His slim frame wanders the corridors, offices and grounds with a near-permanent smile perforating a stylishly-scruffy beard. And with good reason… he doesn’t actually have an office there. Instead, Hastings chooses to do his work in the staff canteen, or he enjoys shuffling into the corner of one the many communal spaces with his laptop. Meetings are seldom held around a boardroom table. Hastings and his team will simply walk in the woodland which envelops Netflix’s headquarters.
He also pays his staff handsomely – ensuring he can afford the cream of the crop with his bright young digital whizzkids who adhere to his ethos of ‘freedom and responsibility’ with working hours, as well as getting to choose how much of their salary is paid in cash or company stock. This is done after their own private meeting with the CEO who likes to set out personal goals for each employee.
It seems almost like a 1960s hippy community dreamt up via the use of substances with a questionable legal heritage, but it works. What’s more, that battling spirit deep within its leader is never far from the surface – particularly when you consider how the senior thinkers at Netflix are referred to as ‘the war team’.
And therein lies the secret to Hastings’ ceaseless quest for improving on success. They analyse trends, viewing habits and competitor activity then act upon them swiftly, almost always stealing a march on any would-be rivals. For instance, this year alone, the ‘war team’ has spent some $5bn on content which includes the launch of 31 new and returning original series.
“You improve the services, it gets more members, a bigger budget, and we use that to get more content and do more research and development – that’s the virtuous cycle we have been on for the last 15 years,” Hastings explains, before potentially letting slip a hint of how he measures his own success…
… “We are only 75m members still – relative to the global footprint of the internet that is small”.
It’s a telling comment, but one that perhaps shines a light into the mysterious minds of one of the business world’s most unique talents. He’s clearly aiming for world domination, but he just wants to do it in the nicest possible way.