Designing a Culture of Reinvention

Netflix CEO and co-founder Reed Hastings talks with a16z co-founder Ben Horowitz about his management philosophies and learnings from managing Netflix through multiple pivots. Because as companies grow and their technologies and customers rapidly evolve, building a resilient culture that can reinvent the product and itself is critical for enduring success.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  As companies grow and their technologies and customers rapidly evolve, building a resilient culture that can reinvent the product and itself is critical for enduring success. This episode from September 2020 features Reed Hastings, the co-founder and CEO of Netflix, in conversation with Ben Horowitz, co-founder of A16Z. They talk about how Reed built Netflix, his management philosophy, lessons learned, and the tactics he used to instill a culture of innovation across the company as it expanded globally.

• 0:32Speaker 01

  The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com/disclosures.

• 0:51Speaker 02

  Hi, and welcome to the A16Z Podcast. I'm Das, and in this episode, we feature Reed Hastings, the CEO and co-founder of Netflix, who talks about his new book, just out, called No Rules Rules: Netflix and the Culture of Reinvention, with A16Z co-founder and fellow author Ben Horowitz, who also wrote a bestselling book about culture last year. You can find the conversation about that book between him and Sonal on the Stories and Code of Culture Change episode. But this conversation, which was recorded recently for the Commonwealth Club of California, focuses on the underlying theme and question of what does it take to create an organization capable of reinventing itself?

• 1:34Speaker 02

  Since Netflix started in the late 90s as a DVD-by-mail rental service competing with Blockbuster, it has completely reinvented itself twice. First, when it went from DVD rental to video streaming platform, and then again when it went from licensing to producing original content. Reed shares with Ben the story of Netflix's evolution, as well as the progression of his own management philosophy, including the hard lesson he learned about what happens when you optimize for efficiency at the expense of creative talent. Also, since Netflix's product is global, he addresses how to translate a culture of innovation across different cultures and countries, from Japan to Brazil to America.

• 2:18Speaker 02

  All this and more in this episode.

• 2:21Ben Horowitz?

  So let's get into it. Reed, so first of all, I'd like to thank you for writing this book. And one of the reasons I really liked it is you start from that honest place, which is where most of us learn management lessons, which is I screwed it up and now I need to figure it out. And that's almost how I've learned everything I know in management. And you did that at your prior company, Pure Software, which you wanted, needed reinvention, but couldn't. What were the things that you ran into at Pure that kept you from being able to reinvent?

• 2:58Speaker 04

  So I was a first time manager. I had invented the first product, Purify, which was a C debugging tool. And I was an inexperienced CEO would be an understatement. And that manifested itself in several ways, but one in particular was every time something went wrong, I didn't want that to go wrong again, which is typically how an engineer approaches a problem. So if you find an error in software, you try to build a regression suite or test for it that runs to make sure that that error doesn't come back.

• 3:33Ben Horowitz?

  Right.

• 3:34Speaker 04

  And that's, you know, good design and good engineering. So I view the organization as a big software puzzle, which I know is laughably simplistic, but that's how I viewed it. And every time there was an error, we put a process in place to make sure that error didn't happen. And indeed, generally, that particular error didn't happen. But what I missed was what's the cultural effects of that year after year? And the cultural effect was that the people who prospered were the people who could develop and follow process well. And that was the value system. And if you followed the process well, you were rewarded in all kinds of ways.

• 4:17Speaker 04

  And over time, it slowly drove out that kind of creative mavericks who didn't really want to deal with all that crap. And the subtle thing is, in the short term, the business ran better, not worse, because it was, you know, very highly optimized. And so there was no negative feedback really about it. And then the market shifted. In that case, it was C++ to Java, but the details don't really matter. And we were unable to adapt. We ended up buying a bunch of companies that tried to have new products for our sales force because we weren't coming up with them ourselves. I guess, you know, all the core signs. And then to do more acquisitions, it gets more complex because you got this other company full of process. And eventually, we drowned.

• 5:02Speaker 04

  And so I think of it, process is it all feels good, but it builds up like barnacles on a boat. And if you don't, every now and then with a boat scrape off the barnacles, then eventually a storm comes and it sinks the boat. And so you just, you know, we always think about it as going a little like technical debt and other software metaphor. But you all go in and scrape the barnacles and really try to get rid of process. And this is why, you know, because I failed in that way in the past, I at least want to fail in a novel at this time.

• 5:39Ben Horowitz?

  All new mistakes.

• 5:40Speaker 04

  That's it, you know. So we're pushing super hard into employee freedom, pushing the anti-process orientation, you know, as hard as we can.

• 5:50Ben Horowitz?

  Yeah, to an amazing level. And why write this book now? And then you also had a co-author, which I thought was interesting. And it wasn't like the normal co-author ghostwriter. It was almost like a co-author, well, what's Reed saying? Yeah, that part's true. I was wondering about this part, that kind of thing. Why that approach?

• 6:11Speaker 04

  Well, your books exempted, I have read way too many CEO pontification books, where the CEO says how great things are and the way they work. And I always wonder, what's the reality? You know, what's really happening in that company? And now and then I've got friends who work there and I can get a bead on it. And it's almost never what the CEO thinks. And of course, I knew that would be true at Netflix, too. So I thought, let me get someone really independent, who's a business school professor, you know, has their own reputation, and give them open access to Netflix. They can interview anyone and everyone. And report to the reader, this is the reality.

• 6:55Speaker 04

  So the book is me pontificating, going through the theory, which you can, yeah, I like doing. And then Erin really saying, well, this is, you know, her observations from dealing with all the employees of the reality. And she had formerly written an incredible book called Culture Map, which is about national cultures within a corporation. So if you're a global company and you have a lot of Koreans and Germans and Brazilians and Dutch and English and Japanese, why are they misunderstanding each other? And then to read her book, Culture Map, is incredible. So I knew she had good insight about culture.

• 7:33Ben Horowitz?

  Right. And did you, did you end up learning things about Netflix where she was like, well, that doesn't make sense reading? You're like, wow, that doesn't make sense. Or how, how did that process go with regards to actually running the company?

• 7:46Speaker 04

  Yeah, as you would expect, if you have a good anthropologist, spend a lot of time with a hundred people, you can pick up things. You know, not that they're completely new, but the relative weighting, how they felt. The fact that we felt like, feel like such an American company, like I had thought, oh, we're really doing well and becoming pretty global, you know, and our Korean or our, you know, Dutch employees are like, wow, this is a super American company. We're a Californian company. So we still have a ways to go to get to, you know, the holy grail where everyone feels they have an equal chance to thrive, you know, whether you're an employee for us in, in Mexico City or in Mumbai.

• 8:27Ben Horowitz?

  Yeah, that's awesome. So we've been talking about culture, but culture means a lot of different things to a lot of different people. It's a very overloaded word. So when you talk, speak of culture in the context of Netflix, what do you mean there?

• 8:42Speaker 04

  I think company culture is the behaviors that get you promoted or get you let go. So everyone, when they go into a company, has to figure out what's the real culture, right? What are the values and behaviors that are rewarded and which ones are violations? And sometimes there's a written culture and sometimes companies follow that written culture. Other times, there's a written culture, like Enron famously had, you know, respect, integrity, you know, as two of their four big words. But that wasn't actually what got promoted. What got them promoted was trading profits. And, you know, then

• 9:22Speaker 04

  people cut corners to do that. And eventually, the company blew up. So, you know, in any company, the real culture is again shown by who gets rewarded and who gets pushed out.

• 9:36Ben Horowitz?

  Right. And it's really interesting in that context that you don't, when you describe the Netflix culture, you do it in a very different way than we're used to seeing in books, which is usually a written culture is about, starts with these values and integrity and so forth. But you more describe it as a system. And there are these pillars in the system, candor, talent density, and rule removal, I guess is, you know, getting rid of rules. And they're sort of interdependent. And then you also kind of speak of layering them. So you, you know, you start with a talent density concept, and then you add a little candor, and then you remove a little rules, and then you kind of recycle through

• 10:21Ben Horowitz?

  the thing again, you know, increase your talent density, kind of increase the amount of feedback people get, and then you can remove more rules. So maybe you could describe that and why you have this sort of interdependent systems view of culture that's, that's so different than the way it's ordinarily described?

• 10:42Speaker 04

  Well, let's separate two things. So there's what our culture is. And then there's if you want to go in this direction, here are some ways to go about it.

• 10:52Ben Horowitz?

  Right.

• 10:53Speaker 04

  Now, what our culture is, I think you're right, is we try to describe precisely behaviors that are rewarded and that managers can be held accountable for. But it's an employee bill of rights in a way, okay? That's in our culture memo. And this I picked up from Jack Welch's book, Winning, and it's in chapter three. He describes that in the past, he put, you know, generalities, you know, integrity, communication. But it's like, those are not near specific enough. And he's like, you know, it's much different than that. And now I'm much more long-form and specific about, you know, how to approach business

• 11:34Speaker 04

  problems and how to grow a great business, which is going to be unique for each company. You can Google Netflix culture and read the current memo, and you can read the 10 behaviors there. And then again, that forms two ways. One is it's us saying to new employees what we want, which again helps people select in or select out. But it's also a sort of bill of rights that an employee is entitled to see those behaviors rewarded or not. And if they see that management is inconsistent, and you know, we're not perfect compared to those values, it gives them something to refer to and to call us to account. Then there's the question you brought up, this sort of spiral notion of, you know, do a little more.

• 12:19Speaker 04

  That was really Aaron's innovation as a book device to basically help people build confidence. Because it's pretty hard to go from most cultures with a lot of process to the next week, no process and no rules. And that's kind of chaotic. And so we sat and thought through, if someone wants to adjust their culture, here's a way to go about it. Okay? Which if you're a startup, you don't need that. So it's a mechanism, or it's our best guess on the way an existing company can absorb the set of ideas if they want to.

• 12:53Ben Horowitz?

  In getting to the Netflix culture, like, you know, one of the things you talk about that you value is sort of challenging your boss. You know, we're all flawed human beings, including bosses. I guess, how does that work in that, you know, from an incentive? Because you want to incent, that's the behavior you want. But often, like, a boss will not reward that necessarily. And how does that end up working inside of Netflix? So that you don't kind of end up with a hypocritical culture where somebody challenges the boss and is punished for that?

• 13:25Speaker 04

  Well, certainly, if they're punished for that, that's going to end all feedback. But even more strongly, because it's anti-normality to criticize the boss in a way dangerous, the boss has to go out of their way to farm for dissent. What could I be doing better? I'll do an exercise with our executives. If you were CEO, what would be different at Netflix? And they have to list and sort through the top three things that would be different. And, you know, that could be, we'd be in China, where we're not, or it could be in sports, or it could be, we would pay higher or lower, or it could be, you know, as trivial as, we'd have better food.

• 14:10Speaker 04

  That forces them to say, if I were CEO, what would be different? Okay, so that's one exercise in farming for dissent.

• 14:17Ben Horowitz?

  Right.

• 14:18Speaker 04

  And then there's, when you're lucky to get feedback, then I'll log the person, often publicly, with their permission. You know, person X told me this, that was, you know, a hard piece of feedback, but it's fair. And so, it's giving them psychic rewards where other people think, oh, that person was gutsy, you know, and did that. So, at multiple levels, you want to overcome people's reticence to provide useful feedback to power figures.

• 14:50Ben Horowitz?

  That's such a great question, by the way. How would you run Netflix if you were in my seat? You know, how are, it's just such a great question to get people to speak up on things that would otherwise seem very dangerous. With the managers, how do you get them to ask? Because you're asking a question where you, in some way emotionally, at least you don't want to know the answer. And so how does, you know, how does that training work? Is that a difficult thing to get them to do?

• 15:19Speaker 04

  It's generally easy to get them to critique pricing strategy or something that's economic.

• 15:25Ben Horowitz?

  Right.

• 15:26Speaker 04

  And it's harder to get them to say, well, if I were CEO, we would have a more empathetic CEO.

• 15:33Speaker 04

  You know, in other words, sort of personal characteristics. So think of it as there's, there's things that are product economic, you know, we'd have more films or less TV that are, are not personal critiques. So then when you get a personal critique, for me at least, even though I've accomplished all these things, when someone, you know, that I respect, one of our executives in particular, gives me feedback that's not positive, it hurts. I'm like, oh my God, you know, and I'm defensive and I'm like, no, no, no, no, you don't understand, you know? And then I have to stop myself and remember, you know, getting feedback in the pain is like doing crunches or pushups. And, you know, you want to stop, you know, it hurts. And you know that it's the painful ones that make you stronger.

• 16:19Speaker 04

  And Ray Dalio talks a bunch about this. If you contain your ego and if you can take the pain, you'll get stronger and you'll get better, you know, as a leader. And so then instead, instead of arguing with a person, I'll say, tell me more about that. And what else? Tell me more, what else? And just keep hitting those two, tell me more, what else? And you know, it'd be amazing what comes out, you know? And then I'm like, oh my God, it really hurts. That's what makes you better. And, you know, to play on the exercise metaphor, you know, if you're a trainer for someone and you beat them, that's not helpful. So, you know, we always want the feedback to be constructive.

• 17:00Speaker 04

  You think of it as, yes, we want honesty and candor, but not like your drunken self, you know, spouting off, you know, random things.

• 17:08Ben Horowitz?

  Yeah.

• 17:09Speaker 04

  What we mean as professional, helpful, you know, can be direct, it can still hurt. Okay. But it's within the bounds of the professional self. You know, it's not critiquing or sharing other things that you might or might not think, but I'll call that your drunk self. Okay. So it's keeping that stuff to the side. It's not unleashing that, you know, but it's making your professional self much more open. Another thing we say is, don't say something about a colleague that you haven't or won't say to them. And so if you were working at Netflix at any level and you come to me and you say, you

• 17:51Speaker 04

  know, Ted Sarandos, my co-CEO, you know, he's got this, this and that problem. And then I say, well, that's interesting. What did he say when you told him that?

• 18:00Ben Horowitz?

  Mm-hmm.

• 18:01Speaker 04

  And then, you know, they look at me all frozen. I can't tell him that. And I'm like, yes, you can. That's the first line. So if, when people, you know, are talking about other colleagues, which is normal and fine, just keep pressing them with, well, and what did they say when you asked them about that? And that stimulates that directness.

• 18:20Ben Horowitz?

  You had a great anecdote in the book about Japan, which has a very kind of pronounced country culture that isn't really that compatible with just plain directness in the way that you talk about. So tell us about, a little bit about how you kind of got, what the problem was and how you got past that.

• 18:41Speaker 04

  Japanese as an island culture and a very cohesive, homogeneous culture has developed a high art form of giving feedback very indirectly. And they call it reading the air. And so if we're both Japanese, without saying anything inappropriate verbally, I can give you a bunch of feedback and you're very confident you got the message. So think of it as a high art form. And then when interacting with Americans, we don't know that art form. And so they'll say something and we're supposed to interpret it as no way or yes, or I wish you did this differently or that.

• 19:16Ben Horowitz?

  Right.

• 19:17Speaker 04

  And we completely miss it because we don't know how to do it there and they don't know that we can't. Okay? So it's definitely a big challenge. And so, and then that's one. And then two, the Confucian cultures have high deference to elders.

• 19:31Ben Horowitz?

  Hmm, yes.

• 19:32Speaker 04

  And so critiquing anyone in power is doubly hard. And then, related to the reading the air, if there do critiques in public, that's like triply hard. You know, I say to our Americans, look, for Japanese to receive criticism in public would be like you yelling at them in American culture. Okay, where it's really emotionally charged and they interpret it that way. So what we have to do is help both sides understand each other. And, you know, that's where the Aaron's Culture Map book is so good. And we say, look, we are going to standardize on English because it takes too long for the rest of the world to learn Japanese and standardize on that. Okay, and we do need one language to communicate. So in this dimension of giving feedback,

• 20:17Speaker 04

  we're gonna go with the American-style verbal feedback because we can all learn that around the world. And so then what we've tried to do is give permission to our Japanese colleagues to do that, including, you know, doing these 360 dinners. You know, we all have to give feedback for each other. And what you're trying to do there is role model the behavior so that they feel like it's acceptable. But, you know, this isn't really the topic of becoming global and when you've got employees from all over the world. Because I'll give you another example where we change the culture. So Americans form trust by doing tasks. So if you go in a meeting and you barely know another employee, but then you work on a project together and it's done well,

• 21:01Speaker 04

  then you have high trust because you trust their competence. Right, right. And so we build trust that way. And we see chit-chat about, you know, kids in baseball teams and other things in a meeting as kind of inefficient. Like, can you get to the point? You know, Americans are very efficient. Brazilians are very much relationship builders. They want to take meals and really talk about family and society and religion and sports and all those things. And, you know, then we'll do the work, you know, and we'll trust each other at work because we've got this basis. And so they're different styles. What we realized is actually the Brazilian style is more efficient because if you've got a strong relationship with people, then you can give good feedback.

• 21:46Speaker 04

  You have that kind of emotional caring for each other. And so about five years ago, when we started doing a lot of work in Brazil, we realized we should really shift our culture. To be more relationship oriented. And so like we'll open meetings and talk about, you know, parents and kids and animals, sports and news. And we'll spend five or 10, you know, five or 10% of your time on that. And then, and then we'll get to the real topics. We want a consistent style around the world so that of, of expectations, so that managers can be on the same page.

• 22:21Ben Horowitz?

  Right. And I know it's coming from a good place because I already had the conversation with you about my kids and you remembered my kids. And that ends up being, you know, at this, you know, the high performing company, American company like Netflix, a key cultural element that you went out and grabbed.

• 22:39Speaker 04

  That's right. The strength of the relationship allows the effectiveness of the, the feedback. And so the narrow inefficiency of taking that time turns out actually to be well worthwhile. Now we're diving into feedback, but we should back up maybe a, a little bit and sort of say, for both you and I, we care about how do you create long-term franchises, companies that continue to innovate. And we've both been shocked at the fall of HP or Sun. So we tried to figure out what happens to these companies, you know, when there's rapid change. And the basic idea we have is that most companies over-optimize for efficiency.

• 23:23Speaker 04

  Okay, they want to get so good at their current market that they lose flexibility to adjust to the future. And the non-intuitive thing is it's better to be managing chaotically if that's productive and fertile. So think of the standard model is clean, efficient, sanitary, sterile. Right. And our model is messy and chaotic and fertile.

• 23:52Speaker 04

  And in the long term fertile will beat sterile. But in the short term sterile is very good. Yes, yes. So you have to be very conscious as a leader. How you're optimizing for the long term innovation. Right. Second. Manufacturing has dominated the economy for 200 years. What you want to really think about is there's this big influence for manufacturing because it's generated most of the economic wealth of the past couple hundred years. And that's around the boss and the worker. And the worker following the rules and you want zero variation. That's Nirvana. And yet, if you're in innovation culture, you innovation or variation is essential.

• 24:37Speaker 04

  At core in innovation culture is around increasing variation. And in manufacturing culture, five sigma is around decreasing variation. Right, right. Now, in manufacturing and in safety, think of hospitals and airlines. You do, you want perfect process, full compliance. And that is the right way to manage those businesses, which are most of the economy. Then there's there's creative sector, which, you know, we're both in. And it includes like ad agencies. It's not just high tech, includes Hollywood, airlines, restaurants, lots of things that are focused on consistency. So we just have to think as managers, we've inherited a cultural legacy

• 25:21Speaker 04

  that is highly optimized for manufacturing and safety, which is process, OKRs, all these ideas that we can manage creativity. When in fact, we really need to create a fertile ecosystem and not try to manage it too much. Okay, and yet not have it be chaotic. So there just hasn't been enough thinking about what's unique about creative companies. Because for creative companies, the fundamental risk is lack of innovation. It's not execution and efficiency. Bringing costs down, those kinds of manufacturing things. It's really, are you organized for innovation? So that's the big context in which.

• 26:03Speaker 04

  We're trying to make a contribution around what would you do to optimize creativity? I mean, we think that's around employee freedom, which is supported by the no rules and the context. Other people have other ideas. But again, it's really about how do you have a company that keeps able to do new invention? So let's take Amazon, incredible company, done amazing amounts of innovation, arguably more than Netflix. Okay. And they're not nearly as much as we are about freedom and no rules. But they're about the two pizza lunches and they're so willing to fail. The fact that they can do like that whole mobile phone disaster and, you know, and then once in a while

• 26:47Speaker 04

  they have an Alexa and it like changes the world. And over time, the innovation sector will see there's a couple of different approaches and what's the way to combine?

• 26:56Ben Horowitz?

  Yes, yes. And yours is very interesting because it's so at its core a cultural approach. Whereas if, you know, when I think about when Jeff Bezos talks about it, he goes into, you know, what you said, willingness to take very high risks. And but it's, it gets back to a cultural thing, which is, is that rewarded in the culture for taking that high risk? Or is it punished when you fail? And he's very thoughtful about how you reward it. So it gets back into the, your original comment, which is about, okay, what are the actual incentives for employees in the company on their behavior? And that's going to lead to creativity.

• 27:39Speaker 04

  And Google's a fascinating one because of course 10 years ago, they were all about 20% time.

• 27:46Ben Horowitz?

  Yes.

• 27:46Speaker 04

  And then that's kind of like all gone. And the question is, what did they learn? You know, it's pretty hard to do innovation on one day a week. And the big innovations they get are things like Android and Google Drive and Google Docs and massive projects. So I'm guessing that they probably That, hey, at Google, the way we innovate is we can put hundreds of people on big ideas. And it's no longer part-time innovation that matters.

• 28:17Ben Horowitz?

  The thing that struck me about your book that was so different than Google's approach is Google's approach always seemed to me to be this very super courageous but top-down set of ideas. So, we want to build an autonomous car. And we're going to put unlimited money for unlimited years into that. And that's, look, it's an amazing thing to do. But your idea is almost the opposite, which is, look, we've got all these creative people here, and if we get rid of the rules that constrain their thinking, they will come up with the innovation. And there won't be any rule against them continuing with that innovation and building it. There's nobody who's going to say no, because we don't have any rules.

• 29:01Speaker 04

  In that way, Netflix and Amazon are closer, you know, to those bottoms-up kind of thing. But Amazon has more lines of business. I mean, we're still basically a one-service company.

• 29:11Ben Horowitz?

  Yeah.

• 29:12Speaker 04

  Okay, so we're earlier in the phase. In Google terms, it'd be like if we only had search.

• 29:17Ben Horowitz?

  Right. But you did, you did run into at Netflix, a very important turning point, where if you had continued to optimize the DVD business, instead of getting to the streaming business, you would have had a huge problem. So maybe you can tell us a little bit about that, because you also kind of screwed it up. And somewhat, I remember you saying, somewhat thanks to my business partner, Marc Andreessen, who was very much on, just eject DVDs and go into the future. So maybe you could tell us about that transition.

• 29:47Speaker 04

  Yeah, I mean, there's just marvelous learnings in that. But let's get to that in a second. What I would say about market is typically you guys, venture capitalists, say you want to go after the largest market possible. And I've always thought that's crazy, because you can't defend it. And so, I've always thought you want to go after the smallest market possible that can hold your five to 10-year growth ambitions.

• 30:11Ben Horowitz?

  Right.

• 30:12Speaker 04

  So...

• 30:13Ben Horowitz?

  Narrow its target.

• 30:14Speaker 04

  If it's the left-handed scissors market, it's too narrow. And so, the practical thing on how big it is, is can it hold five or 10 years of growth? So, back to DVD, by the time we got to 2005, we realized, okay, DVD's probably going to peak about 2010. So it no longer can hold our five or 10 year growth ambitions. So then we've got to figure out how to expand the market definition. Okay. And then we said, okay, we've got to, now's the time we got to expand in the streaming. So 2007, YouTube had just started. Google just bought it in the beginning of 2007. Hulu started. Amazon did a thing called Unbox, which was their internet delivery on video. And Netflix started streaming.

• 30:59Speaker 04

  So all four of us entered basically in 07.

• 31:02Ben Horowitz?

  Yeah.

• 31:03Speaker 04

  And since then, it's been a rocket ship as people realized, okay.

• 31:07Ben Horowitz?

  And for multiple companies, rocket ship.

• 31:09Speaker 04

  Yes, that's right. All, all, all of us with huge growths. I mean, YouTube, by far the biggest viewing growth, but all of us with, with, it was a big enough market. There was a, you know, play there. And Hulu was doing really well, was owned by three of the major media companies. And to some degree, they were positioning of if you care about DVD and streaming, Netflix is okay. But if you really care about streaming Hulu, it's pollution.

• 31:36Ben Horowitz?

  Right.

• 31:37Speaker 04

  And our marketing played into this because the easiest way to differentiate against Hulu was, well, we have DVDs too.

• 31:45Ben Horowitz?

  Yep.

• 31:45Speaker 04

  And the problem is that was going to be a fading value to consumers. So you really, we had to say to our marketers, you can't talk about it. We've got to strip it away because you're going to make us dependent on a thing that's going to become irrelevant. And we have to be full stop, the best streaming service and to win on that basis.

• 32:05Ben Horowitz?

  Right.

• 32:06Speaker 04

  And that in fact, we had to have DVD and streaming be separate so that streaming had to fight and win. And could be better than Hulu as a streaming service. So partially goaded by the, the wonderfully radical Marc Andreessen, who is like, burn the boats. But I don't blame him at all. It's, it's all our fault. We came up with this plan, uh, which was to separate DVD and streaming. And we made one tragic, I made one tragic mistake in it, which is the pricing for the combined plan had been $10 and the separate plans, we said should be $8 for streaming, which is

• 32:44Speaker 04

  about Hulu's price and about $8 for DVD. So it was effectively a 60% price increase. So we sent an email, I sent an email to 20 million American families, so 20% of American society on one day and the price is going up by 20% or 60% and you get to use two services, two websites instead of one. So less convenience, radically higher price in the middle of a recession.

• 33:15Ben Horowitz?

  And no new features.

• 33:16Speaker 04

  No new features. So it did not go well. Okay. And I explained it as this is essential for Netflix's long-term, which they must.

• 33:24Ben Horowitz?

  Yeah, they don't care about you.

• 33:25Speaker 04

  So, oh my God, it was, it was crazy back. And, you know, the stock went down 75%, lots of members quit, Saturday Night Live did skits making fun of us. I mean, it was like, you know, nightmarish. And so we realized that this was going to be a challenge to get out of and we slowly earned back the trust of customers. We basically switched it from Quickster to DVD.com. So now if you go to DVD.com, that's our DVD service. We have a little under 2 million members that are still DVD subscribers. We have nearly 200 million who are streaming. So we were right to separate them. Okay. It's just we did it

• 34:07Speaker 04

  an awful way. And we, so think of it as we did the thing that Kodak never did. We did the thing that AOL never did. We did the thing that Blockbuster never did, which is we did transition our business successfully, but we did not stick the land. We landed ugly. Let's just say that.

• 34:26Ben Horowitz?

  One of the things that you talk about in the book on that is the knowledge to stick it correctly was in the company, but you just didn't listen to it.

• 34:34Speaker 04

  That's what I was getting at. Okay. So afterwards, we, you know, we first had to heal. That took six months or a year because it was just crisis, right? Of we, you know, what are we going to cut? How are we going to survive? Our, our general counsel joked about, he had worked at Webvan. So he goes, at least I've got bankruptcy skills. I mean, it was like gallows humor. So afterwards we said, okay, what went wrong? Well, the first level answer is arrogant CEO who doesn't listen to his people. Sort of King Lear, that kind of thing. And for the most part, that's not what happened. Okay, and what happened was something more subtle, which is our leading people were too deferential. They were like, Reed's been right so many times.

• 35:19Speaker 04

  I think this is going to be bad, but he must see something. And they didn't know that each other kind of all felt the same.

• 35:27Ben Horowitz?

  Yeah.

• 35:28Speaker 04

  And in hindsight, is if we had said, all execs, write down, what's your level of confidence of this move, disaster to, you know, genius?

• 35:39Ben Horowitz?

  Right.

• 35:39Speaker 04

  You know, it would have come up 20 people thinking it's going to be bad. And then that's the strength of the co-feeling would have realized, no, we're right. Reed is wrong.

• 35:48Ben Horowitz?

  Yes.

• 35:49Speaker 04

  Okay. And probably would have stopped. And so the key thing there, we said, is in the future, all major decisions, we've got to have everybody write down what they think, you know, positive 10 to negative 10. And why? Okay, and we just do that in a Google Sheet, but any shared medium is fine. And then everyone knows what everyone else thinks, and you got to put it down and write it. So that little device then has helped us avoid chaos and catastrophe, which is great.

• 36:19Ben Horowitz?

  Yeah, that's a, that's such a great device because, you know, it's always, it's very deceiving when you're CEO because it's at the point when you are right consistently and feeling confident that you caused that problem. So it's right at the point when you're doing the best that people get too much faith in you. If a business was in like a dogfight, competitive battle in its current market, would you still kind of drive for innovation if it was a company like Netflix? Or would you need to optimize more?

• 36:51Speaker 04

  Yeah, probably a little more optimized. When we were in the DVD fight with Blockbuster, this is 05 to 07. We got distracted doing Magic Charms. So we did four things to make ourselves feel better. We went into selling used DVDs directly on our website rather than on eBay. We started buying some little films at Sundance, like a Maggie Gyllenhaal film and some other films, because this was 2005 original content.

• 37:22Speaker 04

  We launched a private social network called Netflix Friends. That was like the Apple Ping kind of thing, but my, and this is 2005 as Facebook was barely out of Harvard, right? And we were doing, you know, you can see each other's queue and viewing history if you give each other permissions. And we said, let's sell banner advertising on our website like Overstock used to do. Okay. So for, you know, non-trivial engineering efforts, because this is the way we're going to differentiate against Blockbuster. Fortunately, we also spent some time on getting shipping more reliable so that our queue fulfillment rate went from 96% to 98%. And in the end, once we beat Blockbuster, we realized the only thing that mattered was

• 38:05Speaker 04

  that queue fulfillment rate, that 96 to 98%.

• 38:09Ben Horowitz?

  Little innovations then.

• 38:11Speaker 04

  That's right. And we as leaders did not have the courage to stand before the employees and say, we're going to win because we can move this from 96 to 98%. And we needed these little magic charms to make ourselves feel good. And it was totally bad management to get distracted on those magic charms. So, you know, having the confidence to focus on the basics and doing the basics incredibly well is important. And then that lesson, which is more of a business strategy lesson than a culture lesson. So that's why it's not in the book.

• 38:44Ben Horowitz?

  Yeah.

• 38:44Speaker 04

  But that lesson is what's fueled our focus on movies and series and not also doing sports and video game and user generated and all kinds of other things. So it's always a balance. I would say when you're in that dogfight, it's you better win the dogfight first and then you can invent the new airplane.

• 39:03Ben Horowitz?

  Right. Without tactics, sometimes there's no strategy. When you think of Netflix culture, what parts do you consider to be timeless, evergreen relative to the parts you see as open to evolution as you enter new markets and evolve the business?

• 39:18Speaker 04

  It's all open to evolution. None of it is golden tablets.

• 39:23Ben Horowitz?

  Yeah.

• 39:23Speaker 04

  You know, we're constantly trying to improve the culture. One of the key things is that most people have the default idea that as you get bigger, you start sucking. And, you know, it gets political, it gets bureaucratic. So if you want to affect the world at scale, you want to grow. And you're making a choice not to be like a boutique restaurant in your neighborhood where you're fantastic, but you don't change the world. Most of us take the trade off, which is we're going to get bigger. That's harder because then we can have more impact in the world. And so the key thing is to get people to believe that it's possible to get better as you get bigger.

• 40:05Speaker 04

  And then you have to really show the examples of where we're getting better as we get bigger. Now, it is harder as you get bigger, but think of Malfoos who thought, you know, the whole world's going to starve once we get above a billion people 250 years ago. Totally wrong. And what he didn't understand is that there are going to be a lot of people thinking about how to have increased food productivity and that the number of people thinking about increased food productivity was going to ultimately outstrip the number of people. And then in fact, you'd have less starvation than 250 years ago instead of more. So again, he missed that. Now, as Netflix grows, we have more people thinking about how to improve the culture.

• 40:48Speaker 04

  So yes, it's harder, but we got more brain power working on it and people are coming up with ideas. So a big example would be, you know, about four years ago, we added inclusion as a core value and we'd been working hard on it and we'd made real progress. And I wish that I had led that 10 years ago. Okay, but I didn't. I wish I had led it at all, but it was brought to me as something that, you know, really needed to be done. And I'm on board and we're driving it, but it's a real improvement because we've got more people thinking about it. And now of our top 20 leaders, we're half men, half women. So it's 50 50. We're 25% leaders of color of our top 20.

• 41:30Speaker 04

  So that's been a great improvement that was really, you know, I've been supportive of it, but it was really driven by all the new talent at Netflix.

• 41:39Ben Horowitz?

  So really interesting. It is, um, you know, culture in particular, getting everybody to participate in a culture at scale is probably the greatest management challenge there is.

• 41:55Ben Horowitz?

  Final question, and you had such colorful answers to this in the Wall Street Journal. How has COVID-19 impacted Netflix? Do you feel the company is in a better place to react to crises because of its cultural reinvention?

• 42:12Speaker 04

  You know, I love work from home. I've been doing work from home my whole life, nights and weekends.

• 42:21Speaker 04

  I think it's always a great part of the mix. I do think that exclusive work from home, where you're like, don't have any in-person contact, is not good. But work from home as part of the work experience is fantastic. And then is Netflix differentially able to adapt? Maybe, but I don't know. I mean, you know, Disney and Amazon, and those ones are all working hard. And it kind of doesn't matter because COVID fortunately is a once in a hundred year phenomenon. And so we're not trying to draw great cultural lessons from it. Instead, we're trying to think of the things that we'll need to be good at for five, 10, 20 years. So we're all making do.

• 43:03Speaker 04

  And I do hope that we'll have a vaccine soon, that many people will get it. And therefore that will eliminate COVID from society and we'll be back to normal next year. So that will be a great day and when we can do this interview live in the Commonwealth Club and have some fun.

• 43:22Ben Horowitz?

  Yeah, that'll be a great thing. Okay, thank you so much, Reid.