What if Your Company Had No Rules?

Netflix co-founder Reed Hastings came to believe that corporate rules can kill creativity and innovation. In this latest edition of the Freakonomics Radio Book Club, guest host Maria Konnikova talks to Hastings about his new book, No Rules Rules, and why for some companies the greatest risk is taking no risks at all.

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

• 0:01Stephen J. Dubner?

  Freakonomics Radio is sponsored by Southern New Hampshire University. There's no hiding how convenient Southern New Hampshire University makes college. They offer over 80 career-focused graduate programs online. Classes have no set meeting times, so you can balance life and learning, and online tuition rates are some of the lowest in the country, making it all a little more manageable. A school this willing to work with you is worth the investment. Visit snhu.edu/freakonomics to learn more. Freakonomics Radio is sponsored by LabCorp On Demand. If you are on a journey to know yourself, start with your health. LabCorp On Demand is designed to get you fast, accurate insights into what's happening

• 0:44Stephen J. Dubner?

  inside of your body, including tests like micronutrient, testosterone, sexual health, and more. It takes only minutes to purchase a test and just days to get results. Visit ondemand.labcorp.com/freak and use code FREAK to save up to 15% on select tests. That's ondemand.labcorp.com/freak and use code FREAK. Know yourself. Freakonomics Radio is sponsored by Amica. You know what they say, if you want to go fast, go alone; if you want to go far, go together. So, go with Amica and get coverage from a mutual insurer that's built for their customers,

• 1:28Stephen J. Dubner?

  one that looks after what's important to you together. Auto, home, life, and more, coverage that fits your unique needs. Amica helps you protect what matters most. Visit amica.com and get a quote today. Freakonomics Radio is sponsored by ChatGPT. ChatGPT Work is a new way to work in ChatGPT. ChatGPT Work can pull info from across your apps and connect to your tools to help you create finished work. You can even automate work in ChatGPT with the Scheduled Tasks feature, and the whole time, you stay in control. Put ChatGPT to work on your most ambitious ideas and projects.

• 2:12Stephen J. Dubner?

  Get started at chatgpt.com by selecting Work Mode, available on Plus and Pro plans.

• 2:26Stephen J. Dubner?

  Hey there. It's Stephen Dubner, and this is a special bonus episode of Freakonomics Radio. You may remember a couple of months ago, we tried a new kind of episode, a Freakonomics Radio Book Club, where we interviewed an author and had her read excerpts from her book. That episode was called "How to Make Your Own Luck." The author was Maria Konnikova, a PhD psychologist who became a professional poker player in order to learn more about decision-making and luck. Her book is called "The Biggest Bluff." So many of you wrote in to say how much you loved that episode, and Maria in particular, that for our second Freakonomics Radio Book Club episode, we are asking Maria to take a turn as host.

• 3:08Stephen J. Dubner?

  And that's the episode you are about to hear. Today's author is Reed Hastings, and the book is "No Rules Rules: Netflix and the Culture of Reinvention," which Hastings co-wrote with Aaron Meyer. We are going to keep playing with this format to see how much we like it, how much you like it. The next Book Club episode we're planning will have me as host again. If you'd like to read that book ahead of time, our selection will be "Inside of a Dog: What Dogs See, Smell, and Know" by Alexandra Horowitz. It was first published around a decade ago, but with so many pandemic puppies out there, it is more relevant than

• 3:50Stephen J. Dubner?

  ever. Plus, I just really like this book. Also, if you want to send a dog question for Alexandra Horowitz, our email is [email protected]. Use the subject line "dog." If you want to send feedback on the episode you are about to hear, same email, [email protected], subject line "Netflix." As always, thanks for the feedback and thanks for listening. And now here is Maria Konnikova in today's Freakonomics Radio Book Club episode.

• 4:32Speaker 01

  Everyone knows Netflix. Especially these days, it's our constant companion. It has 193 million subscribers in 190 countries, with roughly 38% of those from the United States and Canada. These past months, as other industries struggle, Netflix has been booming. Everyone wants to stream. Everyone wants to binge. Everyone wants to escape. But it wasn't always like that. Once upon a time, Netflix was pretty much a shipping and receiving business, sending DVDs to subscribers who'd rent them for a couple of days and return them.

• 5:15Speaker 01

  It was considered such a crazy business idea that the movie rental giant Blockbuster, yes, the Blockbuster that declared bankruptcy in 2010, didn't want to buy it. When Netflix went public in 2002, it had just 600,000 subscribers, and the fledgling company was losing money. Today, it has some 8,600 employees and a market cap of $228 billion. So how did we get from there to here? Where did Netflix come from? And how was it able to thrive? I'm Maria Konnikova,

• 6:00Speaker 01

  and this is the Freakonomics Radio Book Club. Today, join me in a deep dive into No Rules Rules: Netflix and the Culture of Reinvention, the new book from Netflix co-founder Reed Hastings and noted business professor Aaron Meyer. The book is not so much an autobiography of Hastings or even Netflix's origin story. It's really more of an eye-opening look at the unorthodox, even a little intimidating, way that Netflix runs.

• 6:32Speaker 02

  For the most part, you want to make people feel like, if anything, they would get fired for being cautious.

• 6:51Speaker 03

  From Stitcher and Dubner Productions, this is Freakonomics Radio, the podcast that explores the hidden side of everything, with today's special guest host, Maria Konnikova.

• 7:08Speaker 01

  Before there were DVDs and streams, there were vacuum cleaners.

• 7:17Speaker 01

  What were you like growing up? Give us a little bit of the Reed story before you became Reed Hastings Netflix.

• 7:25Speaker 02

  As a kid, I grew up with my two sisters, and I would say I was not particularly business oriented. You know, we had the typical lemonade stands and selling cinnamon sticks and things like that. And then at the end of high school, I got a job selling rainbow vacuum cleaners. And that's what really got me interested in business, is just seeing how that company was operated and how fun it was to be sharing it with other people. And I loved it so much that I deferred college for a year.

• 8:00Speaker 01

  So, I mean, I think you're the first person I've ever heard say that you loved going door to door selling vacuum cleaners. What was it about it that you loved?

• 8:09Speaker 02

  Yeah, you meet tons of different people. This was the early 80s, so it was a more friendly time in a way. Different conversations with different people from all different walks of life. I loved the fellow salespeople, you know, customers. And the product is really pretty cool. It's pretty amazing.

• 8:28Speaker 01

  Hastings, who was from Boston, eventually did give up his vacuum selling job to go to Bowdoin College in Maine. He decided to study math. And soon, that decision led him to the Peace Corps, where he taught math to high schoolers in rural Swaziland.

• 8:47Speaker 01

  Why did you decide to switch gears so much and then to teaching mathematics if you loved the original sales job?

• 8:54Speaker 02

  You know, when I was in college, I got seduced by the thing that I was differentially good at, which was math. And then, you know, being a math teacher was not easy. That was a lot of work of motivating and understanding kids. And, you know, it's not intense math. It's really trying to help a bunch of kids get excited.

• 9:15Speaker 01

  Was it always going to be the Peace Corps? Is that what drew you to teaching? Or did you want to teach period and ended up in the Peace Corps?

• 9:23Speaker 02

  No, I joke that if the Peace Corps had sent me to be a fish farmer, which could have happened, you know, I'd probably be working on agriculture policy now.

• 9:32Speaker 01

  After his two years in the Peace Corps, Hastings went back to school, this time to Stanford for a graduate degree in computer science. He wanted to study one area in particular, artificial intelligence.

• 9:47Speaker 02

  I thought AI might be a nice blend, not as dry as math, but more intellectual and challenging than being a classroom teacher. And so I got fortunate of hitting the first AI bubble in the mid 80s at the right time.

• 10:02Speaker 01

  You also have said before that Stanford was really where you fell in love with computer programming. How did you find programming and why did that end up being the direction that you wanted to pursue when you started becoming more entrepreneurial minded?

• 10:17Speaker 02

  Well, you get exposed to a lot of things in graduate school and I got to take a lot of computer science classes and I loved them. You know, it was easy to work all the time because it was enjoyable, like a big puzzle. And that really led to my first company, Pure Software. And the great thing about the product was very technical software, but the key thing was the culture and how we tried to build that.

• 10:50Speaker 01

  As Hastings' co-author Aaron Meyer writes in No Rules Rules, Hastings' openness about his mistakes at Pure Software make it sound as though the company failed. But Pure Software sold in 1997 for $750 million, and it was that sale that helped Hastings fuel his next big venture, Netflix. Still, Hastings is open about the cultural failures of the company. And as he looked for his next big idea, the experience of running Pure Software helped him to realize something. He didn't necessarily want to be a CEO again. Instead, he decided to try out the investing side of things,

• 11:34Speaker 01

  pouring money into a number of companies and joining their boards. But he never stopped thinking of new ideas, ideas he'd often bounced back and forth with Mark Randolph, a former colleague. One day, the duo came up with an idea to rent DVDs through the mail, and like that, Netflix was born. Randolph became the company's first CEO, but in 1999, Hastings took over.

• 12:02Speaker 02

  It was clear that it was both a big opportunity and that we needed to raise a lot of capital, and that would probably require me as CEO because I had a track record.

• 12:12Speaker 01

  So it was more out of necessity than you deciding, I really, really want to do this again?

• 12:17Speaker 02

  Yeah, I mean, I was super excited to do it. But yes, I think that's right. If it had been sailing along on its own, then I probably wouldn't have. And there's some part of it that was just the joy of getting back in and having a team. And from that, we evolved to doing a subscription DVD rental. That was originally the 20 bucks a month for three DVDs at a time, as many as you wanted.

• 12:42Speaker 01

  So you guys went back and forth for a while with different ideas. What was it about this one that actually seemed to stick? And that made you actually decide, hey, let me mail this DVD to myself and see if it's actually going to arrive? And why did you decide after you saw that it was feasible that this was the one?

• 12:58Speaker 02

  You know, we weren't sure that it was the one. Every new business has a bunch of risk around it. DVD was very lightweight, so it was easy to mail compared to its predecessor, the VHS cassette. So it opened a new opportunity. And at the time, Amazon was shipping lots of goods, and it was clear that this was a big opportunity. And then eventually, we wanted to be able to stream the content. And we thought, okay, if we can build, you know, a great user interface and build a subscriber base, then we should be able to migrate from shipping DVDs to streaming, which, you know, took us 10 years to start, or close to 10 years, started in 2007. And now we're close to 200 million streaming, and we've got just under 2 million DVD.

• 13:42Speaker 02

  So it's almost 100 to 1 difference today.

• 13:46Speaker 01

  Could someone else have founded Netflix?

• 13:50Speaker 02

  Yeah, I think Blockbuster could have done, you know, they were big on renting, first VHS and then DVD. And certainly, other people would have done streaming without Netflix.

• 14:02Speaker 01

  So was streaming something you had in mind before you founded Netflix? Did you see this as somewhere that the market was eventually going to go?

• 14:10Speaker 02

  Yeah, it was clear even back then that the internet would continue to get faster and faster, and you'd be able to do streaming video eventually, which is why we named the company Netflix and not, you know, DVDbymail.com.

• 14:23Speaker 01

  Well, clear to you, but you recount talking to Blockbuster, and it was certainly not clear to the whole industry that streaming was the future.

• 14:34Speaker 02

  You know, that is true. If you grow up doing stores, and Blockbuster was really, really good at stores, you become very specialized about that. And Blockbuster was over-optimized for a single thing. And so you have to watch out as a leader that you become so good at one thing that you are not good at the skills necessary to continue to thrive. And this is where, you know, it really helps, I think, to have a model where a company's organized around flexibility, rather than exploiting the last bit of efficiency of some current model.

• 15:11Speaker 01

  Here now is Reed Hastings, reading from his new book, co-authored with Aaron Meyer, called No Rules Rules.

• 15:22Speaker 02

  Blockbuster's story is not an anomaly. The vast majority of firms fail when their industry shifts. Kodak failed to adapt from paper photos to digital. Nokia failed to adapt from flip phones to smartphones. AOL failed to adapt from dial-up internet to broadband. And my own first business, Pure Software, could not adapt to changes in its industry either. Because our company culture wasn't optimized for innovation or flexibility. I started Pure Software in 1991. At the beginning, we had a great culture. We were a dozen people creating something new and having a blast.

• 16:04Speaker 02

  Like many small entrepreneurial ventures, we had very few rules or policies inhibiting our actions. When the marketing guy decided to work from his dining room because it helped him think to be able to pour himself a bowl of Lucky Charms whenever he felt the urge, he didn't have to get permission from management.

• 16:26Speaker 01

  This earlier version of Pure was flexible. Everyone could work however they wanted to maximize what they were bringing to the company. Lucky Charms may not be my cereal of choice, but the whole setup seems rather nice. Then, things started to change. Here is Reed Hastings again.

• 16:45Speaker 02

  Then Pure Software started to grow. As we hired new employees, a few did stupid stuff, leading to errors that cost the company money. Each time this happened, I put a process in place to prevent that mistake from occurring again. For example, one day, our salesperson at Pure, Matthew, traveled to Washington, DC to meet with a prospective client. The client was staying at the five-star Willard Intercontinental Hotel, so Matthew did too. At $700 a night. When I found out, I was frustrated. I had our HR person write a travel policy outlining how much employees could spend on airplanes, meals, and hotels, and requiring management approval to go beyond a specified spending limit.

• 17:32Speaker 02

  Policies and controls became so foundational to our work that those who were great at coloring within the lines were promoted, while many creative mavericks felt stifled and went to work elsewhere. I was sorry to see them go, but I believe that this was what happens when a company grows up. Then two things occurred. The first is that we failed to innovate quickly. We had become increasingly effective and decreasingly creative. In order to grow, we had to purchase other companies that did have innovative products. That led to more business complexity, which in turn led to more rules and process. The second is that the market shifted.

• 18:15Speaker 02

  To survive, we needed to change. But we had selected and conditioned our employees to follow process, not to think freshly or shift fast. We were unable to adapt, and in 1997, ended up selling the company to our largest competitor.

• 18:34Speaker 01

  So what did Hastings learn? I asked him, "How exactly is Netflix different from its predecessor?"

• 18:42Speaker 02

  Netflix, of course, is a tremendous change from being a domestic DVD-by-male renter to leading and streaming around the world. It really has proved out that focusing on flexibility is the key, and it's really about that no rules is the right way to go, or no rules rules. And then, of course, it's not as simple as just taking away the rules. You've got to figure out some other way to have people be aligned to work well together. This book is trying to be a contribution to other organizations to think about different ways to operate. So we've had that very traditional paradigm of the factory forever. And now with creative work,

• 19:27Speaker 02

  there's potentially other ways to think about things which focuses on flexibility rather than efficiency.

• 19:37Speaker 01

  So what is this famous culture of Netflix that has shepherded it from a fledgling mail-in DVD company that Blockbuster scoffed at buying back in 2000 to the industry-leading innovator that we know today? What does it mean to be a company that runs on no-rules rules? It all started from a moment in the early days of Netflix, when the management team had to do the one thing that most teams want to avoid doing: fire a huge portion of its staff.

• 20:11Speaker 02

  In the spring of 2001, crisis struck. The first internet bubble burst, and scores of dot-coms failed and vanished. All venture capital funding stopped, and we were suddenly unable to raise the additional funds we needed to run the business, which was far from profitable. Morale in the office was low, and it was about to get lower. We had to lay off a third of our workforce. I sat down with Mark and Patty McCord. Patty had come with me from Pure Software and was the head of Human Resources, and we studied the contribution of each employee. We didn't have any obvious poor performers, so we divided the staff into two piles:

• 20:55Speaker 02

  the 80 highest performers, who we would keep, and the 40 less amazing, we'd let go. Those who were exceptionally creative, did great work, and collaborated well with others, went immediately into the keepers pile. The difficulty was that there were many borderline cases. Some were great colleagues and friends, but did adequate work, rather than great work. And others worked like crazy, but showed uneven judgment and needed a lot of hand-holding. A few were exceptionally gifted and high-performing, but also complainers or pessimists. Most of them would have to go. It wasn't going to be easy.

• 21:40Speaker 02

  In the days before the layoffs, my wife remarked how on edge I was, and she was right. I was worried that motivation in the office would plummet. I was convinced that after I'd let go of friends and colleagues, those who stayed would think the company wasn't loyal to employees and was bound to make everyone angry. Even worse, the keepers would have to shoulder the work of those that go, which seemed certain to lead to bitterness. We were already short of cash. Could we bear a further collapse in morale? The day of the layoffs arrived, and it was awful as expected. Those who were laid off cried, slammed doors, and shouted in frustration.

• 22:24Speaker 02

  By noon, it was finished, and I waited for the second half of the storm, the backlash from remaining employees. But despite some tears and visible sorrow, all was calm. Then, within a few weeks, for a reason I couldn't initially understand, the atmosphere improved dramatically. We were in cost-cutting mode, and we'd just let go a third of our workforce, yet the office was suddenly buzzing with passion and energy and ideas. A month later, the holidays arrived. DVD players were popular that Christmas, and by early 2002, our DVD by mail subscription business was growing rapidly again.

• 23:07Speaker 02

  Suddenly, we were doing far more work with 30% fewer employees. To my amazement, those same 80 people were getting everything done with a passion that seemed higher than ever. They were working longer hours, but spirits were sky-high. It wasn't just our employees who were happier. I'd wake up in the morning and couldn't wait to get to the office. In those days, I drove Patty McCord to work every day, and when I swung up to her house in Santa Cruz, she would practically leap in the car with this big grin. "Reed, what's going on here? Is this like being in love? Is this thrill gonna wear off?" Patty had put her finger on it.

• 23:49Speaker 02

  The entire office felt like it was filled with people who were madly in love with their work.

• 23:56Speaker 01

  For Reed Hastings, talent density is the key first step to being able to let go of traditional rule structures. Hire the best people, people you trust, people whose judgment you trust, and then empower them. Don't tell them what they can and can't do. Let them decide for themselves. But talent can't come with baggage.

• 24:23Speaker 01

  I was struck by a phrase that you use, that you have a policy of not hiring any brilliant jerks. I would love for you to talk a little bit more about that because I think that we live in a culture where people do tend to admire brilliant jerks, and so what if they're a jerk?

• 24:41Speaker 02

  Well, we're very big on teamwork and working well in groups to be able to accomplish things. And the problem with the jerk is they're very hard to work with. And so we feel like it's a better model to require, you know, personal responsibility and respect, and to have good team relations as a mandatory aspect. So you have to be both talented and good at teamwork. And most people want to be good team players or social human beings. So sometimes they just haven't had the right schooling or instruction on effective team behavior. But ultimately, we don't tolerate the jerks, brilliant or not.

• 25:22Speaker 01

  What about if they're content creators? What about if they're one of the hottest showrunners in the business?

• 25:27Speaker 02

  Yeah, I'm sure on the fringes, both with creative people and also non-creative, I'm sure there's some jerkiness that we have to deal with. But as a whole, what we want to do is have our employees work really well with each other, to be able to be very honest with each other, including honest with me, and to incent behaviors that help us navigate a very rapidly changing entertainment landscape.

• 25:57Speaker 01

  It's not just about hiring the right sorts of people, of course, and making sure to maintain the right sort of environment. It's also about how you empower those people once you get them to come on board. And one of the key tenets of Netflix is to get rid of the normal controls you'd come to expect in a corporate environment. Things like expense reports, approvals for big spending decisions, vacation policies. The idea is to entrust every employee to decide for themselves. Netflix isn't a hierarchy in the typical sense of the word. Instead, Reed Hastings thinks of it as a tree, but not in the way you might think.

• 26:39Speaker 02

  In a tree, the trunk is supporting all the branches, which do all the work. The leaves, the photosynthesis, nutrients. And so we look at our leadership team as the trunk supporting all of the real work, rather than being at the top of an organization, sort of like the king.

• 26:57Speaker 01

  But what happens if the tree is a giving tree?

• 27:02Speaker 02

  Ah, she has read her overstory. Let's remember that the giving tree, doesn't it, just before it dies, it puts all the nutrients back into the roots?

• 27:11Speaker 01

  It does, it does.

• 27:13Speaker 02

  Yeah, okay. Hopefully, we last as long as a sequoia. We'll see.

• 27:19Speaker 01

  In the meantime, a tree has inbuilt mechanisms for coordinating its activities: photosynthesis, growth, nutrient exchange. As much as Netflix may be a tree in spirit, in reality, it's not a living interconnected organism. So how do you make sure everything is functioning as intended?

• 27:44Speaker 01

  Something that I got very nervous about very early in your book was the element of no rules, rules, where you don't have vacation policies and you don't have this policy and you don't have that policy. I'd feel like I can't take vacation if there are no vacation days. And I know that you model behavior, obviously, but how do you prevent people from burning out because they want to excel and they love their jobs? So they want to keep going.

• 28:08Speaker 02

  Sure, the vacation policy is one specific thing, but it's illustrative of the broader structure of the book, which is Aaron goes in as the critic, kind of channeling the reader, says, "Wait a minute, wait a minute, wait a minute."

• 28:21Speaker 01

  Aaron is, again, Aaron Meyer, Hastings' co-author. For the book, she conducted over 200 interviews with current and former Netflix employees to learn about the company's culture. Her voice offers an outside perspective on the good and bad of Netflix's culture.

• 28:40Speaker 02

  You know, it's not that great having no vacation policy. Does that mean no vacation? You know, and then tries to really hear from people what those concerns are. And of course, I am a strong role model, taking lots of vacation, and I do some of my best thinking when I'm on vacation. So now that we've had it for a decade, we've figured out a pretty good balance where we have very few people who abuse it and sort of, you know, go away for a year. And then we have very few people who don't take any vacation because they don't feel licensed to. So that's an example. The number of hours that you work in a day is also not formally regulated. People get an approximate social understanding, and that

• 29:24Speaker 02

  seems to work pretty well.

• 29:29Speaker 01

  That social understanding is another key element of the culture you find in the Netflix offices, one where context is set from above, where leaders lead through their own behaviors so that people can get a sense of expectations. It's the opposite of do as I say, not as I do. They don't actually say anything. They just do. And they expect others to do the same. You don't set explicit regulations. Instead, you instill an ethos where the norms of behavior of the company are clear, and you trust your people to follow those norms. Hastings offers up a hypothetical example of how someone at Netflix might guide an employee to, say,

• 30:13Speaker 01

  conceptualize an ad highlighting Netflix's bingeable quality, and how easily that guidance can go awry.

• 30:20Speaker 02

  Control is when you tell someone specifically to do something. Let's cancel that advertisement that makes us look bad. And then context would be, you know, we're generally trying to connect with consumers. What is making us do this advertisement? And really trying to understand what the motivation is. And then if the person says, "Well, you keep talking how we want to be, you know, must-see TV, kind of essential viewing." And so that's how I came up with this addiction advertisement. And then you could say, "Okay, I can see that the context that I set, which is we want to be seen as essential, you know, wasn't specific enough. And instead, we want to be seen

• 31:05Speaker 02

  as a part of everyday life, but not generating, you know, addictive behaviors, and that I needed to improve the context." And thus, by improving the context, it would probably have good application in many other parts of the business in addition to, say, this group doing the advertising.

• 31:29Speaker 01

  Leading by context, it's an attractive idea, to be sure. Who would argue against freedom of choice? But in a global, sprawling organization, are there any risks to this type of leadership? Or is risk exactly what Netflix is trying to cultivate?

• 31:47Speaker 02

  Remember that all of Netflix is managing on the edge of chaos.

• 31:53Speaker 01

  I'm Maria Konikova. We'll get into all of that right after this.

• 32:06Stephen J. Dubner?

  Freakonomics Radio, sponsored by Granola. You know that moment when a meeting ends and someone says, let's circle back on this next week, and everyone nods, but no one writes it down? Then next week rolls around and it's radio silence? That's why Granola exists. Granola is an AI-powered notepad built for the way real people actually meet. You take rough notes like you normally would, and in the background, Granola securely transcribes the meeting. Then it turns everything into clean, structured, actually useful notes when the meeting ends. And the best part? Granola works through your device's audio, which means it integrates seamlessly into the video conferencing tools you already use. No setup, no awkward bots. It's just your normal meeting with superpowers. If meetings are eating up your day, Granola is a no-brainer. You can try it totally free.

• 32:50Stephen J. Dubner?

  Just head to granola.ai/freakonomics. That's granola.ai/freakonomics to get your time back. Try it for free at granola.ai/freakonomics.

• 33:08Stephen J. Dubner?

  Freakonomics Radio is sponsored by Quince. You know those pieces in your closet that you find yourself wearing on repeat? The sweater that goes with everything? The perfect pair of pants? Or the tee you somehow always reach for first? Those are the pieces that make getting dressed easy, and that's what Quince does best. Quince focuses on high-quality wardrobe staples made with premium materials like 100% Mongolian cashmere, organic cotton, and merino wool. The styles are timeless, versatile, and designed to become the dependable pieces you reach for day after day. And it's not just clothing. Quince brings that same approach to everything they make, from hotel-quality bedding and bath to kitchen essentials and thoughtfully designed furniture. Find your next fall favorites at Quince.

• 33:52Stephen J. Dubner?

  Download the Quince app for app-exclusive offers, or go to quince.com/freak. Get free shipping on your order and 365-day returns. Now available in Canada and the UK, too. That's Q-U-I-N-C-E dot com slash freak.

• 34:13Stephen J. Dubner?

  Freakonomics Radio is sponsored by hotels.com. Hotels.com helps you find and book the right stay for work faster. With business preferences, save your travel must haves like gym access or breakfast just once, then get tailored results whenever you search for work travel. Plus, with a free membership, you can save up to 20% on hotels and earn rewards on every stay for future travel. Book now at hotels.com. Visit hotels.com for details.

• 34:49Speaker 01

  Today, we're talking with Reed Hastings, co-founder and now co-CEO of Netflix. His new book, No Rules Rules, which he wrote with business school professor Aaron Meyer, unpacks why Netflix is the successful global content machine and streaming powerhouse it is. We heard earlier that Netflix likes to lead with context. That means its leaders try to educate on what kinds of decisions would help Netflix thrive. Employees can and are encouraged to call some pretty big shots on their own. For instance, content buyers can pull the trigger on multimillion dollar movie or documentary deals without a supervisor's approval.

• 35:33Speaker 01

  But leading by context only works in certain types of corporate structures. It's hard to imagine, say, a hospital running without specific protocols in place. If everything has to be coordinated by the minute, you need clear rules and regulations. And so Netflix is deliberate about how it sets up its organizational structure.

• 35:56Speaker 02

  You know, one form of efficiency is coordinating all the tactics so everybody knows what's going on. And then the problem is, as you get big, that gets harder to do, you get slower. So another way to operate is more loosely coupled, where lots of different departments are doing different things. And then the danger is that they're going in different directions. So you want them to be aligned, but not tightly coordinated. And to do that, you have to really set a lot of context, use a lot of examples, a lot of storytelling. But remember that all of Netflix is managing on the edge of chaos. Okay, you want to be right up to that edge where it's dynamic and there's freedom.

• 36:38Speaker 02

  It has not fallen into chaos, but it's kind of right on the edge of it. And again, that's only appropriate for some types of businesses.

• 36:47Speaker 01

  Could you see something happening that would make you go over that edge in some area? Is that something you're afraid of? Or do you think that you've got a pretty good tightrope-walking technique down?

• 36:59Speaker 02

  I'm sure, you know, that in certain groups, we get too close to the edge and then we have to pull it back and be more clear about the context of what we're trying to do. So it's definitely like the blind person figuring out where the stove is in the room. You've got to be ready to get a little bit burned and feel the heat wherever you can.

• 37:20Speaker 01

  Many companies today are focused on error prevention. But to Hastings, it's not all that risky to allow employees to make a mistake. It's riskier not to. No risk-taking would mean Netflix losing out on top talent, overlooking a shifting marketplace and failing to conceptualize innovations. As Hastings writes, Netflix is less like a perfectly synchronized orchestra with a conductor directing how musicians should hit a note or hold a beat. It's more like a jazz band, one where all the musicians know the rules and how to play, but nothing is scripted or planned.

• 38:01Speaker 01

  I was fascinated by that analogy and I think that jazz obviously sets context and everyone has to respond to each other. I'd love for you to talk a little bit about it.

• 38:09Speaker 02

  If you think about a conductor in an orchestra, it's an incredible thing, the level of synchronization, the level of precision, and it creates great art. So let's just say symphonies and orchestras are amazing. Okay, and then there's this renegade little branch of music and you know, people are riffing off of each other and responding and everyone is highly skilled. To be able to do that, you need incredible practice and a great ear. And we model ourselves more on that. It's less on top-down precision, it's less on efficiency and order and synchronization. And so it's a little bit chaotic, also very beautiful in a different way.

• 38:52Speaker 01

  It's a beautiful thought indeed. But in practice, when you're talking about an organization as large and multifaceted as the one Netflix has become, how does it work in reality? If every musician needs to be performing at peak, constantly reading and reacting and being ready for that virtuoso improv solo, doesn't that take a toll? Wouldn't you feel the pressure to perform no matter what? So if I'm someone who's a high achiever, who's incredibly motivated, who's kind of at the top of my game and loves what I'm doing, so how do you prevent me from just basically killing myself because I'm working too hard? And I want to make sure that I don't get fired. It's not that I'm scared about getting fired,

• 39:37Speaker 01

  it's just I want to keep showing you just how good I am.

• 39:41Speaker 02

  Well, you know, to the degree that you've got manic tendencies and you tend to be, you know, obsessive about all those things, I'm sure it's hard. But what we try to do is reward people who, you know, show good balance and accomplish a lot and are trying to run the marathon in terms of sustainability.

• 39:58Speaker 01

  How are you able to... Accomplish that yourself. You allude to some rocky starts where you had issues in your marriage that you had to kind of work through and that there did seem to be a work-life balance issue.

• 40:12Speaker 02

  Yeah, I mean, these were all the stories from my first company, Pure Software, where there were a lot of things that didn't go right, both in my family life and in work life. And it was out of some of those painful lessons that we really started thinking about the culture at Netflix. And in so many ways, what this book is, is all the things I wish I knew when I had started that first company and about the importance of being direct and honest in a professional setting. And so, again, it's a story after story about the problems with not being honest and the benefits of being, you know, more honest than most people typically are in companies.

• 40:55Speaker 02

  In my first few years as CEO at Pure Software, I managed the technology well. But I was still pretty miserable at the people part of leadership. I was conflict avoidant. People would become upset if I addressed them directly with a problem, so I tried to work around issues when they came up. I traced this personality trait back to my childhood. When I was a kid, my parents were supportive, but we didn't talk about emotions in our house. I didn't want to upset anyone, so I avoided difficult topics. Without much thought, I carried this attitude over into my work. At Pure Software, for example, we had a very

• 41:38Speaker 02

  thoughtful senior leader named Aki, who I felt was taking too long developing a product. I got frustrated and upset, but instead of talking with Aki, I went outside the company and struck a deal with another set of engineers to get the project going. When Aki learned what I'd done, he was furious. He came at me and said, "You're upset with me, but you go around my back instead of just telling me how you feel?" Aki was dead right, the way I'd handled the situation was terrible, but I didn't know how to openly talk about my fears. The same problem affected my personal life. By the time Pure went public in 1995,

• 42:20Speaker 02

  my wife and I had been married for four years and we had one young daughter. It was the pinnacle of my professional life, but I didn't know how to be a good spouse. The next year, when Pure acquired another company 3,000 miles away, it got harder. I spent half of each week away, but when my wife expressed her frustration, I would defend myself, saying that everything I did was for the good of the family. When friends would ask her, "Aren't you excited about Reed's success?", she wanted to cry. She was distant from me, and I was resentful of her. The problem turned around when we started going to a marriage counselor. He got each of us to talk about our resentments.

• 43:03Speaker 02

  I began to see a relationship through my wife's eyes. She didn't care about money, she'd met me in 1986 at a party for returned Peace Corps volunteers and had fallen in love with a guy who had just spent two years teaching in Swaziland. Now she found herself hitched to a guy obsessed with business success. What was there for her to be excited about? Giving and receiving transparent feedback helped so much. I saw I'd been lying to her. When I would say things like, "Family is the most important thing to me", "I've been missing dinners at home and working all hours of the night", and now I see that my words were worse than platitudes. They'd been lies.

• 43:46Speaker 02

  We have both learned what we could do to be better partners, and our marriage came back to life. We've been married now for 29 years and have two grown kids. Afterward, I tried to take the same commitment to being honest back to the office. I began encouraging everyone to say exactly what they really thought, but with positive intent, not to attack or injure anyone, but to get the feelings, opinions, and feedback out on the table where they could be dealt with. As we began giving increasing amounts of candid feedback to each other, I saw that getting feedback had an additional benefit. It pushed the performance of the office to new levels.

• 44:33Speaker 01

  Feedback is crucial in the world of Netflix. You're expected to not just receive it with a smile, but be ready to give it at any point. To everyone. Your subordinates, your superiors, maybe even someone you don't work with directly. It can seem intimidating to an outsider like me, almost cult-like. But it comes from a place of personal experience. Because Hastings has made mistakes. One, perhaps the single largest mistake in Netflix corporate history. In September 2011, after Netflix's streaming service had gained its foothold,

• 45:14Speaker 01

  the company announced that it would spin off its DVD service into a platform called Quickster. The idea proved extremely unpopular, and Netflix pulled the plug on the concept shortly after the announcement. It's interesting that even in a culture that's as open as yours, it seems that you've still been evolving because there have been moments where in retrospect, people said they wished they had spoken up and they didn't, like Quickster.

• 45:40Speaker 02

  Well, we're constantly evolving. I mean, I tell new employees that, you know, sometimes I get asked, "How are we going to preserve the culture as we grow?" And I always say, "The goal is not to preserve it, it's to improve it." Humans in a hierarchical organization are naturally deferential, and you kind of get the model that the goal of your job is to please your boss. And we try to reorient people to the goal is to serve the organization, and you should tell your boss what you're doing. But ultimately, it's up to you to figure out how to best serve the organization and the customers.

• 46:13Speaker 01

  We know hindsight's 2020. So tell us a little bit about, you know, pre-Quickster launch. What was going on? Because I think that this is an opportunity to illuminate some of the cultural thinking around feedback.

• 46:27Speaker 02

  Well, Quickster involved separating DVD and streaming into two different services. And we were very obsessed about doing that so that we could focus on the streaming service. And it also involved a 60% price increase for consumers to go from $10 to $16.

• 46:46Speaker 02

  And a number of leaders in the company were very scared that the customers would react quite poorly to this. And we knew that there would be some tensions, but I vastly underestimated because I could see how important it was to our long-term survival to separate those two. That clouded essentially my judgment about how normal people consuming Netflix would feel about it. And there was a number of executives who were panicked, but they thought, oh, well, probably Reed is right. He's been right before. And they didn't know that their peers were also very nervous. And afterwards, when we all compared notes of how did this happen, we realized that

• 47:30Speaker 02

  if all the peers had been talking, then they would have all ganged up on me and prevented Quickster. So we instituted something we call farming for dissent, where on these big decisions, everybody has to write down in public in a shared document how they feel about the idea and their judgment about it. So having that sort of public accountability about what they think and no one's going to be perfect on it helps a lot.

• 48:00Speaker 01

  When Quickster proved a colossal failure, the mistake was Hastings' own. I asked him, what if it's an employee that screws up on a massive scale? For instance, what if the hugely popular show Stranger Things, whose second season costs Netflix up to $8 million per episode, had flocked? What then?

• 48:23Speaker 02

  Well, we're fortunate that even our biggest shows are the most 1% of our budget in viewing. So I'm glad that Stranger Things was a great success, but we've had other shows that haven't been. But Quickster was a pretty big one. You know, if you want to judge by the stock market, which is just one test, I think our stock went down 75% over that year. So that was a pretty big one.

• 48:47Speaker 01

  It's one thing to say you'd never hold someone responsible and you won't get fired for failing. But, I mean, if I worked at Netflix, I might think, well, maybe I will get fired if it's a big enough failure, if I actually screw up enough.

• 48:59Speaker 02

  Well, that's probably true. I mean, to the degree that it was a big enough failure, you'd have to question, why were we choosing to have you still do that thing? But you're not going to support a lot of innovation if you do that very often. So for the most part, you want to make people feel like, if anything, they would get fired for being cautious. But again, avoiding firing is not very motivating. We really want to work on the inspiration. And how can you make a real contribution? And yes, just like when you're a professional athlete, you could get injured on any game. But if you spend your time and energy focusing on what if I get injured, you're never going to play your best. So you have to play light and you have to will yourself to not think about those injuries,

• 49:43Speaker 02

  even though they can happen. So think of it more like that. We're trying to draw out the best performance of people so they can play epic games.

• 49:53Speaker 01

  Epic games. It's not for nothing that Hastings views Netflix not as a family, but as a sports team. Each position should be filled by the best athlete, and everyone has to be the best. It's a tough ask, especially when your team goes from regulation-sized to spanning the globe. How does it change running a company that's the underdog to running a company that's actually the leader and the darling and the one that everyone looks to?

• 50:27Speaker 02

  You got to be a little more careful. You got to be a better role model, be more consistent when you're, you know, we're not quite the leader. YouTube is about seven times as much viewing as us. But, you know, we're in the top five, so your point is valid, which is we're one of the leaders. So we really try to think through, you know, how do we help each culture have a voice? And so thinking about how are we genuinely good for Mexican storytelling? And how do we find great Mexican stories to share with the world? Or Spanish, you know, or Korean?

• 51:02Speaker 01

  That's not the only thing a leader like Netflix needs to think about. Companies need to plan for extreme circumstances. But if nothing else, the present moment has illustrated the limits of any future planning.

• 51:16Speaker 01

  Covid, of course, has been a boon, at least for now, for the streaming services. But it made me wonder how Netflix would handle a change of a similar scale that was not actually conducive to its core business.

• 51:29Speaker 02

  We've been very fortunate during Covid that people are staying at home, watching entertainment, and so our business has grown faster than ever. So it's more the challenge of hiring than any other challenge.

• 51:42Speaker 01

  I recognize that Covid is not the best example in the sense that Netflix is growing right now, but your job is to see those things potentially. So, given that your culture really is so talent dense, how do you go about dealing with that if you do have to actually contract?

• 52:01Speaker 02

  Well, it's, you know, very hypothetical. We went public at 200 people about 20 years ago, and now we're about 8,000. So, negative things can happen, and you have to deal with unforeseen circumstances. The basic thing that we're trying to get through is investing in the human capacity, not so much in rules, but in good judgment. And that makes people a little nervous, because it's not necessarily objective. And I say, no, judgment's not objective. Judgment is judgment. And so it's leaning into judgment and developing the people, and then they can handle either very rapid growth, or potentially shrinkage, or various competitors, or new opportunities.

• 52:43Speaker 01

  So how does Covid actually affect that culture-wise? The fact that you can't travel anymore, the fact that so much of the Netflix culture is about communication and feedback and all of these interactions. I can only imagine that it's more difficult to replicate that in a Zoom environment than it would be for businesses with slightly different cultures.

• 53:05Speaker 02

  Well, Covid is a, you know, huge and terrible thing. But again, organizationally, we're really set up to adjust to challenges and opportunities. And so, as an example, in that first weekend, you know, we moved hundreds of workstations into people's homes that are animators, who, you know, produce animated feature films. And I didn't even know about it. And, you know, I got told about it about a week later.

• 53:31Speaker 01

  What about the original content with all of the shutdowns?

• 53:35Speaker 02

  We're fortunate to be back to producing and filming in Europe, in Asia, and little bits in the US that's still got a ways to go. But we're running full ahead in Europe, which is great for us.

• 53:48Speaker 01

  Great. I think a lot of people will be very happy to hear that, who are scared that there will be no new television to watch because nothing is getting filmed.

• 53:55Speaker 02

  The Crown is coming this winter, so everyone will get their fix.

• 54:04Speaker 01

  But maybe this can also serve as a time of reflection. Huge changes can happen in a heartbeat. You can't plan for them, but can you react to them? And this is just as important a question to ask. Do you want to react to them? Or do these changes herald a market shift so profound that you want no part in it? What if it's the kind of shift that inspired Hastings to take a chance on an idea no one wanted a part of? Not even Blockbuster. Are you still feeling that inspiration?

• 54:40Speaker 02

  Yeah, I mean, for me, we're just beginning. You know, we're strong in the US, but we're so, so small around the world. And we just have an incredible opportunity to share stories. And we want to have entertainment, really bring people together and connect and, you know, see each other in all kinds of ways, not only between countries, but also between social classes, between genders, between races. And entertainment can play such a positive role in all of that.

• 55:09Speaker 01

  What do you see as new opportunities? First was the transition from DVD to streaming. Then we had the transition to Netflix original content. Do you see that being the future?

• 55:20Speaker 02

  Well, the big thing we're working on is succeeding around the world like we have in the US. So we want to be as good at German content as we are at American content and as good at Brazilian content and Korean. And that's a long work in progress. So we're investing a lot there.

• 55:37Speaker 01

  How do you make sure that you don't miss the next opportunity? And do you feel confident that you will be in a position to just completely change gears if need be?

• 55:51Speaker 02

  You know, it depends, I guess, on what the substitute is. So if the substitute is other digital phenomena, video gaming, or, you know, some kinds of phone interaction, or AR, or VR, then we'll probably do fine, because, you know, that will also cross, integrate with, like, great television stories, movies, and series. To the degree that the substitute is everybody's meditating, and then they don't bother with entertainment anymore, then that's a radically different proposition. And typically, companies have a hard time with that. Like Kodak might have been able to produce digital cameras, but were they ever going to become Instagram? Not really, because the substitute for Kodak was so radically different

• 56:34Speaker 02

  in Instagram as a way of sharing memories and photos, that they probably had no hope. So again, it depends on what the innovation is.

• 56:45Speaker 02

  With Netflix, I hope to promote flexibility, employee freedom, and innovation, instead of error prevention and rule adherence. At the same time, I understood that as a company grows, if you don't manage it with policies or control processes, the organization is likely to descend into chaos. Through a gradual evolution, over many years of trial and error, we found an approach for making this work. If you give your employees more freedom, instead of developing processes to prevent them from exercising their own judgment, they will make better decisions, and it's easier to hold them accountable.

• 57:28Speaker 02

  This also makes for a happier, more motivated workforce, as well as a more nimble company.

• 57:34Speaker 01

  Netflix is a remarkable success story, and it seems clear that the unique culture that Reed Hastings has created plays a large role in that success. But I can't help but wonder, is that all there is?

• 57:50Speaker 01

  Just looking at your overall trajectory and at Netflix's overall trajectory, what role do you ascribe to luck?

• 57:57Speaker 02

  Oh, huge. I mean, a number of times, an incredibly lucky thing happened. And you can't predict it. You know, I'm lucky to be healthy. I'm lucky to be in California. So you just make what you can and do the best you can. And in our case, what we did with this book is really try to lay out all the lessons that we've learned so that future organizations can start from a better place. And I'm sure they will innovate beyond what Netflix does. And that, you know, in 25, 30 years, people look back and say, yeah, that was good. But we've gotten so much better.

• 58:40Stephen J. Dubner?

  That was Maria Konnikova in conversation with Reed Hastings about his new book, No Rules Rules: Netflix and the Culture of Reinvention. It was co-authored by Aaron Meyer and published by Penguin Press. As this book club format is still a work in progress, we would love to hear what you thought. Let us know at [email protected]. Hope you enjoyed this bonus episode. We will be back with a regular episode, as always, on Wednesday at 11:00 PM Eastern Time. Until then, take care of yourself, and if you can, someone else, too.

• 59:17Stephen J. Dubner?

  Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Mary Deduke. Our staff also includes Alison Kreglow, Greg Rippon, Daphne Chen, Matt Hickey, Zach Lipinski, and Corinne Wallace. Our intern is Emma Terrell. We had help this week from Dan DeZula. Our theme song is "Mr. Fortune" by The Hitchhikers. The other music was composed by Luis Guerra, with additional music this week by Michael Riola and Stephen Ulrich. You can get Freakonomics Radio on any podcast app. If you want the entire back catalog, use the Stitcher app or go to Freakonomics.com, where we also publish transcripts and show notes. As always, thanks for listening.

• 1:00:04Speaker 04

  Stitcher.

• 1:00:10Stephen J. Dubner?

  Freakonomics Radio is sponsored by Ozempic. Innovation happens through rethinking what's possible. And when it comes to GLP-1s, Ozempic pill does just that. Learn more about Ozempic semaglutide tablets, 4 and 9mg, by calling 1-833-OZEMPIC or visit Ozempic.com to view the medication guide and ask your doctor what's possible with FDA-approved Ozempic pill.

• 1:00:40Stephen J. Dubner?

  Freakonomics Radio is sponsored by US Bank Smartly Checking and Savings. You know, US Bank Smartly Checking and Savings are bank accounts that work harder for you. You get better savings rates, fee waivers, and rewards from day one, so you spend less time worrying about money and more on what matters. Sign up for US Bank Smartly Checking and Savings today at usbank.com/smartly. Member FDIC. Copyright 2026 US Bank.

• 1:01:12Speaker 04

  When you shop at Publix, you know you and your family are getting the best products. From freshly baked bread to Greenpeace organic ice cream to delicious subs custom made just for you. Publix, where shopping is a pleasure.

• 1:01:26Speaker 05

  This episode is brought to you by Charles Schwab. Is there a right time to sell a stock? Are you taking the right risks with your portfolio? Financial decisions can be tricky, and often, your own cognitive and emotional biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab, can help. Join host Mark Reapy as he offers practical solutions to help overcome the cognitive and emotional biases that may affect your investing decisions. Listen at schwab.com/financialdecoder.