MDA Distinguished Speaker Series: Netflix CEO Reed Hastings

It's a treat to be here with all of you. I never thought I was gonna be an entrepreneur. I thought I, well, I didn't know exactly. My first job out of university was a high school math teacher. And I did that for a couple of years. And I really wanted to do something that was stimulating more mentally, that was a harder challenge. And so I thought, well, maybe computer science would be that. The lucky break of my life was getting into Stanford Graduate School in computer science in the mid 80s. So I got a degree there. And just being around other entrepreneurs, I remember thinking again and again, wow, if that person can do it, I can do it. And I had just never been around entrepreneurs. And so I deified it. I made it seem like, you know, Bill Gates, you know, amazing. And I mean, he is an amazing guy. But, you know, many of the other entrepreneurs were just regular human beings who were passionate about an idea. And when I was in graduate school, I was surrounded by people thinking of ideas. And I was programming a lot. I was an engineering student. And I had a great idea. So I realized that, you know, a lot of the time I was typing on these workstations. And then I was going to the mouse and I was typing and going to the mouse. And it's kind of inefficient, right? You know, you're always doing this and finding the keys. And the best thing in the world would be a foot mouse. And if you could control it with your foot, you know, you could type and you're like, you never have any of this, right? And I could be really fast, all these multi-window systems. And I worked with a mechanical engineering student to make a foot mouse. And I was so excited about patenting this device. And I was going to be the foot mouse company. And, you know, like all my friends were sick of me because all I would do was like touch their feet and try to feel how they were on the foot mouse. And we got a couple of the prototypes done. And it was so difficult because after, even me, after like two hours, my leg is cramping. I'm like having to do special workouts. And then on the ground, it's very dirty. And so the mouse gets really gross and then you got to clean it out. And, you know, and it was like, and it was so disappointing because I'd worked so hard and I thought I was an entrepreneur and I had a business plan. I realized nobody wants a foot mouse. And even to today, you know, 30 years later, no one has done a foot mouse. Okay, which just shows you, there really was not a market. And the hardest challenge for all of you is finding product market fit. Finding a product that people actually want and is relevant. And what I would say is you just can't tell, okay? I have been very lucky because the foot mouse didn't work out and I moved on. And two years later, I had a different idea for a software tool. And that one, everybody needed. I was able to build a company, it grew to a big success. We went public in 1995 with Morgan Stanley. And then because that succeeded, I was able to do Netflix. And so there's a lot of luck of being willing to try. So I compare being an entrepreneur is that you have to be so stupid that you'd be willing to jump out of a plane with no parachute, because you assume a bird is gonna fly by at the right time and you're gonna grab it, okay? Because I look back at the decisions I made and you know, they were not rational. But I think you fall in love. And being an entrepreneur is fundamentally about falling in love. And you fall in love with an idea, with your team, and you do crazy things. And some of the time it works out. And you know, love, it's not rational. You don't like decide to be in love. All these folks here have been schooled on matrices and there is a lean startup entrepreneurship framework. We've de-risked the whole thing. It's very game of love. And none of that works. None of that works. Yeah, none of that works. One question, how do you view failure, right? The mouth doesn't work to you. Is that failure or is that, what is that, right? Yeah, it hurts. Because like falling in love, it's a very emotional experience. You have to have so much positivism and energy. I was selling the foot mouth so hard and I was trying to create believers, you know? And you know, and then to realize it's not gonna work. You get a lot of self-doubt, you know? And again, I went, I mean, maybe like you with the law and stuff. And then I went and practiced. I wrote software for other people and I loved it. I mean, you know, it was a good living. I had a job, you know, so it was fine. You see, you lick your wounds and then one day you kind of went, okay, I'm going back in again. And then it was about two years later and most good ideas, they build on other things. They like synthesize some sets of ideas. There's very few things that are out of the blue, completely different. And so I had an idea for, at the time before Java was popular, C programming was very popular and there was millions of C programmers. And C is a great language for some things but has a series of problems that cause computers to crash and programs to crash. And I invented a way of dealing or catching many of those problems that no one had had before. So this first product Purify was for C programmers on Unix systems. And that product then was, you know, the target market C programmers were ecstatic about. And so on the back of that, I was able, my first, I didn't know any venture capitalists and this was a programmer tool. So it was, you know, kind of not exciting market but I got 20 people all to invest $20,000 into getting a company started. You know what I love about hearing these stories? It means all of us, when you cut us, we bleed, right? We're all mortal human beings. And it's the same, just to share, like my first startup, not even the first startup, my first thing was I was convinced the Singaporean film was gonna do really well. I financed it, I put a lot of my own money from my investment banking book and boy, did I lose it all. I mean, I lost, I didn't lose some, I lost all of it. Because did the film get finished? The film get finished, but the distributor just took the whole top, you know, the cuts and we just didn't make the end. Netflix would never do that. You should do a movie now and we will take it around the world. But I did, from that learning, I did Asian Food Channel. I realized a distributor has a lot of information, right? I mean, and coming back to Netflix, you guys know what people like and not just in the US, globally, right? Just watching the human behavior. So I wanna shift the gears a little bit, talk about some of the gut-wrenching moments that you may have had at Netflix because there were certain that I didn't make it through. One of the things is, you know, can you imagine, we always talk about the pivot, about how you do something and it's going well and then one day you wake up and you say, it's not going well. Well, you remember Netflix, their original business model was you were shipping DVDs through the mail and then one day, maybe you woke up and you said, this is all gonna go to pieces, it's online streaming. By that time, you were a public company, you had a board of directors, someone asked you the question, so how did you tell your board of directors, did you go in one day and say, hey, you know this great business we have, there's DVDs, that's just gonna go to kaput. We're gonna scrap it, we're gonna eat our own young and we're starting from scratch. So I need X amount of money to do this and then you smile at them. Was it sort of like that or? Yeah, if you're so lucky to find a product market fit and then you build a company around that product, that company grows and your danger is that that's the only product you ever do because to win in the marketplace, you must be great at it and so you're very specialized around your initial product market fit and then eventually, in all cases, the market shifts. Now there's new technology, new problems and so the second stage is can you shift with it and in my first company in Netflix, we were very good at C programming tools and then Java grew and we said, ah, Java's stupid, very slow, stupid language and of course, it just kept growing and getting better and better and the market for C programming shrank and we ultimately got acquired by another company who was more forward looking. So to answer your question, I had the personal conviction of screwing up, okay? I had made a mistake in the first company of being too focused on the needs of C programmers and not enough about the small but growing set of Java programmers. So when DVD was very popular, I could see it growing. I was like, that's the C programmers, okay? But over here, this streaming segment, the parallel and so you at least, in the second company, try to make new mistakes. You don't want to make the same mistakes again and so it was easy because I had pattern match and that we should lean forward into streaming which we started in 2007 and then the streaming has grown and grown and DVD kept growing until 2013, only in the US and then DVD's been heading down. Now, globally, we're 80 million streaming and only five million DVD. But it sounded like it wasn't sort of a ultimatum but you were leaning into risk. You were telling the board, we still want to act like a startup. We need to invest in this thing and that's how you kind of communicate. I would say, it's not that we were really leaning into risk because we were leaning into expanding in streaming and it might feel, again, if you're lucky enough, all of you to have product market fit, you grow your company sometime between the third year and the 20th year, then you'll find that the product as you envisioned it has to change. Of course, all products are like that and so we were ready for it and I think for all of you, it's just planting a seed that again, if you succeed in the entrepreneurial dream, that then you realize the invention doesn't stop. You have to keep evolving with the market. But that takes leadership, that takes foresight, that takes a long-term view. We're lucky in Singapore, we had a gentleman called Lee Kuan Yew who had that vision. I feel like a lot of companies, especially when they're not founder-driven anymore and they're just caretaker management, they wouldn't necessarily do that. Do you feel that's a fair assessment that only founder-driven companies would kind of do that? No, I think there've been a number of companies that have evolved, Cisco is an example that through multi, multi generations that we're not. So sometimes they're founder-driven and if you're a founder, you love the mythology that only the founder can do it. But I think if we look over the long-term, two, 300 years, you want Singapore to continue to prosper, we want Netflix to continue to prosper, you have to get, the founding part helps to have a good heritage and then you need to build on top of that and go further. Yeah, but actually, thinking about it, now there are also a couple of founder-led companies which also just decide that they're also not gonna do that, like a lot of family-owned companies don't do that because they're risk-averse. Which brings me to the question, it's about culture. And I know Netflix has been thoroughly investigated on the internet, you even put your slides, which I read, the best one was, what was it? Adequate performance generates you a very generous severance pay. Talk about your culture, why is it so important that you're a big company but you still gotta work like a startup? Hopefully some of you have Googled Netflix culture and how many people have read the slide deck? Okay, good, so the rest of you, the best gift I can give you for the day is to go read the slide deck online about it. And it's not that you will want to do that. Some parts you may or may not want to, but it's being explicit about the cultures you're trying to build as you grow. And you may choose to do that or other things. And everything in there, it's in reaction to the first company. So in the first company, we had too many processes. Every time something went wrong, we set in place a process to make sure that that mistake didn't happen again. And it sounded good to engineer out the errors in the way we operated. But in fact, it built a very bureaucratic system where the values in the company were who can follow the rules. And then when presented with a market challenge like the rise of Java, we had a whole bunch of people who were good at following rules, not people who were good at first principle thinking. So the company had selected for process compliance. And we did very well in the C programming market because we were highly optimized for it. And so in the second company, I realized we want to under optimize for the current market to be a little bit loose, and to have thinkers because it's all about the people quality. And the fundamental insight is in the short term process helps you, but in the long term, it's great people who are thinking that help you. And so you want to optimize for the long term by having very flexible structures, minimum process, everything that attracts great talent. You asked about our policy that says adequate performance gets a generous severance package. So it's like a sports team, and you're never going to win a championship if every position, you're not always trying to upgrade that position. So we think about our company as a team, a professional sports team, and different from a family. You know, family is great with love, but many families, it's kind of dysfunctional, right? Not everybody gets along, but you're there together anyway. That's a good metaphor, but not so good for a company. I think a professional sports team is a better metaphor. Every player, me included, we have to be good for our position every year. And so what's exciting about that is if you're on the Netflix team, everyone around you is very talented. So many people want to be a team player, but not everybody has the skill, like in football or soccer, to do a blind pass. You know, it takes a lot of skill to do that. And what we try to do is attract the people who can do that. And then we have minimum process around it. And we're still learning. It's not perfect in what we do. So I'm going to try to solidify that idea with a specific example, right? So one of the things that people don't, maybe I'll give some context, is that in the media world, certainly in the United States, people are very afraid of serialization. I think the majors, if you look at the top 10 shows, it's Third Rock from the Sun, it's a lot of comedies, which you can turn up, watch, and then you don't have to watch the next one. In Asia, we're all about hyper-serialization. You know, my wife's addicted to Korean dramas and so on and so forth on Netflix. You guys invented binge viewing. You hyper-serialized and you released it on the same day. Now, was that the sports team at Netflix thinking about it? Or how did you come to that crazy idea? You remember I said before about ideas, you pull a couple other ideas together. So the original binge viewing for us was DVD box sets, and we would get these box sets of the HBO content, and we'd watch five episodes a night. So we'd just put the DVD in, you know? But that was limited by DVD and the cost. It was like $80 US for a box set. And so what we were able to do is take that insight of control over the experience and marry it with the internet, and then that's what became binge viewing. So you often, you take ideas from your experience, from your friends, combine them in a unique way, and then once it goes, like binge viewing, then you take off and run with it and be pioneering of binge viewing. But even we didn't recognize binge viewing. I know because we're successful, it's probably, you know, you look at us and you say, wow, they're so great. But when binge viewing first came up, we thought it was a bad term because it evokes binge drinking and binge eating, and so we tried to soften it. No, no, it's feast viewing, feast viewing. And it turns out that's very soft, who cares? The people like binge because it's got that edge to it. But we didn't invent it, we didn't see it. The customers invented it, and the customers made it real, and we finally relented and embraced it. So there's many things that we could have been done better over the years, like understanding the concept around binge viewing, that we get credit only for not stopping it. So I think we've got time for two more questions, from me at least. Again, you bet the house on the house of cards. You don't have to make shows, you're gonna make shows. It's very expensive, Kevin's not cheap. Again. It was a great, this is four years ago, and it was our first big original content. And unfortunately, we were only in the US. And so we couldn't secure the global rights. So what we did is we got as many rights as we could afford. We launched the series, it's been successful. And now as we expand, for example, here in Singapore, we only have one through three right now. We'll have season four coming up. So we're going back and trying to fix what we had, just on our first two originals, House of Cards and Orange is the New Black. All the other originals, like Narcos, we have full global rights. So our dream is everybody gets the same content, all around the world at the same time. I love Narcos. And Narcos is a great show, and where we've got many, many more coming. And so think of it as House of Cards and Orange, we're sorry that we don't have all the rights we want, it's coming. But on every other show, it's global content. And we're trying to produce around the world. So we've got a great Korean movie we're producing, Okja, with a director who did Snowpiercer. We're doing Japanese anime. We'd like to do local content here. We've got a show in France we're debuting around the world. So what we want to do is invest locally in production, make a great global title and share the world's culture. If you think of all of the important challenges that the world has, you know, over the next 20, 50 years, cultural understanding is a key part. And so what we want to do is get titles shared around the world and do spectacular productions all around the world and share them broadly. So why don't we open it up for questions? Yeah, I was gonna say, time's up, but that means time's up for us to talk, right? But now they've done, okay, excellent. Questions, guys?