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Swimming against the stream: The Netflix story

IFM_ The Netflix story
Netflix earned some 7.7 million new subscribers in the last three months of 2022

According to legend, Netflix co-founder Reed Hastings spent the best USD 40 of his life in 1997. He was angry at the time. He had recently received a sizeable fee for returning a rented copy of Apollo 13 six weeks late. Reed questioned why the movie renting cost couldn’t be more like the gym membership one. At the time, DVDs were a brand-new, underutilised technology and were about to take off in the American market. Boston-born Hastings created a business plan for mail-order movies. Within a year, DVD-by-post turned streaming behemoth Netflix.

After 25 years, the founding tale of Reed Hastings is now considered lore in the business world. Regardless of how much of it is true, his achievement is evident. Netflix, a cult-status start-up that generated close to USD 30 billion in revenue in 2021, has evolved into a Silicon Valley entertainment stalwart. There are worries about how long Hastings will stay at the helm as so-called “streaming wars” have surfaced, with Amazon Prime Video and Disney+ throwing their hats on the battlefield as well. Hastings has so far guided the ship with conviction.

The Global Internet Phenomena Report by Sandvine says that Netflix was responsible for 15% of global internet traffic usage in 2022, followed by YouTube (11.4%), Disney+ (4.5%) and Amazon Prime Video (2.8%). Netflix also earned some 7.7 million new subscribers in the last three months of 2022, thus bringing its membership to an all-time high of 230 million people. The online entertainment platform’s line-up of new shows has also attracted users to a new lower-priced “Basic with Ads” subscription.

It will also roll out paid sharing in 2023, and it hopes that this will “result in a very different quarterly paid net ads pattern in 2023, with paid net ads likely to be greater in Q2’23 than in Q1’23.”

Nay to the naysayers

Although Reed Hastings would later experience a major epiphany with Netflix, it wasn’t his first flash of genius in the business world. He graduated from Bowdoin College with a degree in mathematics and later told The New York Times that he “found the abstractions beautiful and engaging.” He later completed his master’s in computer science at Stanford. Then, in 1991, when he was 31 years old, he, along with Raymond Peck and Mark Box, co-founded Pure Software, their first company.

The company, which initially provided engineers with a debugging tool, proved to be a successful venture. Before it went public in 1995, revenue increased annually and it was quickly acquired by a rival, Rational Software, for USD 750 million. Wall Street didn’t like the deal, but Hastings didn’t care about it. He told The Times, “I was white-water kayaking at the time, and with kayaking, if you gaze and focus on the problem you are far more likely to encounter danger. I concentrated on the safe water and the outcome I desired. I disregarded the doubters.”

Reed Hastings wasted no time turning his inspiration for Netflix into a reality. He founded the company in 1997 alongside businessman Marc Randolph.

The rental battles

Two hundred thirty-nine thousand people joined Netflix in its first year, and it didn’t take long for its distinctive red DVD envelopes to spread throughout the country and abroad. By positioning the company at the forefront of entertainment and technology, Hastings created a stir.

In 2000, Netflix introduced a monthly flat cost, eliminating the need for late fines and due dates. Initially, Netflix offered a pay-per-rental approach for each DVD.

“We could sign up early adopters because it was still a dial-up, VHS world, and most video stores didn’t carry DVDs,” he told Inc.

Before its initial public offering in 2002, when it listed its shares at USD 15 per share, the company continued to grow. The business reported its first profit in 2003, earning USD 6.5 million on USD 272 million in sales. In 2005, it shipped out a million DVDs per day after its earnings soared to USD 49 million in 2004. Yet, 2005 was when DVD sales in the US market peaked at USD 16.3 billion.

The next objective for Reed Hastings was to enter the world of video streaming. In 2005, he told Inc., “We want to be prepared when video-on-demand happens. Because of this, the business is called Netflix rather than DVD-by-mail.”

Reed Hastings declared in 2011 that Netflix would separate its DVD and streaming businesses into distinct memberships with distinct fees and titles. The DVD side would be called Qwikster, but the streaming service would keep the moniker Netflix.

Netflix share price dropped by 75% by the end of 2011. Hastings initially gambled more but ultimately abandoned his ambitions for Qwikster.

Hastings kept on dominating the movie rental market.

Blockbuster, which formerly had 9,000 video rental locations across the US, declared bankruptcy in 2010 after being weighed down by nearly USD 1 billion in debt and ripped apart by internal conflicts. Just ten years after Hastings and Randolph proposed a USD 50 million sale of their company to the giant of video rentals, Blockbuster went out of business. The meeting ended amid the dot-com bubble with the crises-ridden company’s executives “laughing us out of their office,” according to former Netflix CFO Barry McCarthy.

Throwing out the rulebook

Reed Hastings is renowned for taking a back seat at Netflix. He told Forbes, “Great individuals don’t want to be micromanaged. We control by establishing a context and letting people go.”

Hastings presently shares leadership duties with Ted Sarandos, the company’s co-CEO and CCO, who joined the organisation in 2000 and became the co-CEO in 2020.

Reed Hastings and Erin Meyer, a business school professor, wrote ‘No Rules Rules: Netflix and the Culture of Reinvention’ in 2020. The book describes his leadership philosophies and how they are applied at Netflix.

The annual leave arrangements at Netflix are one example of the ‘no rules’ approach. Hastings encourages employees to take time off through public holidays and parental leave policies, betting that employee loyalty and innovation would make up for any productivity losses.

According to him, a highly flexible environment outperforms in the long run; thus, “we’re willing to take some inefficiency narrowly and in edge cases” to develop it.

At The New York Times DealBook Conference, Hastings said he takes six weeks off annually.

He claimed that by spending this time away from the office “hiking some mountain” or “reading something unrelated to work,” in order to get new insights.

The “no rules” attitude has some drawbacks, and Hastings acknowledges that it is not an ideal approach. For example, the controversial “keeper test” asks managers to decide whether they would try to persuade a team member to stay/accept the departure, possibly even with relief, if it happened. The ‘keeper test’ suggests that if their response is the latter, they should immediately let them look for someone else.

“Consider a fantastic athlete. You know that every game presents the possibility of injury, possibly even one that ends your career. But dwelling on that and overthinking can make you feel worse. Hence, we need to hire people who can put that aside and who strive to work with wonderful coworkers because that is what they love—the calibre of their coworkers or the constancy of that—rather than job security,” Hastings advised Variety.

According to Reed Hastings, Netflix’s message is clear, “We’re not a good place to come if job stability is your top goal. We don’t want individuals to experience crippling terror since it is counterproductive. Netflix, however, is searching for a special kind of person who can ignore that fear.”

Reed Hastings thinks that retaining Netflix’s innovative spirit and competitive edge depends on taking a firm stance against mediocrity. At Pure Software, he observed an alternative.

“We ceased to be creative. We all cared about the process. Then the market changed, and we could not make a change, so we eventually sold to our biggest competitor. So it ended up being an outstanding financial success, but it did not become an epic, world-changing company the way we want Netflix to be,” he said.


Netflix’s new advertising strategy modification is more of a U-turn than a change in strategy.

Netflix’s top financial officer said advertising was “not in our plan” in March 2022, reiterating Hastings’ pledge to keep ads off the network. In April, Netflix disclosed its first quarterly subscriber decrease in over a decade, and a falling stock price spurred a quick reconsideration. The streaming behemoth wants additional users through its cheaper, ad-supported subscription.

According to Brian Wieser, president of business intelligence at WPP-owned GroupM, Netflix has “a great untapped audience.”

Netflix may also capitalise on the USD 60 billion-plus advertising industry.

Netflix must fight the idea that its ad-supported service compromises its brand.

“It is scary if the only way to reinvigorate growth is offering cheaper products that worsen the consumer experience, essentially making it more like the dying linear TV experience,” LightShed Partners analyst Rich Greenfield told the Financial Times.

Entrepreneurship requires patience and tenacity, not immediate money.

Reed Hastings admits advertising doesn’t boost growth. He stated that advertising looks easy until you get in it.

“Then you realise you have to rip that revenue away from other places because the total ad market isn’t growing, and in fact, right now it’s shrinking,” he told in 2020.

“We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction,” the company wrote to investors in 2019.

In a July analysis, media company Kantar Group found that paid and free ad-supported streaming grew significantly, while born streaming without advertisements grew slower.

“Value is increasingly important to retaining streamers as platforms compete for screen time or risk being cancelled and replaced,” said Nicole Sangari, vice president of Entertainment on Demand at Kantar Worldpanel Division.

“High stacking [of multiple subscriptions] explains this upward trend of significant [paid and free ad-supported streaming] growth. Consumers were willing to pay less for commercials as stacking increased. As a result, streaming has gone full circle, from avoiding cable TV advertisements to relying on ads to expand,” she added.

Sangari called Netflix’s ad-supported tier a “suitable strategy to combat losing subscribers due to its cost and value.”

She claimed an ad-supported tier “can help win back its lost subscribers,” as customers who planned to cancel can convert to a cheaper package. Yet, fighting password sharing may cost the company clients.

“Their strategies depend on how loyal customers perceive its features and value,” Sangari said.

HBO Max and Hulu have grown while Netflix struggles.

“The platforms have focused on cost-savings to prove value and created a content niche that they expanded: HBO Max with new releases and Hulu with next-day cable to Hulu TV series,” Sangari added.

“Both offered something unique to the market, and with greater competition have focused on diversifying their offerings to drive engagement.”

Good world change

Several industry experts appreciate Netflix’s change to ad-supported advertising, but Hastings’ overnight abandonment of ad-free streaming may force investors to question other agreements. For example, Netflix might expand into live news, sports, and gaming.

Reed Hastings is planning a succession, with Sarantos sharing the CEO role and making Netflix content decisions. He mentioned quitting the company by 2030 in a recent earnings call.

Reed Hastings is known for his philanthropy and politics outside of Netflix. Forbes listed him among the 400 wealthiest Americans in 2017, valuing his wealth at USD 5 billion. According to the Silicon Valley Business Daily, Hastings donated USD 8.1 million to California politicians between 2001 and 2011. He gave USD 89,000 to Barack Obama’s 2012 re-election campaign and USD 1.4 million to Joe Biden’s 2020 presidential campaign.
Hastings and his wife, producer Patty Quillin, formed a Bill Gates-Warren Buffett philanthropic pact to donate most of their wealth.

“It’s an honour to be able to try to help our community, our country and our planet through our philanthropy,” Hastings and Quillin stated at the time.

Hastings has pledged USD 100 million to revamp American public schools. The couple also committed USD 120 million to two US historically black universities and the United Negro College Fund to fund scholarships for black students in 2020, and he spent USD 20 million creating a teacher training centre. In 2005, Hastings told Inc. that entrepreneurship is about patience and persistence, not immediate money.

Streaming wars

Netflix has revolutionised film: film content and delivery. House of Cards, the company’s debut TV series, won seven Emmys after receiving 56 nominations. Since beginning the political thriller, Netflix’s original programming juggernaut has produced critically lauded hits like Stranger Things, The Crown, Bridgerton, and Sex Education. Netflix has market power while losing subscribers.

Netflix wants to rule content after expanding to 190 countries. Netflix commissioned 160 films and TV shows in the second quarter of 2022, most foreign-produced.

Reed Hastings said, “What’s next is becoming a great Turkish and Egyptian content developer and sharing that with the world.”

In the streaming wars, content matters. Despite losing customers, Netflix has shown market strength. Kantar’s Sangari claimed it offers content and an easy-to-use interface to keep subscribers engaged.

Streaming is growing. Kantar reported that 113 million US homes used streaming services in June 2022, 88% of the total. The average home has five streaming service subscriptions per study. Hastings says Netflix’s rivals aren’t only streaming services.

In 2017, Hastings called sleep Netflix’s biggest competitor. “You know, think about it, when you watch a Netflix show and get addicted, you stay up late,” he remarked.

In 2019, he said video games were stealing more customers than competitors.

“We take consumer screen time, both mobile and TV, from a wide range of competitors. We need to compete with Fortnite more than HBO in this very fragmented industry,” Hastings said.

Even as Disney+ gets more members, Hastings is secure in Netflix’s position.

“Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard – we estimate they are all losing money, with combined 2022 operating losses well over USD 10 billion, vs. Netflix’s USD 5 billion to USD 6 billion annual operating profit,” the company wrote to shareholders.

Reed Hastings stated he was not in this for the easy money. Subscription after subscription, he intends to develop a “world-changing” enterprise.

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