Reed Hastings and Netflix Upended Hollywood. But Is His Model Built to Stay on Top?
The Netflix CEO makes few day-to-day content decisions, but his company has reshaped how we watch TV all the same. Now he faces a new kind of challenge: staying ahead as his service’s most culturally ubiquitous shows fade away.Reed Hastings and Netflix Upended Hollywood. But Is His Model Built to Stay on Top?
The Netflix CEO makes few day-to-day content decisions, but his company has reshaped how we watch TV all the same. Now he faces a new kind of challenge: staying ahead as his service’s most culturally ubiquitous shows fade away.
Reed Hastings is the kind of folksy, soft-spoken guy who would rather wear a Stranger Things–themed Christmas sweater than a suit and tie on a call with Netflix investors. This may help explain why the company’s CEO has been consistently underestimated by his media-mogul peers. Netflix was once dismissed by Comcast as reruns television and by Time Warner as the Albanian army trying to take over the world. What these companies didn’t realize was that Hastings lives for a good fight. Now they’re throwing together mega-mergers and creating new streaming services in an effort to stop the Netflix juggernaut.
Over the summer, AT&T finalized its deal to purchase Time Warner, whose CEO, Jeff Bewkes, said it was an underdog against Netflix. The combined company plans to launch a three-tiered streaming service in 2019. Disney will soon be the owner of 21st Century Fox and is set to launch a streaming service of its own. And Comcast is reportedly working on an NBC-centric service, while Viacom, the other major media force in TV, has already conceded defeat and agreed to produce Netflix-exclusive shows.
What’s Hastings doing about all this corporate maneuvering? Apparently nothing. “I pride myself on making as few decisions as possible in a quarter,” he said during a July interview with TED Talks curator Chris Anderson. “I find out about big decisions now that are made all the time and I never even heard about it, which is great.”
Netflix has ascended to cruising altitude, leaving Hollywood incumbents struggling to reach its heights. The company combines a potent mix of Silicon Valley mystique, Hollywood glamor, and Wall Street–fueled spending power that can’t be replicated elsewhere. The data-driven, customer-obsessed work culture yields the best streaming product on the market. The sky-high contracts bring in top acting and producing talent. And the consumer desire for instant gratification means that as long as the service keeps producing bingeable shows at high volume, people will keep subscribing. Netflix’s success, like Amazon’s or Facebook’s, has become self-perpetuating.
Of course, winning wasn’t always this easy. Netflix shed a third of its staff after the 2001 dot-com bust, saw its stock price collapse during the 2011 Qwikster debacle, and gambled its streaming business on unproven original programming in 2013. The only constant throughout Hastings’s 21-year run at the company has been change. “No one thought we’d be mailing discs for a hundred years,” he said at the TED event. “You have a lot of paranoia about what’s coming next. That’s part of the founding ethos [and] that’s an advantage.” The question is whether Hastings and his company will be able to maintain that advantage in a world where streaming television via the internet is no longer novel.
In the early 1990s, Hastings ran a successful but bureaucratic tech firm, Pure Software, that was ultimately disrupted by a more nimble competitor. He vowed that Netflix would be different, a place of constant reinvention where the best ideas would always win. Employees are granted an unusual level of autonomy, using their discretion to do everything from expense Uber trips to green-light new shows. The pay is high, even by tech industry standards, but so are the expectations. A recent Wall Street Journal investigation described Netflix’s workplace culture as “ruthless, demoralizing and transparent to the point of dysfunctional.”
Employees are encouraged to critique their coworkers with bracing honesty. Explanations for firings can circulate widely, with some workers even being sacked during meetings. Managers are encouraged to fire employees who don’t feel essential to fast-changing business needs, a policy that’s known as the “keeper test.” “The notion that companies should make special investments in developing people, provide paths for promotion, and strive for high employee retention rates are deeply ingrained,” Patty McCord, Netflix’s longtime chief talent officer, wrote in her 2018 book Powerful. “But I’ve come to believe such thinking is outmoded.”
McCord, who worked with Hastings in Netflix’s early years to codify the company’s workplace virtues, was herself let go in 2012. Netflix has more in common with a giant like Amazon, which goes to morale-crushing extremes to meet customer satisfaction, than it does with the cable incumbents who failed to innovate for decades. The paranoia Hastings views as a strategic asset contributes to what one Netflix executive called a “culture of fear.”
But Netflix’s demanding approach yields results and influence outside of the office walls. Early in its originals run, show creators praised Netflix’s hands-off approach to production, a nod to its trust in worker autonomy. The decentralized decision-making process helps explain how Netflix will end up producing or distributing 1,000 titles this year around the globe. And the “survival of the fittest” mentality is even beginning to creep into the company’s renewal strategy, as more and more underperforming shows get canceled. That includes The Get Down, American Vandal, and Daredevil.
Undergirding these big bets isn’t just Hastings’s leadership—it’s the obscene gobs of money Netflix is spending. This year the company will spend about $13 billion on content and burn through at least $3 billion in cash. Because Netflix gets to spread the cost of that content over several years on its balance sheet, the company is technically profitable, even as its free cash flow plunges further into the red with each passing year. This strategy, which is common among Silicon Valley startups, doesn’t sound alarm bells for investors. Wall Street has accepted Netflix’s premise that it can take over television if it spends like mad, which provides Netflix the financial security to take over television by spending like mad. The creative freedom on offer to creators, combined with the fat checks—$100 million for Kenya Barris, $150 million for Shonda Rhimes, and $300 million for Ryan Murphy—make Netflix the ideal landing place of stars.
For less prominent Hollywood talent, though, the infusion of Netflix cash hasn’t always been a boon. A recent feature by Fast Company’s Nicole LaPorte highlighted the struggles of yeoman actors and writers who are making less money and working shorter seasons on Netflix than they would on a 22-episode broadcast show. Stand-up comedy has experienced a similar bifurcation, where the A-list talent pulls in unprecedented paydays but less famous comedians earn roughly the same amount as they would on Comedy Central. It’s the Netflix employee model—lavish pay for top performers, table scraps for the rest—applied to an entire industry.
All of these changes to the ways television is produced, Netflix says, are in service to the customer … as long as that customer’s aspiration is to watch more Netflix. In his TED interview, Hastings explained the company’s 2017 decision to eliminate the five-star rating system for movies and TV shows in favor of a simpler thumbs up/thumbs down system. “Everyone would rate Schindler’s List five stars and then they would rate Adam Sandler’s The Do-Over three stars,” he said. “But in fact when you looked at what they watched, it was almost always Adam Sandler.”
Here, Hastings tidily sums up the difference between old Netflix, which was designed to help movie fans expand their horizons beyond Blockbuster, and new Netflix, which is designed to match subscribers to relatable content as efficiently as possible. If Netflix is doing its job properly, the bingeing never stops. This strategy has worked because the sheer volume of Netflix shows means that there’s something for everyone to like, or at least be distracted by enough to keep streaming. Affinity and indifference read the same when the data is being crunched by an algorithm.
Netflix’s mass of middling, mildly entertaining content presents the primary vulnerability that competitors may be able to exploit. The streaming service’s early run of widely recognized shows, like Orange Is the New Black and House of Cards, are now being retired. Meanwhile, the last of its comfort-food licensed mainstays will be tough to hold onto in a fractured media world. Though the company is keeping Friends for another year after offering up $100 million, AT&T may make the hit series exclusive to its own streaming service in the future. And according to Recode, The Office will soon be up for a similarly tough licensing renegotiation with NBCUniversal. Netflix may end up losing out on its most culturally ubiquitous shows at the same time that Disney is launching a service packed with iconic IP tied to Star Wars, Marvel, and Pixar.
Despite its promises of creative freedom, there are also signs that Netflix’s devotion to data is causing it to conform to Hollywood norms in some unexpected ways. According to the Wall Street Journal, the critically acclaimed dramedy GLOW was nearly canceled after its first season. But it was the Silicon Valley–based old guard who wanted the show gone due to low engagement, and the expanding Hollywood outpost who defended the show due to its acclaim. While directors used to praise Netflix as a blank canvas, talk lately has turned to show notes via algorithm. “Because Netflix is a data company, they know exactly how their viewers watch things,” Cary Fukunaga, director of the Netflix show Maniac, told GQ in August. “So they can look at something you’re writing and say, We know based on our data that if you do this, we will lose this many viewers. … The algorithm’s argument is gonna win at the end of the day. So the question is do we want to make a creative decision at the risk of losing people.”
Losing people is the one thing Netflix can’t afford to do: Its entire business model is built on indefinite breakneck growth. That will be tougher when competing against the biggest brands in entertainment as bidding wars drive up the costs of individual programs. But Hastings’s bet is that Netflix’s brand has grown bigger than the shows themselves, and that its algorithms will get better at matching people with whatever piece of content will reinforce the service’s value for at least another month. People may sign up for Netflix for a specific program, but they keep subscribing because it guarantees them something new every time they boot it up. It’s a strategy that worked for cable companies for decades, but Netflix will only get a couple of years to enjoy unchallenged dominance. “The consumer has a lot of entertainment options,” Hastings said during an investor call earlier this year. “If we earn more of consumers’ time, then we continue to grow. And if we get lazy or slow, we’ll be run over, just like anybody else.”