Lessons from the rise and demise of Netflix, the trap of thinking software is management & new App for consuming content on the move

1 May 2022 Newsletter

“Be brutally honest about the short term and optimistic and confident about the long term.” – Reed Hastings

Hope you’re Thriving!

I’ve enjoyed a busy week with workshops and meetings and some great early feedback on my new onboarding book. Oh, and I finished a TV series on Apple TV called We Crashed about the co-working space WeWork. The show was excellent.

Oh, Netflix

Netflix hasn’t had the best week. Their share price went from $700 at the end of last year to $348 just over a week ago and $189 at the time of writing. The market cap has gone from $305billion in November to $84billion. Ouch!

Netflix was once lauded for their strategic genius in beating cable tv companies and becoming the biggest at content on-demand via the internet. They promised the most extensive range of content at the lowest price.

But this strategy relied on content that other large media companies (Hollywood) owned. And a good strategy doesn’t make sense for competitors to copy. It might take a few years to catch up if they can copy, and then the market can become commoditised. So the challenge is to take those early gains and develop more differentiation over time.

Some of the issues that Netflix has encountered include:

• Increased competition from services such as Apple TV, Disney+, Amazon Prime
• Talk of an ad-supported version
• Customer complaints that there is a lot of content but not a lot to watch
• Raising prices

Let’s look at how Netflix has increased prices over the past ten years.

Pricing increases are essential and should be included in plans for profit growth, especially today in an inflationary environment.

Let’s now overlay the Netflix share price onto the pricing changes chart.
The share price is the thin blue line in the image below.

Let’s next overlay subscriber growth onto both the pricing increases and the share price. You can see the consistent subscriber growth every quarter until this year in the image below.

In its earlier days, Netflix would stream content from Hollywood studios with their support. They didn’t believe that streaming would become as big as it did. But as time went on, Hollywood came to learn that streaming was indeed a big business, and that’s how they could own more of the profit from their content.

Of course, Netflix knew that this was coming and tried to mitigate this by producing a lot of their own content, shows only available on Netflix.

More recently, however, as competitors have either taken back their own content or invested heavily in developing their own content, the market has become commoditised.

Netflix’s first-mover advantage has now passed as the market matured. Netflix directly competes for viewer time against rivals on its content, rather than the content it acquires from others. It’s done a fantastic job until now.

However, the brutal realities of the market are now emerging.

The eight rules that built Netflix

I don’t believe for a minute that Netflix is in a doom loop or a death spiral.

The Netflix culture slide deck is a 124-page presentation outlining how CEO Reed Hastings hires, fires, and rewards employees. You can see a copy of it here. The powerful winning culture that Netflix has created should not be underestimated for a moment. When Reed Hastings founded Netflix, his Co-Founder was Marc Randolph.

In an article that I read in the past week, Randolph lists the eight rules that his father gave him, which he says are how they helped build Netflix into the streaming giant that they are today.

1. Do at least 10% more than you are asked. No one ever got ahead doing the bare minimum. In his book, Marc says, “when it comes to making your dream a reality, one of the most powerful weapons at your disposal is dogged, bullheaded insistence.” Build a life you’re proud of.
2. Never, ever, to anybody present opinions as fact on things you don’t know. Takes great care and discipline. When asking for money and growing a company, you need to be trusted. Marc was trusted by all because of his approach.
3. Be courteous and considerate always—up and down. One morning, Reed Hastings (then Chairman) walked in and opened a PowerPoint to tell Marc why he (Reed) should take over as CEO. Despite the disappointment and frustration Marc had to have felt; they remained close. Marc also used this mentality toward the employees at Netflix and was well-liked to the end. He built relationships with the employees and listened to the opinions of all.
4. Don’t knock, don’t complain—stick to constructive, serious criticism. While Reed’s approach wasn’t ideal, it was constructive. Open conversations allow companies, and people, to operate at the highest level. This was encoded in their culture of “radical honesty.”
5. Don’t be afraid to make decisions when you have the facts on which to make them. Netflix built its culture based on the concept of Freedom and Responsibility. This is displayed in their loose expense policies and unlimited PTO. Treat your employees like adults.
6. Quantify where possible. From the beginning, Netflix was extremely data-driven. This allowed them to respond to demand and make sure everyone got a DVD immediately. Hunches are best backed up by the numbers.
7. Be open-minded but skeptical. In Netflix’s early days, no one believed the solution would work. They’ve led major innovations throughout their history and learned from many failures. They’ve tested and kept (or folded) countless initiatives [stopping DVD sales when their sole revenue source, DVDs when VHS was dominant, regional shipping facilities, Qwikster & Netflix split, original content to name a few].
8. Be prompt. In 2000, with Netflix floundering, Blockbuster asked to meet in 12 hours. They somehow made it from Silicon Valley to Dallas in that time, and Reed offered to sell Netflix for $50 million (when it was worth nothing). The Blockbuster CEO laughed in their face. 22 years later, Blockbuster has long been bankrupt, and Netflix is worth over $85 billion. While the meeting didn’t go as they hoped, it’s an excellent example of the lengths they went not to make others wait. If you respect others, you will appreciate their time.

Today, Netflix is thriving under Reed Hastings, but it could not have gotten there without Marc Randolph’s leadership.

These lessons are from Marc’s book That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea

 

Speechify

Have you ever wanted to read articles, PDFs, or emails while driving or exercising? This week I came across Speechify, an app that reads these things to you. You can even take photos of books, and it will read them to you.

For the CEO who introduced me to it, it has changed his consumption of content dramatically.

 

This week on The Growth Whisperers podcast

The trap of thinking software is management

There’s a trap that leaders can fall into, thinking that software can replace the important role to manage people.

There is no substitute for leaders managing and leading people. But, some software companies might advocate that their product will remove or reduce the need to manage and lead people. And this could come with a set of second-order consequences that affect employee engagement and retention.

Software is fantastic at automating processes, but cannot replace human to human interactions. Also, we discuss the line between automating menial tasks and managing people to be more effective.

Episode 107 – The Growth Whisperers

Listen to The Growth Whisperers
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Keep Thriving!
Brad Giles