The rise and rise of Netflix

These notes surfaced recently, as I prepared to film an interview with Hastings' co-founder Marc Randolph for a documentary about how Netflix became the first global internet channel and arbiter of content. I was pleased to discover that I still feel the same about a man who has become, in the ensuing decade and a half, one of the most powerful CEOs on the planet. 

My film probes how Netflix leveraged the power of the people it served to further its business ambitions. By doing good by its public, Netflix did very, very well for itself.

“We began to learn more and more about how to use individual tastes to build an economic model,” Randolph told me about those early days. “Once you have a system where you can actually impact what somebody likes, they are happy, but the big thing is you have power over Hollywood.” 

Looking at those notes, it seems Hastings knew from the start that the consumer data and intense love Netflix was amassing online could power a revolution in home entertainment. Not just trading DVDs for streaming or big screens for small, but a worldwide transformation in how content is made, monetised and enjoyed. In the many interviews we did, he remained circumspect about his end game, and played up the threats from a long litany of rivals.

Until technology caught up and Netflix grew large enough to impose the people's will on Hollywood, Hastings took the insurgent's position, cloaked his ambition and focused on a series of battles that defined him as a chief executive.
 
When I met him in 2004, Hastings wore bowling shirts, jeans and a haircut that looked like it cost five bucks at the corner barbershop. He was rumpled, good natured, open and startlingly honest, yet struggled to control a tendency to roll his eyes and condescend to less clever people – including journalists. His hubris toward his gargantuan rivals, considering Netflix's mere two million subscribers and gyrating stock price, was priceless. 

“We expect Blockbuster to be as successful against us as Barnes & Noble was against Amazon,” he told investors that year. At the time, Blockbuster had 60 million global users and more than 9,000 stores.

He told a table of journalists, including me, at a Reuters conference in San Francisco that he would run Netflix at break-even “for as long as it takes” to grow as fast as possible to run off Blockbuster and Amazon. As the company's stock price tumbled on the news, he calmly observed that he would manage the company for the long term. I marvelled at his sangfroid that day but learnt later that the seven years it took to solidify his position drained him.

“Blockbuster attacked a lot harder than we ever thought they would,” he told me in 2009 as Netflix surpassed 10 million subscribers and Blockbuster was flirting with bankruptcy. He felt “sadness and elation… because the company that has been trying to kill us for so long is dying.”

The Blockbuster battle refined Hastings as a CEO, forcing him to focus intently on capitalising on the opening the home-entertainment industry had given him and to confront the idea that data and revolutionary ideas were not enough. 

“We walked into this situation where the single biggest competitor that we were going to have to disrupt was despised by both audiences that we needed to work with – customers and Hollywood,” Randolph said. Netflix needed to fill that void of trust.

Hastings initially did not embrace the importance of inspiring the strong brand love that Randolph, a marketing expert, craved. Randolph built it into Netflix's cultural DNA and its user interface, which doubled as a market-research platform that could quickly incorporate features that pleased its subscribers. 

The marketing team complained at first that Hastings' right-brained engineers were too data driven, and pushed to cut non-essential but beloved features. But as data revealed how personalised user experiences driven by a movie-recommendation engine and flawless customer service translated into customer loyalty, brand evangelisation and organic growth, he was converted. 

“We realised that e-commerce allowed you to have this very direct, very intimate connection with your customer to not only know them but to show them that you know them,” Randolph said. 

Hastings told me that he became obsessed with improving the matching algorithm to the point that his wife complained that he spent more time working on it during a family ski trip than he did with his two small children. When he could no longer improve it on his own, he offered the $1 million Netflix Prize to spur innovation in the way Netflix matches subscribers with movies they love. Maintaining that bond is now a company priority.

The matching algorithm eventually “learnt” to group subscribers around the world into “taste clusters” and to find associations between people and movies so arcane that human language cannot describe them, creating a voyage of discovery that subscribers find magical. The ability to use the matching algorithm to salvage worthy but underrated shows such as Mad Men and Arrested Development inspired viewer devotion and caught the attention of artists.

“We have to have intense brand love and focus,” he said last month at the Recode Code Conference. “What we can be is the emotional connection brand… super-focused on one thing that people are emotional about.”

If the Blockbuster battle showed that brand love caused subscribers to stick with Netflix, the next battle, to launch streaming and go head-to-head with the cable industry, demonstrated the power of giving consumers choice. 

The streaming app underwhelmed the tech and entertainment worlds when it launched in 2007. It was for laptops only and offered a paltry catalogue of about 1,500 mostly older movies and television series. But the app retained the powerful market research capabilities that Randolph, who left Netflix three years earlier, had built into the original website's user interface. Netflix now could “watch” subscribers as they watched Netflix, recording the time of day, for how long, how quickly and where they accessed content. Tech writers predicted that no one would watch movies on laptops, but the data derived from the streaming app suggested that people loved being untethered from their televisions and watching snippets of content on the go.

Based on those insights, Hastings made deals to install the app on every DVD player, games console and portable device possible before teaming up with Roku to design a set-top box. The data showed another surprising trend that would rock the world of television: streaming inspired binge-watching, leading Hastings to conclude that people wanted to be free of “appointment television”. He gave them multiple platforms and their choice of content any time, and the adoption of streaming took off, more than doubling Netflix's subscriber base, to 20 million, within three years. 

Hastings harnessed their power by publishing monthly performance statistics for US internet service providers starting in January 2010 to motivate subscribers, who by then accounted for 20 per cent of peak-time traffic, to reward ISPs who played by neutral rules. Bandwidth caps began falling in Canada after Hastings said he could not understand why Netflix users there, who comprised 40 per cent of all Anglophone households, were saddled with the highest prices for data in the developed world. Last week, he said net neutrality was no longer a front-burner issue for Netflix.

What Hollywood studios and cable companies had dismissed as a niche industry suddenly looked like a formidable competitor, and they began closing ranks against Netflix by jacking up prices for streaming rights and hoarding premium movies and television shows.
“This has been an era of experimentation and I think it's coming to a close,” Time Warner CEO Jeff Bewkes said in 2010 of co-operating with Netflix.

It was too late to intervene; the Netflix streaming app came installed on practically every internet-enabled device sold and its devoted subscriber base was larger than that of Comcast. In the hard bargains that studios were now driving for content and cable companies' rock-bottom customer satisfaction, Hastings saw another opening. 

To lure talent to the unproven online platform, he and chief content officer Ted Sarandos broke the Hollywood model and offered marquee names like David Fincher, Kevin Spacey and Jenji Kohan what every creative soul craves. As soon as Spacey and Fincher's House of Cards and Kohan's Orange is the New Black debuted to rave reviews, a new day dawned in content creation. The $6 billion Netflix has committed to new movies and television shows this year is the second-highest in the media world, behind cable sports behemoth ESPN, and everyone wants to know what it takes to be a Netflix content creator.

“Netflix was able to walk in and see this dynamic and recognise that what motivates an artist is not entirely the money; what motivates them is creative freedom and control and resources and Netflix was able to give them that. And it was this huge opening that Hollywood gave them,” Randolph said.

Hastings still has doors to beat down, but these days he can afford to exercise a light touch. He complained last month that theatre chains are “closing ranks” against Netflix's Cannes Film Festival entries, but offered to let exhibitors partner in day-and-date releases of Netflix movies – an inevitability that the chains are resisting to their detriment. 

He has raised an army of 100 million people across the globe who are becoming accustomed to having their multitudinous voices heard and their desires served, and they are his secret weapon for change. By knowing people, delighting them and giving them a window into worlds they might never have experienced, Netflix pervades everything, from people's relationships (viz “Netflix cheating”) to US government policy (viz H1B visas, President Donald Trump's travel ban). And the people can have a say in it all.