Freakonomics Radio - What if Your Company Had No Rules?

Episode Date: September 12, 2020

Netflix co-founder Reed Hastings came to believe that corporate rules can kill creativity and innovation. In this latest edition of the Freakonomics Radio Book Club, guest host Maria Konnikova talks to Hastings about his new book, No Rules Rules, and why for some companies the greatest risk is taking no risks at all.

Hey there, Stephen Dubner, and this is a special bonus episode of Freakonomics Radio. You may remember a couple months ago, we tried a new kind of episode, a Freakonomics Radio book club, where we interviewed an author and had her read excerpts from her book. That episode was called How to Make Your Own Luck. The author was Maria Konnikova, a PhD psychologist who became a professional poker player in order to learn more about decision making and luck. Her book is called The Biggest Bluff. So many of you wrote in to say how much you loved that episode, and Maria in particular, that for our second Freakonomics Radio Book Club episode, we are asking Maria to take a turn as host.

That's the episode you are about to hear. Today's author is Reed Hastings, and the book is No Rules Rules, Netflix and the Culture of Reinvention, which Hastings co-wrote with Aaron Meyer. We are going to keep playing with this format to see how much we like it, how much you like it. The next book club episode we're planning will have me as host again. If you'd like to read that book ahead of time, our selection will be Inside of a Dog, What Dogs See, Smell, and Know by Alexandra Horowitz. It was first published around a decade ago, but with so many pandemic puppies out there, it is more relevant than ever. Plus, I just really like this book.

Also, if you want to send a dog question for Alexandra Horowitz, our email is radio at Freakonomics.com. Use the subject line dog. If you want to send feedback on the episode you are about to hear, same email, radio at Freakonomics.com, subject line, Netflix. As always, thanks for the feedback and thanks for listening. And now here is Maria Konnikova and today's Freakonomics Radio Book Club episode. Everyone knows Netflix, especially these days, is our constant companion. It has 193 million subscribers in 190 countries, with roughly 38% of those from the United States and Canada. These past months, as other industries struggle, Netflix has been booming. Everyone wants to stream.

Everyone wants to binge. Everyone wants to escape. But it wasn't always like that. Once upon a time, Netflix was pretty much a shipping and receiving business, sending DVDs to subscribers who'd rent them for a couple of days and return them. It was considered such a crazy business idea that the movie rental giant Blockbuster, yes, the Blockbuster that declared bankruptcy in 2010, didn't want to buy it. When Netflix went public in 2002, it had just 600,000 subscribers and the fledgling company was losing money. Today, it has some 8,600 employees and a market cap of $228 billion. So how did we get from there to here?

Where did Netflix come from? And how was it able to thrive? I'm Maria Konnikova, and this is the Freakonomics Radio Book Club. Today, join me in a deep dive into No Rules Rules, Netflix and the Culture of Reinvention, the new book from Netflix co-founder Reed Hastings and noted business professor Aaron Meyer. The book is not so much an autobiography of Hastings or even Netflix's origin story. It's really more of an eye-opening look at the unorthodox, even a little intimidating, way that Netflix runs. For the most part, this is Freakonomics Radio,

the podcast that explores the hidden side of everything, with today's special guest host, there were vacuum cleaners. What were you like growing up? Give us a little bit of the Reed story before you became Reed Hastings Netflix. As a kid, I grew up with my two sisters and I would say I was not particularly business oriented. You know, we had the typical lemonade stands and selling cinnamon sticks and things like that. And then at the end of high school, I got a job selling rainbow vacuum cleaners. And that's what really got me interested in business is just seeing how that company was operated and how fun it was to be sharing it with other people. And I loved it so

much that I deferred college for a year. So, I mean, I think you're the first person I've ever heard say that you loved going door to door selling vacuum cleaners. What was it about it that you loved? Yeah, you meet tons of different people. This was the early 80s, so it was a more friendly time in a way. Different conversations with different people from all different walks of life. I loved the fellow salespeople, you know, customers. And the product is really pretty cool. It's pretty amazing.

Hastings, who is from Boston, eventually did give up his vacuum selling job to go to Bowdoin College in Maine. He decided to study math. And soon, that decision led him to the Peace Corps, where he taught math to high schoolers in rural Swaziland. Why did you decide to switch gears so much and then to teaching mathematics if you loved the original sales job? You know, when I was in college, I got seduced by the thing that I was differentially good at, which was math. And then, you know, being a math teacher was not easy. That was a lot of work of motivating and understanding kids. And, you know, being a math teacher was not easy. That was a lot of work of motivating and understanding kids. And, you know, it's not intense math.

It's really trying to help a bunch of kids get excited. Was it always going to be the Peace Corps? Is that what drew you to teaching? Or did you want to teach, period, and ended up in the Peace Corps? No, I joke that if the Peace Corps had sent me to be a fish farmer, which could have happened, you know, I'd probably be working on agriculture policy now. After his two years in the Peace Corps, Hastings went back to school, this time to Stanford for a graduate degree in computer science. He wanted to study one area in particular, artificial intelligence. I thought AI might be a nice blend, not as dry as math, but more intellectual and challenging

than being a classroom teacher. And so I got fortunate of hitting the first AI bubble in the mid-80s at the right time. You also have said before that Stanford was really where you fell in love with computer programming. How did you find programming? And why did that end up being the direction that you wanted to pursue when you started becoming more entrepreneurial minded? Well, you get exposed to a lot of things in graduate school. And I got to take a lot of computer science classes.

And I loved them. You know, it was easy to work all the time because it was enjoyable, like a big puzzle. And that really led to my first company, Pure Software. And the great thing about the product was very technical software, but the key thing was the culture and how we tried to build that. As Hastings co-author Aaron Meyer writes in No Rules Rules, Hastings' openness about his mistakes at Pure Software make it sound as though the company failed. But Pure Software sold in 1997 for $750 million.

And it was that sale that helped Hastings fuel his next big venture, Netflix. Still, Hastings is open about the cultural failures of the company, and as he looked for his next big idea, the experience of running Pure Software helped him to realize something. He didn't necessarily want to be a CEO again. Instead, he decided to try out the investing side of things, pouring money into a number of companies and joining their boards. But he never stopped thinking of new ideas, ideas he'd often bounce back and forth with Mark Randolph, a former colleague. One day, the duo came up with an idea to rent DVDs through the mail. And like that, Netflix was born. Randolph became the

company's first CEO. But in 1999, Hastings took over. It was clear that it was both a big opportunity and that we needed to raise a lot of capital. And that would probably require me as CEO because I had a track record. So it was more out of necessity than you deciding, I really, really want to do this again. Yeah. I mean, I was super excited to do it, but yes, I think that's right. If it had been, you know, sailing along on its own, then I probably wouldn't have. And there's some part of it that was just the joy of getting back in and having a team. And from that, we evolved to doing a subscription DVD rental. That was originally the 20 bucks a month for three DVDs at a time, as many as you wanted. So you guys went back and forth for a while with different ideas. What was it about this one that

actually seemed to stick and that made you actually decide, hey, let me mail this DVD to myself and see if it's actually going to arrive? And why did you decide after you saw that it was feasible that this was the one? You know, we weren't sure that it was the one. Every new business has a bunch of risk around it. DVD was very lightweight, so it was easy to mail compared to its predecessor, the VHS cassette. So it opened a new opportunity. And at the time, Amazon was shipping lots of goods, and it was clear that this was a big opportunity. And then eventually, we wanted to be able to stream the content. And we thought, okay, if we can build a great user interface and build a subscriber base, then we should be able to migrate from shipping DVDs to streaming, which, you know, took us 10 years to start or close to 10 years,

started in 2007. And now we're close to 200 million streaming, and we've got just under 2 million DVDs. So it's almost 100 to 1 difference today. Could someone else have founded Netflix? Yeah, I think Blockbuster could have done, you know, they were big on renting first VHS and then DVD. And certainly other people would have done streaming without Netflix. So was streaming something you had in mind before you founded Netflix, did you see this as somewhere that the market was eventually going to go? Yeah, it was clear even back then that the internet would continue to get faster and faster and you'd be able to do streaming video eventually. Which is why we named the company Netflix and not, you know, DVDbymail.com. Well, clear to you, but you recount talking to Blockbuster and it was certainly not clear to the whole industry that streaming was the future. You know, that is true. If you grow up doing stores and Blockbuster was really, really good at stores, you become very specialized about that.

And Blockbuster was over-optimized for a single thing. And so you have to watch out as a leader that you become so good at one thing that you are not good at the skills necessary to continue to thrive. And this is where it really helps, I think, to have a model where a company is organized around flexibility rather than exploiting the last bit of efficiency of some current model. Here now is Reed Hastings reading from his new book, co-authored with Aaron Meyer, called No Rules Rules. Blockbuster's story is not an anomaly. The vast majority of firms fail when their industry shifts. Kodak failed to adapt from paper photos to digital. Nokia failed to adapt from flip phones to smartphones.

AOL failed to adapt from dial-up internet to broadband. And my own first business, Pure Software, could not adapt to changes in its industry either, because our company culture wasn't optimized for innovation or flexibility. I started Pure Software in 1991. At the beginning, we had a great culture. We were a dozen people creating something new and having a blast. Like many small entrepreneurial ventures, we had very few rules or policies inhibiting our actions. When the marketing guy decided to work from his dining room because it helped him think, to be able to pour himself a bowl of Lucky Charms whenever he felt the urge, he didn't have to get permission from management.

This earlier version of Pure was flexible. Everyone could work however they wanted to maximize what they were bringing to the company. Lucky Charms may not be my serial of choice, but the whole setup seems rather nice. Then things started to change. Here is Reed Hastings again. Then Pure Software started to grow. As we hired new employees, a few did stupid stuff, leading to errors that cost the company money. Each time this happened, I put a process in place to prevent that mistake from occurring again.

For example, one day our salesperson at Pure, Matthew, traveled to Washington, D.C. to meet with a prospective client. The client was staying at the five-star Willard Intercontinental Hotel, so Matthew did too, at $700 a night. When I found out, I was frustrated. I had our HR person write a travel policy outlining how much employees could spend on airplanes, meals, and hotels, and requiring management approval to go beyond a specified spending limit. Policies and controls became so foundational to our work that those who were great at coloring within the lines were promoted, while many creative mavericks felt stifled and went to work elsewhere. I was sorry to see them go, but I believe that this was what happens when a company grows up. Then two things occurred. The first is that we failed to innovate quickly.

We had become increasingly effective and decreasingly creative. In order to grow, we had to purchase other companies that did have innovative products. That led to more business complexity, which in turn led to more rules in process. The second is that the market shifted. To survive, we needed to change, but we had selected and conditioned our employees to follow process, not to think freshly or shift fast. We were unable to adapt, and in 1997, ended up selling the company to our largest competitor. So what did Hastings learn? I asked him, how exactly is Netflix different from its predecessor? Netflix, of course, is a tremendous change from being a domestic DVD-by-mail renter to leading and

streaming around the world. It really has proved out that focusing on flexibility is the key, and it's really about that no rules is the right way to go, or no rules rules. And then, of course, it's not as simple as just taking away the rules. You've got to figure out some other way to have people be aligned to work well together. This book is trying to be a contribution to other organizations to think about different ways to operate. So we've had that very traditional paradigm of the factory forever. And, you know, now with creative work, there's potentially other ways to think about things which focuses on flexibility rather than efficiency. So what is this famous culture of Netflix that has shepherded it from a fledgling mail-in DVD

company that Blockbuster scoffed at buying back in 2000 to the industry-leading innovator that we know today. What does it mean to be a company that runs on no-rules rules? It all started from a moment in the early days of Netflix when the management team had to do the one thing that most teams want to avoid doing, Fire a huge portion of its staff. In the spring of 2001, crisis struck. The first internet bubble burst and scores of dot-coms failed and vanished. All venture capital funding stopped and we were suddenly unable to raise the additional funds we needed to run the business, which was far from profitable. Morale in the office was low, and it was about to get lower.

We had to lay off a third of our workforce. I sat down with Mark and Patty McCord. Patty had come with me from Pure Software and was the head of human resources, and we studied the contribution of each employee. We didn't have any obvious poor performers, so we divided the staff into two piles. The 80 highest performers, who we would keep, and the 40 less amazing, we let go. Those who were exceptionally creative, did great work, and collaborated well with others went immediately into the keeper's pile. The difficulty was that there were many borderline cases. Some were great colleagues and friends, but did adequate work rather than great work.

And others worked like crazy, but showed uneven judgment and needed a lot of hand-holding. A few were exceptionally gifted and high-performing, but also complainers or pessimists. Most of them would have to go. It wasn't going to be easy. In the days before the layoffs, my wife remarked how on edge I was, and she was right. I was worried that motivation in the office would plummet. I was convinced that after I'd let go of friends and colleagues, those who stayed would think the company wasn't loyal to employees. It was bound to make everyone angry.

Even worse, the keepers would have to shoulder the work of those that go, which seemed certain to lead to bitterness. We were already short of cash. Could we bear a further collapse in morale? The day of the layoffs arrived, and it was awful as expected. Those who were laid off cried, slammed doors, and shouted in frustration. By noon it was finished, and I waited for the second half of the storm, the backlash from remaining employees. But despite some tears and visible sorrow, all was calm. Then, within a few weeks, for a reason I couldn't initially understand, the atmosphere improved

dramatically. We were in cost-cutting mode and we just let go a third of our workforce, yet the office was suddenly buzzing with passion and energy and ideas. A month later, the holidays arrived. DVD players were popular that Christmas, and by early 2002, our DVD-by-mail subscription business was growing rapidly again. Suddenly, we were doing far more work with 30% fewer employees. To my amazement, those same 80 people were getting everything done with a passion that seemed higher than ever. They were working longer hours, but spirits were sky high. It wasn't just our employees who were happier.

I'd wake up in the morning and couldn't wait to get to the office. In those days, I drove Patty McCord to work every day, and when I swung up to her house in Santa Cruz, she would practically leap in the car with his big grin. Reed, what's going on here? Is this like being in love? Is this thrill going to wear off? Patty had put her finger on it. The entire office felt like it was filled with people who were madly in love with their work. For Reed Hastings, talent density is the key first step to being able to let go of traditional rule structures. Hire the best people, people you trust, people whose judgment you trust, I was struck by a phrase that you use that you have a policy of not hiring any brilliant jerks.

I would love for you to talk a little bit more about that, because I think that we live in a culture where people do tend to admire brilliant jerks. And so what if they're a jerk? Well, we're very big on teamwork and working well in groups to be able to accomplish things. And the problem with the jerk is they're very hard to work with. And so we feel like it's a better model to require, you know, personal responsibility and respect and to have good team relations as a mandatory aspect. So you have to be both talented and good at teamwork. And most people want to be good team players or social human beings. So sometimes they just haven't had the right schooling or instruction on effective

team behavior. But ultimately, we don't tolerate the jerks, brilliant or not. What about if they're content creators? What about if they're one of the hottest showrunners in the business? Yeah, I'm sure on the fringes, both with creative people and also non-creative, I'm sure there's some jerkiness that we have to deal with. But as a whole, what we want to do is have our employees work really well with each other to be able to be very honest with each other, including honest with me, and to incent behaviors that help us navigate a very rapidly changing entertainment landscape. It's not just about hiring the right sorts of people, of course, and making sure to maintain the right sort of environment.

It's also about how you empower those people once you get them to come on board. And one of the key tenets of Netflix is to get rid of the normal controls you'd come to expect in a corporate environment. Things like expense reports, approvals for big spending decisions, vacation policies. The idea is to entrust every employee to decide for themselves. Netflix isn't a hierarchy in the typical sense of the word. Instead, Reed Hastings thinks of it as a tree, but not in the way you might think. In a tree, the trunk is supporting all the branches which do all the work, the leaves, the photosynthesis, nutrients. And so we look at our leadership team

as the trunk supporting all of the real work, rather than being at the top of an organization, sort of like the king. But what happens if the tree is a giving tree? She has read her overstory. Let's remember that the giving tree, doesn't it, just before it dies, it puts all the nutrients back into the roots? It does. It does. Yeah, okay. Well, hopefully we last as long as a sequoia. We'll see. In the meantime, a tree has inbuilt mechanisms for coordinating its activities. Photosynthesis, growth, nutrient exchange. As much as Netflix may be a tree in spirit, in reality, it's not a living interconnected organism.

So how do you make sure everything is functioning as intended? Something that I got very nervous about very early in your book was the element of no rules rules where you don't have vacation policies and you don't have this policy and you don't have that policy. I'd feel like I can't take vacation if there are no vacation days. And I know that you model behavior, obviously, but how do you prevent people from burning out because they want to excel and they love their jobs, so they want to keep going. Sure, the vacation policy is one specific thing, but it's illustrative of the broader structure of the book, which is Erin goes in as the critic, kind of channeling the reader,

and says, wait a minute, wait a minute, wait a minute. Erin is, again, Erin Meyer, Hastings' co-author. For the book, she conducted over 200 interviews with current and former Netflix employees to learn about the company's culture. Her voice offers an outside perspective on the good and bad of Netflix's culture. You know, it's not that great having no vacation policy. Does that mean no vacation? And then tries to really hear from people what those concerns are. And of course, I am a strong role model of taking lots of vacation and I do some of my best thinking when I'm on vacation. So now that we've had it for a decade, we've figured out a pretty good balance where we have very few people who abuse it and sort of,

you know, go away for a year. And then we have very few people who abuse it and sort of, you know, go away for a year. And then we have very few people who don't take any vacation because they don't feel licensed to. So that's an example. The number of hours that you work in a day is also not formally regulated. People get an approximate social understanding and that seems to work pretty well. That social understanding is another key element of the culture you find in the Netflix offices. One where context is set from above. Where leaders lead through their own behaviors so that people can get a sense of expectations. It's the opposite of do as I say, not as I do. They don't actually say anything. They just do. And they expect others to do the same. You don't set explicit regulations. Instead, you instill an ethos where the norms of behavior of the company are clear,

and you trust your people to follow those norms. Hastings offers up a hypothetical example of how someone at Netflix might guide an employee to, say, conceptualize an ad highlighting Netflix's bingeable quality, and how easily that guidance can go awry. Control is when you tell someone specifically to do something. Let's cancel that advertisement. that makes us look bad. And then context would be, we're generally trying to connect with consumers what is making us do this advertisement and really trying to understand what the motivation is. And then if the person says, well, you keep talking how we want to be must-see TV, kind of essential viewing.

And so that's how I came up with this addiction advertisement. And then you can see, okay, I can see that the context that I set, which is we want to be seen as essential, you know, wasn't specific enough. And instead, we want to be seen as a part of everyday life, but not generating, you know, addictive behaviors, and that I needed to improve the context. And thus, by improving the context, it would probably have good application in many other parts of the business, in addition to, say, this group doing the advertising. Leading by context. It's an attractive idea to be sure. Who would argue against freedom of choice? But in a global sprawling organization, are there any risks to this type of leadership? Or is risk exactly what Netflix is trying to cultivate? Remember that all of Netflix is managing on the edge of chaos.

I'm Maria Konnikova. We'll get into all of that right after this. Today, we're talking with Reed Hastings, co-founder and now co-CEO of Netflix. His new book, No Rules Rules, which he wrote with business school professor Aaron Meyer, unpacks why Netflix is a successful global content machine and streaming powerhouse it is. We heard earlier that Netflix likes to lead with context. That means its leaders try to educate on what kinds of decisions would help Netflix thrive. Employees can, and are encouraged to, call some pretty big shots on their own. For instance, content buyers can pull the trigger on multi-million dollar movie or documentary deals without a supervisor's approval. But leading by context only works in certain

types of corporate structures. It's hard to imagine, say, a hospital running without specific protocols in place. If everything has to be coordinated by the minute, you need clear rules and regulations. And so Netflix is deliberate about how it sets up its organizational structure. You know, one form of efficiency is coordinating all the tactics so everybody knows what's going on. And then the problem is, as you get big, that gets harder to do, you get slower. So another way to operate is more loosely coupled where lots of different departments are doing different things and then the danger is that they're going in different directions. So you want them to be aligned but not tightly coordinated. And to do that, you have to

really set a lot of context, use a lot of examples, a lot of storytelling. But remember that all of Netflix is managing on the edge of chaos. You want to be right up to that edge where it's dynamic and there's freedom. It has not fallen into chaos, but it's kind of right on the edge of it. And again, that's only appropriate for some types of businesses. Could you see something happening that would make you go over that edge in some area? Is that something you're afraid of? Or do you think that you've got a pretty good tightrope walking technique down? I'm sure, you know, that in certain groups, we get too close to the edge and then we have

to pull it back and be more clear about the context of what we're trying to do. So it's definitely like the blind person figuring out where the stove is in the room. You've got to prepare to get a little bit burnt and feel the heat wherever you can. Many companies today are focused on error prevention. But to Hastings, it's not all that risky to allow employees to make a mistake. It's riskier not to. No risk-taking would mean Netflix losing out on top talent, overlooking a shifting marketplace, and failing to conceptualize innovations. As Hastings writes, Netflix is less like a perfectly synchronized orchestra with a conductor

directing how musicians should hit a note or hold a beat. It's more like a jazz band, one where all the musicians know the rules and how to play, but nothing is scripted or planned. I was fascinated by that analogy, and I think that jazz obviously sets context, and everyone has to respond to each other. I'd love for you to talk a little bit about it. If you think about a conductor and an orchestra, it's an incredible thing, the level of synchronization, the level of precision, and it creates great art. So let's just say symphonies and orchestras are amazing. Okay, and then there's this renegade little branch of music and, you know, people are riffing off of each other and responding and everyone is highly skilled.

To be able to do that, you need incredible practice and a great ear. And we model ourself more on that. It's less on top-down precision. It's less on efficiency and order and synchronization. And so it's a little bit chaotic, also very beautiful in a different way. It's a beautiful thought indeed. But in practice, when you're talking about an organization as large and multifaceted as the one Netflix has become, how does it work in reality? If every musician needs to be performing at peak, constantly reading and reacting and being ready for that virtuoso improv solo, doesn't that take a toll? Wouldn't you feel

the pressure to perform no matter what? So if I'm someone who's a high achiever, who's incredibly motivated, who's kind of at the top of my game and loves what I'm doing. So how do you prevent me from just basically killing myself because I'm working too hard? And I want to make sure that I don't get fired. It's not that I'm scared about getting fired. It's just I want to keep showing you just how good I am. Well, you know, to the degree that you've got manic tendencies and you tend to be, you know, obsessive about all those things, I'm sure it's hard. But what we try to do is reward people who, you know, show good balance and accomplish a lot and are trying to run the marathon in terms of sustainability.

How were you able to accomplish that yourself? You allude to some rocky starts where you had issues in your marriage that you had to kind of work through, and that there did seem to be a work-life balance issue. Yeah, I mean, these were all the stories from my first company, Pure Software, where there were a lot of things that didn't go right, both in my family life and in work life. And it was out of some of those painful lessons that we really started thinking about the culture at Netflix. And in so many ways, what this book is, is all the things I wish I knew when I had started that first company and about the importance of being direct and honest in a professional setting.

And so again, it's a story after story about the problems with not being honest and the benefits of being more honest than most people typically are in companies. In my first few years as CEO at Pure Software, I managed the technology well. But I was still pretty miserable at the people part of leadership. I was conflict avoidant. People would become upset if I addressed them directly with a problem, so I tried to work around issues when they came up. I traced this personality trait back to my childhood. When I was a kid, my parents were supportive, but we didn't talk about emotions in our house. I didn't want to upset anyone, so I avoided difficult topics. Without much thought, I carried this attitude over into my work.

At Pure Software, for example, we had a very thoughtful senior leader named Aki, who I felt was taking too long developing a product. I got frustrated and upset, but instead of talking with Aki, I went outside the company and struck a deal with another set of engineers to get the project going. When Aki learned what I'd done, he was furious. He came at me and said, you're upset with me, but you go around my back instead of just telling me how you feel? Aki was dead right. The way I'd handled the situation was terrible, but I didn't know how to openly talk about my fears. The same problem affected my personal life. By the time Pure went public in 1995, my wife and I had been married for four years and we had one young daughter. It was the pinnacle of my professional life, but I didn't know how to be

a good spouse. The next year, when Pure acquired another company 3,000 miles away, it got harder. I spent half of each week away, but when my wife expressed her frustration, I would defend myself, saying that everything I did was for the good of the family. When friends would ask her, aren't you excited about Reed's success? She wanted to cry. She was distant from me, and I was resentful of her. The problem turned around when we started going to a marriage counselor. He got each of us to talk about our resentments. I began to see a relationship through my wife's eyes. She didn't care about money. She'd met me in 1986 at a party for Returned Peace Corps volunteers and had fallen in love with a guy

who had just spent two years teaching in Swaziland. Now she found herself hitched to a guy obsessed with business success. What was there for her to be excited about? Giving and receiving transparent feedback helped so much. I saw I'd been lying to her when I would say things like family is the most important thing to me. I've been missing dinners at home and working all hours of the night. And now I see that my words were worse than platitudes. They'd been lies. We have both learned what we could do to be better partners and our marriage came back to life. They'd been lies. We have both learned what we could do to be better partners, and our marriage came back to life. We've been married now for 29 years and have two grown kids. Afterward, I tried to take the same commitment to being honest back to the office.

I began encouraging everyone to say exactly what they really thought, but with positive intent, not to attack or injure anyone, but to get the feelings, opinions, and feedback out on the table where they could be dealt with. As we began giving increasing amounts of candid feedback to each other, I saw that getting feedback had an additional benefit. It pushed the performance of the office to new levels. Feedback is crucial in the world of Netflix. You're expected to not just receive it with a smile, but be ready to give it at any point. To everyone, your subordinates, your superiors,

maybe even someone you don't work with directly. It can seem intimidating to an outsider like me, almost cult-like, but it comes from a place of personal experience because Hastings has made mistakes. One, perhaps the single largest mistake in Netflix corporate history. In September 2011, after Netflix's streaming service had gained its foothold, the company announced that it would spin off its DVD service into a platform called Quickster.

The idea proved extremely unpopular, and Netflix pulled the plug on the concept shortly after the announcement. It's interesting that even in a culture that's as open as yours, it seems that you've still been evolving because there have been moments where in retrospect people said they wish they had spoken up and they didn't like Quickster. Well, we're constantly evolving. I mean, I tell new employees that sometimes they get asked, how are we going to preserve the culture as we grow? And I always say the goal is not to preserve it, it's to improve it. Humans in a hierarchical organization are naturally deferential. And you kind of get the model that the goal of

your job is to please your boss. And we try to reorient people to the goal is to serve the organization. And you should tell your boss what you're doing. But ultimately, it's up to you to figure out how to best serve the organization and the customers. We know hindsight's 20-20. So tell us a little bit about pre-Quickster launch, what was going on? Because I think that this is an opportunity to illuminate some of the cultural thinking around feedback. Well, Quickster involves separating DVD and streaming into two different services. And we were very obsessed about doing that so that we could focus on the streaming service.

And it also involved a 60% price increase for consumers to go from $10 to $16. And a number of leaders in the company were very scared that the customers would react quite poorly to this. And we knew that there would be some tensions, but I vastly underestimated because I could see how important it was to our long-term survival to separate those two. That clouded essentially my judgment about how normal people consuming Netflix would feel about it. And there was a number of executives who were panicked, but they thought, oh, well, probably Reed is right. He's been right before. And they didn't know that their peers were also very nervous. And afterwards, when we all compared notes of how did this happen,

we realized that if all the peers had been talking, then they would have all ganged up on me and prevented Quickster. So we instituted something we call farming for dissent, where on these big decisions, everybody has to write down in public in a shared document how they feel about the idea and their judgment about it. So having that sort of public accountability about what they think and no one's going to be perfect on it helps a lot. When Quickster proved a colossal failure, the mistake was Hastings' own. I asked him, what if it's an employee that screws up on a massive scale? For instance, what if the hugely popular show Stranger Things, whose second season cost Netflix up to $8 million per episode, had flopped? What then? Well, we're fortunate that even our

biggest shows are at most 1% of our budget in viewing. So I'm glad that Stranger Things was a great success, but we've had other shows that haven't been. But Quickster was a pretty big one. If you want to judge by the stock market, which is just one test, I think our stock went down 75% over that year. So that was a pretty big one. It's one thing to say you'd never hold someone responsible and you won't get fired for failing. But I mean, if I worked at Netflix, I might think, well, maybe I will get fired if it's a big enough failure, if I actually screw up enough. Well, that's probably true. I mean, to the degree that it was a big enough failure,

you'd have to question why were we choosing to have you still do that thing. But you're not going to support a lot of innovation if you do that very often. So for the most part, you want to make people feel like if anything, they would get fired for being cautious. But again, avoiding firing is not very motivating. We really want to work on the inspiration and how can you make a real contribution. And yes, just like when you're a professional athlete, you could get injured on any game. But if you spend your time and energy focusing on what if I get injured, you're never going to play your best. So you have to play light and you have to will yourself to not think about those injuries, even though they can happen.

So think of it more like that. We're trying to draw out the best performance of people so they can play epic games. Epic games. It's not for nothing that Hastings views Netflix not as a family, but as a sports team. Each position should be filled by the best athlete, and everyone has to be the best. It's a tough ask,

especially when your team goes from regulation-sized to spanning the globe. How does it change running a company that's the underdog to running a company that's actually the leader and the darling and the one that everyone looks to? You got to be a little more careful. You got to be a better role model and be more consistent when you're, you know, we're not quite the leader. YouTube is about seven times as much viewing as us, but, you know, we're in the top five. So your point is valid, which is we're one of the leaders. So we really try to think through, you know, how do we help each culture have a voice? And so thinking about how are we genuinely good for Mexican storytelling and how do we find great Mexican stories to share with the world or Spanish, you know, or Korean.

That's not the only thing a leader like Netflix needs to think about. Companies need to plan for extreme circumstances, but if nothing else, the present moment has illustrated the limits of any future planning. COVID, of course, has been a boon, at least for now, for the streaming services. But it made me wonder how Netflix would handle a change of a similar scale that was not actually conducive to its core business. We've been very fortunate during COVID that people are staying at home watching entertainment, and so our business has grown faster than ever. So it's more the challenge of hiring than any other challenge. I recognize that COVID is not the best example in the sense that Netflix is growing right now,

but your job is to see those things potentially. So, given that your culture really is so talent dense, how do you go about dealing with that if you do have to actually contract? Well, it's, you know, very hypothetical. We went public at 200 people about 20 years ago, and now we're about 8,000. So negative things can happen and you have to deal with unforeseen circumstances. The basic thing that we're trying to get through is investing in the human capacity, not so much in rules, but in good judgment. And that makes people a little nervous because it's not necessarily objective. And I say, no, judgment's not objective.

Judgment is judgment. And so it's leaning into judgment and developing the people. And then they can handle either very rapid growth or potentially shrinkage or various competitors or new opportunities. So how does COVID actually affect that culture-wise, the fact that you can't travel anymore, the fact that so much of the Netflix culture is about communication and feedback and all of these interactions? I can only imagine that it's more difficult to replicate that in a Zoom environment than it would be for businesses with slightly different cultures? Well, COVID is a huge and terrible thing. But again, organizationally, we're really set up to adjust to challenges and opportunities. And so as an example, in that first weekend, we moved hundreds of workstations into people's

homes that are animators who produce animated feature films. And I didn't even know about it. And I got told about it about a week later. What about the original content with all of the shutdowns? We're fortunate to be back to producing and filming in Europe, in Asia, and little bits in the U.S. that still got a ways to go. But we're running full ahead in Europe, which is great for us. Great. I think a lot of people will be very happy to hear that who are scared that there will be no new television to watch because nothing is getting filmed.

The crown is coming this winter, so everyone will get their fix. But maybe this can also serve as a time of reflection. Huge changes can happen in a heartbeat. You can't plan for them, but can you react to them? And this is just as important a question to ask. Do you want to react to them? Or do these changes herald a market shift so profound that you want no part in it? What if it's the kind of shift that inspired Hastings to take a chance on an idea no one wanted a part of, not even Blockbuster? Are you still feeling that inspiration? Yeah, I mean, for me,

we're just beginning. You know, we're strong in the U.S., but we're so, so small around the world. And we just have an incredible opportunity to share stories. And we want to have entertainment really bring people together and connect and, you know, see each other in all kinds of ways, not only between countries, but also between social classes, between genders, between races. And entertainment can play such a positive role in all of that. What do you see as new opportunities? First was the transition from DVD to streaming. Then we had the transition to Netflix original content. Do you see that being the future? Well, the big thing we're working on is succeeding around the world like we have in the U.S. So we want to be as good at German content as we are at American content and as good at Brazilian content and Korean. And that's a long work in progress. So

we're investing a lot there. How do you make sure that you don't miss the next opportunity? And do you feel confident that you will be in a position to just completely change gears if need be? You know, it depends, I guess, on what the substitute is. So if the substitute is other digital phenomena, video gaming, or, you know, some kinds of phone interaction, or AR or VR, then we'll probably do fine because, you know, that will also cross integrate with like great television stories, movies and series to the degree that the substitute is everybody's meditating and then they don't bother with entertainment anymore. Then that's a radically different proposition.

And typically companies have a hard time with that. Like Kodak might have been able to produce digital cameras, but were they ever going to become Instagram? Not really, because the substitute for Kodak was so radically different in Instagram as a way of sharing memories and photos that they probably had no hope. So again, it depends on what the innovation is. With Netflix, I hope to promote flexibility, employee freedom, and innovation instead of error prevention and rule adherence. At the same time, I understood that as a company grows,

if you don't manage it with policies or control processes, the organization is likely to descend into chaos. Through a gradual evolution over many years of trial and error, we found an approach for making this work. If you give your employees more freedom instead of developing processes to prevent them from exercising their own judgment, they will make better decisions and it's easier to hold them accountable. This also makes for a happier, more motivated workforce as well as a more nimble company. Netflix is a remarkable success story. And it seems clear that the unique culture that Reed Hastings has created

plays a large role in that success. But I can't help but wonder, is that all there is? Just looking at your overall trajectory and at Netflix's overall trajectory, what role do you ascribe to luck? Oh, huge. I mean, a number of times an incredibly lucky thing happened. And you can't predict it. You know, I'm lucky to be healthy. I'm lucky to be in California. So you just make what you can and do the best you can. And in our case, what we did with this book is really try to lay out all the lessons that we've learned so that future organizations can start from a better place. And I'm sure they will innovate beyond what Netflix does. And that, you know, in 25, 30 years, people look back and say, yeah, that was good,

but we've gotten so much better. That was Maria Konnikova in conversation with Reed Hastings about his new book, No Rules, Rules, Netflix and the Culture of Reinvention. It was co-authored by Aaron Meyer and published by Penguin Press. As this book club format is still a work in progress, we would love to hear what you thought. Let us know at radio at Freakonomics.com. Hope you enjoyed this bonus episode. We will be back with a regular episode, as always, on Wednesday at 11 p.m. Eastern Time. Until then, take care of yourself and, if you can, someone else, too.

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