Today, Explained - Netflix has no chill

Episode Date: July 6, 2020

Netflix grew so popular during lockdown, it almost broke the internet. Land of the Giants: The Netflix Effect explains how the company has upended tech, Hollywood, and how we spend our free time. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Visit connectsontario.ca. We've made who knows how many episodes about COVID-19 and quarantine, but we've had this big blind spot the entire time. Not one mention of Tiger King or Love is Blind or Extraction. We have not talked about Netflix. According to data from Nielsen, the global pandemic has more of us turning to services like Netflix than ever before. Streaming doubled between 2019 and 2020. The company added something like 16 million subscribers in the first few months of the year. So many people were streaming shows and movies that the EU had to ask Netflix to lower their video quality. Netflix almost broke the internet during quarantine. There's no denying the company has changed entertainment as we know it.

And our friends over at Recode have a new podcast all about how that happened. It's called Land of the Giants, The Netflix Effect. And it's going to change how you think about Netflix. Over the course of seven episodes, which you can't yet binge because they're coming out one at a time every Tuesday for the next few weeks, you're going to hear about how Netflix is kind of a culty company to work for and how the company eviscerated Blockbuster and disrupted Hollywood, how their creepy algorithm knows what your brain wants to see next, and why the company is totally cool carrying the debt of a small country. So be sure to subscribe wherever you're listening to this

right now. And to whet your appetite, we're running the first episode on Today Explained today. Here it is, Land of the Giants, the Netflix effect, episode one. Back in early March, about a week before we all went on lockdown, our team got on a plane, remember planes? And went to Netflix's headquarters in Hollywood to meet with a bunch of their top executives. I'm with a news crew. Are you really?

Yeah, these are the folks from Fox Media. Good luck. All right, thanks. Okay, let me just take you over here. We went through the famous Netflix lobby, which has the state-of-the-art video screens that show Netflix movies and TV shows, and they change every couple of seconds.

It's really impressive. We passed these bountiful micro-kitchens that are overflowing with snacks and food and everything you'd ever want, and we went to a conference room where we sat down with the most powerful man in Hollywood. Thank you for making time. Easy question.

Tell us your name and what you do. I'm Ted Sarandos. I'm the chief content officer at Netflix. Ted Sarandos spends billions and billions of dollars a year to make TV shows and movies that get watched by a couple hundred million people around the world. But a decade ago, Netflix wasn't reshaping entertainment as we know it. It was just a company that rented out DVDs and streamed other companies' old TV shows and movies.

Ted Sarandos wanted to change that. He and his boss, CEO Reed Hastings, wanted Netflix to start making its own stuff, stuff that was as good as anything you'd see on HBO or NBC. They wanted to show their customers and Hollywood that they were serious. In order to do that, they needed a big, serious hit. That's how you devour a whale. One bite at a time.

Enter House of Cards. Give and take. Welcome to Washington. A big-budget political drama starring a big name, Kevin Spacey. This was back when it was okay to like Kevin Spacey. And made by a big-time director, David Fincher, who made movies like Seven, Fight Club, and The Social Network. Ted Sarandos really wanted this show. But so did everyone else. So when I looked at that and said, why would they do this show with us? Everybody wanted House of Cards.

HBO, FX, AMC, everyone was bidding on it. And why would they do it with us. Everybody wanted House of Cards. HBO, FX, AMC, everyone was bidding on it. And why would they do it with us? We've never made or released an original anything. So basically, I said, look, we're going to have to have an answer for that. HBO could tell Fincher and company they were the home of The Sopranos and Sex and the City. AMC could boast about Mad Men and Breaking Bad. But Netflix just had red envelope mailers for their DVDs. So Sarandos had to get creative, and he had to break out his checkbook. This committee has accused me of a great number of things. You accused me of pay to play. If the show didn't work, we will have dramatically

overpaid for one show. And if it does work, it could fundamentally change our business. So to me, it was a classic risk-reward analysis, and we were able to apply to it. This was the deal. Netflix would pay $100 million to make the show, and it promised to make two full seasons without ever seeing a single pilot. This would be a giant bet for any company in the content business,

but it was colossal for Netflix, which had never done any of this before. But the craziest part wasn't the money, or even that a tech company was going to make two seasons of a show sight unseen. How much of your ability to get this deal done, to do $100 million, two seasons, is specific to Netflix's culture? Well, 100%. Because I told Reid about the deal after we did it. Really? Yeah. He literally had no idea that you had plunked down $100 million in two seasons?

No, half the company was still believing that exclusivity didn't matter. You called up Reid and said, by the way, I just spent $100 million on a show? Pretty much. What Sarandos is talking about here is a big part of Netflix's internal culture. It's something employees refer to as freedom and responsibility. It's what allowed Sarandos to bet really big on something he had no idea how to do and to do it without running it by his boss first. Sarandos believes that Netflix's culture, led by Hastings,

is what allowed it to become the industry-changing, zeitgeist-defining giant it is today. It was him creating the culture that empowered me to do that and knowing that I could rationalize the risk-reward side of it, the upside of this deal if it works out, and knowing if I thought that I was going to get fired if it didn't work, I probably would have missed it. What was his reaction when you said,

by the way, we just bought a show for this much? He was very excited about it. I mean, he was a little anxious. $100 million is a lot of money to us at that point. Some context here. A couple years earlier, Netflix had spent about $25 million to buy a huge catalog of movies from Disney and Sony for two years. And this was $100 million for a single show. I will tell you that he completely understood the logic going into it and understood why we did it. And I said it was fast moving and, you know, that's why we did it. And that the idea that if it makes it, that we become much

different than what everyone thought we were. And if you think it was hard getting here, you're beginning to understand what I'm willing to do to stay. You know, the rest House of Cards was a commercial and critical smash. It told Hollywood and everyone else that Netflix wasn't just a place to see reruns anymore. And now, Netflix makes just about anything it wants, whenever it wants. Ted Sarandos was right. This is Land of the Giants, the Netflix effect.

I'm Peter Kafka, and I'm here with my colleague, Ronnie Mola. Peter and I are both reporters at Recode and Vox. And over the next seven episodes, we're going to explore how Netflix has reshaped how we watch and what we watch. We're going to cover a lot of ground this season, from the way Netflix toppled blockbuster video and disrupted Hollywood, to the streaming wars that have kicked off thanks to Netflix's enormous success. But we're going to start the series off with what people at Netflix will tell you is the most important thing about Netflix. It's internal culture, which I bet does not look like any company you've ever worked for. Maybe you've heard about hard-driving tech companies, and Netflix is certainly one of those.

But it's way weirder than that. There are all kinds of things at Netflix that sound better than the place you work at. Like you get to make more money or you take as much vacation as you want. And there are lots of things that sound really worrisome, like the idea the company is constantly trying to figure out if it can replace you with someone better. Or that you're going to get constant criticism from your coworkers and managers or pretty much anyone. And then you've got to take that criticism seriously. That culture comes with its own language, too. So if you want to work there, you have to learn to use phrases like blast radius, no

brilliant jerks, keeper test, sunshining. If you think that sounds like a cult, well, sometimes working on this podcast, we felt that way, too. But this isn't some management fad that Netflix picked up recently. It's deep in the company's bones. And Netflix believes deeply that it's core to its success. Much of Netflix's culture was shaped by Reed Hastings and his longtime head of HR, Patty McCord, who is now a corporate management superstar based on her work there. The way McCord tells it, a critical part of the Netflix DNA came out of a

brutal day in 2001, when Netflix was just a few years old, and she laid off a third of the company. We said goodbye because we ran out of money. I mean, we were just broke. And what we literally did was we gathered in the parking lot, where we always did, and Reed said, today is the day we're going to say goodbye to some of you. And your manager's going to tell you who goes to see Patty and her team in HR, and who's going to stay. Boris Drautman was an early Netflix engineer. He remembers standing outside in the parking lot, listening to Hastings address the company,

wondering if he was still going to have a job when Hastings finished speaking. You're going to go back to the office and your manager will tell you whether you made it or didn't make it. And so after that, we all kind of trickled in back to the office. And the manager started calling in people who didn't make it one at a time to the office and letting them know. So that was pretty, pretty tough.

Jotman survived those cuts, though he was obviously freaked out. But for Patty McCord, this is what she did for a living. Come on, this is, I've done this. I had done this. I've been in Silicon Valley for 30 years. You think I haven't done a layoff before? This was nothing. But even McCord, who was used to firing people, was surprised at what happened next. That layoff was what begat the high-performance culture. And we got twice as much done with the third as many people. And it was more fun. And that was, that truly, I think, was the beginning of the culture, which is, you know, we were working so hard and we're getting so much done. And that beautiful startup, if you've ever been in it, it's just so thrilling. The takeaway from McCord and Hastings and other Netflix executives was

that laying people off can be good for the company. And more than that, Netflix was a team, not a family. So it wants to swap out the players it has for better ones whenever it can. Some employees, like Droughtman, the ones who kept their jobs, were not as excited about this. What I've heard was the notion of the team of employees being considered as a team of football players. If you can upgrade any one of them, why wouldn't you? And so it was very kind of cold and calculated approach to human resources. You can call that cold and calculating, but Hastings and McCord thought that this idea, along with the other values they developed along the way, really defined what Netflix was or could be. They really wanted to figure out a way to cultivate and

preserve this culture. So they wrote it down. If you go back and you look at the quote famous culture deck, the first chapter is about the values and behaviors that we expect from each other. Like if I want, if I expect honesty from you, what does that mean? And if you're dishonest, what does that mean? This is the're dishonest, what does that mean? This is the beginning of what's now known as the Netflix culture deck. Netflix kept this inside the company for years, but in 2009, it shared it on the internet. You can still find a version of it on Netflix's site today. It's this 125-page slideshow presentation.

This was a huge hit at tech and startup companies because at tech and startup companies, the idea of moving fast and making it up as you go and not worrying that much about org charts sounds kind of familiar. Even if you don't actually do that stuff, it sounds like something you want to do because that's how you're supposed to disrupt the big entrenched companies in your way,

the way that Google and Facebook did it. So in Silicon Valley, Netflix's model was aspirational and also plausible and an echo of stuff they already believed. And what's not to love? Netflix is preaching efficiency, hard work, building a team of all-stars, giving people room, or rather the freedom and responsibility to work the way they want to work. Okay, well, we have adults who are high performers. Well, should we have a bunch of rules? You know, at the time we were at that chapter, we had just gone public and everybody was telling us it was time for our employee handbook and it was time for all the policies. And we thought, why?

You know, really? What if we experiment with that? What if we don't have a travel policy? What if we don't have a time off policy? And this is crucial. This wasn't advice coming from some business school professor or a consultant or some doofus writing a blog post. When Netflix put this on the internet, this was coming from a company that was winning.

They were kicking ass. And they were telling you, this is how we did it. You can do it too. For employees, the trade-off for all this excellence has been that things are not necessarily stable at Netflix. You may like that, or you may find that really unsettling. You're only on there when you're performing your best, and then once you're not at your best, you get cut. Shalini Ramachandran is a Wall Street Journal reporter who spent years covering Netflix and wrote a fascinating story that really dug into

the pros and cons of working there. You started to see that people were like, this is super weird. Like, it actually is like not that fun a place to work. We're really scared of being fired. A lot of the people I talked to felt that there was a culture fear. In fact, there was a former HR executive who said that she often heard that. But I think that at the same time, it wasn't just like, oh, it was a horrible place to work and I regret it. It was often, it was really tough and I hated the way I was fired and my friend was fired, but I'm really glad I got to work there for some time.

One crucial point she explored in her reporting was the way the people at the top of the org chart felt about the culture versus the rank and file. Many of the top executives, as you can imagine, drink the Kool-Aid of, like, Netflix obviously has been doing a great job and business and innovating its own business. And so in many of the things that it's been doing,

they can point to our culture, it's working. The top line results are great. But I think what many of the people at the top probably can't see is what's going on as you grow at this breakneck pace. As we were working on this podcast, we spoke with people who worked at Netflix who told us some of the same stuff. I talked to a marketer who said the company had a punishing work ethic that was not sustainable. And then she also told me that when she left Netflix, she knew she'd never get paid that well again. Publicly, Netflix doesn't express any doubts about how it runs the company. It thinks its high-achieving culture is what enabled it to beat Blockbuster and leap years ahead of everyone else in media and tech. And Netflix believes this culture helps recruit employees.

McCord and Netflix co-founder Mark Randolph have written books about it, and Reed Hastings has one coming out this fall. And let's be clear, lots of companies say their culture is key to their success, and lots of companies spend time talking about their values. In the original version of the Netflix culture deck,

Reed Hastings pointed out that Enron had its values, including the word integrity, chiseled on the wall of its lobby. And this was before it went bankrupt and its leaders went to jail for fraud. But at Netflix, you just can't pay lip service to this stuff. You really need to believe in it, or at least act convincingly as if you do. You need to be all in. The bosses do acknowledge that Netflix culture, born in a Silicon Valley startup, developed at hyperspeed, may not work everywhere. Hastings, for instance, doesn't think you could use the Netflix model to run a factory that makes

cars or a vaccine, stuff you have to make exactly the same way every single time, using a very strict set of rules. There's also a question about how well this culture is going to work as Netflix moves from being a Silicon Valley company to a Hollywood company. Netflix now has this big office right on Sunset Boulevard. And over the last few years, a lot of Netflix hires have come from movie studios and TV networks. It's paying a lot of Hollywood veterans much better than their old jobs did. And in the process, Netflix is remaking Hollywood. But we're going to find out how well those people can adapt to the Netflix way of doing things. LA isn't the only concern here.

Netflix is setting up offices all over the world, and a culture that works in California may not fly in Europe or Asia. This is a huge global test for Netflix, and it's underway right now. We're not going to get the results for years. Spencer Wong was a Wall Street analyst who covered Netflix. And Reed Hastings liked his work so much that he hired him as head of investor relations, where he would talk to other Wall Street people. And up until then, Wong thought he knew Netflix pretty well.

Until he found out that anyone who worked there got to see the most valuable information the company had, its running tally of subscribers. I was like, oh my gosh, this is like, if I was an analyst, this is like a gold mine. Like, this is exactly what I would want. And I was like, oh, so like, who gets this? Like, you know, and I think Wells was like, oh, a couple thousand people, like, you know,

whoever signs up. And I was like, whoa, that's crazy. John Friedland was a reporter for the Wall Street Journal, where he spent a lot of time trying to learn company secrets. Then he went to work in PR for Disney, which tries really hard to keep its secrets secret. Working for Netflix was very different. I'll never forget because my first meeting, they're up there, they're talking all the numbers to everybody, director and up. Which is how many people? At that point,

it was maybe 100 people. But it was like, holy camoly. What Friedland was looking at were Netflix's financial results, numbers it hadn't made public yet. At other publicly traded companies, those numbers, which are only released to the world every three months, are treated like nuclear launch codes.

Getting that information early is worth a ton of money to a ton of people. And Netflix was basically handing it out to its employees. There's no armed guards, no lock, no key. To go to this place where they're just freely talking about economic outcomes and the finances prior to public disclosure struck me as remarkable because confiding in that large group of people about very sensitive financial materials was kind of a high level of trust and confidence to put in your staff.

And you know what? It worked just fine. It's kind of crazy that Netflix has never had these numbers leak out. It just lays them out for hundreds of its employees and almost dares them to abuse it. It's a pretty cool message, which is we're going to treat you like adults. And part of being an adult is understanding what's going on at your business. So you know what we know. And also part of being an adult is being discreet. In other words, the company is telling its employees, we trust you. This is a big part of the Netflix culture, this idea of radical transparency. We believe in internal transparency because we want our employees to be well-equipped with context on what we're trying to do as a business so that

the employees feel empowered to make smart decisions on behalf of the company. So maybe being able to see inside your company's finances sounds like a good thing to you. What about letting your coworkers see what you make? Sounds a little less good. But that's radical transparency, too. There are some 500 executives at Netflix that have the ability to see what every single employee makes. And at one point recently, Reed Hastings suggested that every employee at Netflix should be able to see what all 7,000 employees make. That one didn't happen because other Netflix execs shot it down.

Turns out that even people who embrace radical transparency draw the line somewhere. And even the executive we talked to earlier, John Friedland, surpassed the boundaries of Netflix's tolerance for candor, another one of the company's buzzwords. In 2018, the former communications chief used the N-word to illustrate how harmful saying the word retarded could be in a Netflix comedy special. He used the word again that day when he described the incident to HR. After an internal uproar, Friedland apologized to Netflix employees. He was eventually fired. Coming up, how Netflix made the biggest mistake in its history, and how the lessons from that self-inflicted wound ended up making its culture even weirder.

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please contact Connex Ontario at 1-866-531-2600 to speak to an advisor free of charge. BetMGM operates pursuant to an operating agreement with iGaming Ontario. Welcome back to Land of the Giants, the Netflix Effect. We're exploring Netflix's unique culture and how and why they made it. We're going to tell you about a part of Netflix's culture that came out of one of its biggest mistakes. Okay, Roddy, I'm going to take you back to 2011 when Reed Hastings almost sank the company. All right, so here's the deal. Today, Netflix announced that it was splitting its business into two. I mean, the good news that's going to come out of this is no longer will New Coke be the worst public announcement. It's really

going to be Quickster, which I'm saying is deadster. This was Netflix's attempt to get the world to embrace streaming long before streaming was mainstream, and it failed. It's one of those experiences that no one wants to think about, that's for sure. It failed so badly that Netflix execs like Cindy Holland, who runs original programming, have tried to forget it. Let's back up. Netflix started out in the late 90s, shipping movies and TV shows on DVDs through the mail. And in 2007, Reed Hastings began letting his subscribers stream videos over the internet, too, for free. At first, this was a thing that appealed just to early adopters.

But by 2011, millions of Netflix customers were doing it. But Hastings wanted things to move even faster. He wanted everyone to stream, and he wanted to start getting out of the DVD business. We were a hybrid service with DVD and streaming together in the U.S., starting to do streaming alone internationally. I realized that we would be better if we could split those two services so we were not dependent on DVD and that we were the best streaming company full stop. You can hear it in his voice. Hastings is a tech guy and he's a very logical dude. And like a lot of Silicon Valley logical dudes, especially those that have had some success early on like he did, Hastings assumed that if it made sense to him, you'd get it too. In his mind, this was simple. Streaming was the future and Netflix had to make itself

into a streaming company. So Hastings tried to force the issue. You'll still be able to stream movies, but if you want DVDs, you're going to have to use a whole new service. Boy, are people pissed off about that one. In 2011, Netflix announced that its basic service, which offered DVDs and unlimited streaming for $10 a month, was now going to be two services.

If you wanted to watch stuff on the internet, you'd pay $8 a month for that. And if you wanted to rent DVDs, you'd pay another $8 a month for that, too. So you have to pay a lot more to get the same stuff you got before. That is a good way of putting it. It was a 60% price hike delivered when Americans were still climbing out of a huge recession. And it went along with a move to make a simple service way more complicated.

You can imagine how that went over. No one was thrilled by the recent Netflix pricing increase. But the way in which they delivered the message was what really seems to have caused the majority of the backlash. This is one of the first mainstream internet uprisings against a big consumer company. A lot of this happened on Facebook, where Netflix customers went to complain,

and sometimes they would find Reed Hastings there answering some of their complaints. He was extra hands-on back then. It's hard to remember what 2011 was like, but a lot of the internet, mass behavior, social interaction stuff was just starting. And so this idea that then people would be upset on Facebook and then other people would see it and amp up the total conversation, we had not witnessed many of those in society before. Netflix customers weren't the only ones

who didn't like Hastings' idea. Many of his executives also had doubts, but they were scared to tell him that. Or more generously, they figured Reed Hastings is super smart, and if he thought it was right, he must be right, even if it made no sense to them. I do remember the conversations. You know, the difficult thing about it is Reed had been right about almost everything. Cindy Holland is one of those executives who didn't know how to tell Hastings that splitting the business in two might be a mistake. This was really the first big example where I think there was some nervousness. Yeah, there were some doubts, but he'd just been right so many times.

This wasn't terrible logic, by the way. Reed Hastings was the guy who started a video company back when everyone in the world got their videos from Blockbuster. Bad idea, right? But he won. By 2011, Netflix had more than 20 million subscribers and Blockbuster was bankrupt.

So maybe Hastings did know what he was talking about. Everyone knows the tale of the self-absorbed, arrogant CEO who doesn't listen. And there's an element of that because we had been so successful at so many things before that. But the more subtle one is that I had been so successful before that most of the executives thought, this isn't smart, or I don't think it is smart, but Reid has been right on so many things. I'll bet he's right on this one, and I'm just not seeing it. But the customers saw it it and Netflix paid the price. By the end of

the year, more than 700,000 people had canceled their Netflix subscription. And at one point, Netflix stock had dropped by 70%. What was it like inside the company when you rolled this out and then saw the feedback coming in, saw the stock drop? What was it like? At first, we were defensive and we knew it was going to be hard. We weren't stupid that people were going to like it. Customers bailed on him and investors hammered his stock, and Hastings doubled down. To emphasize that the future of Netflix was streaming, he announced that Netflix's DVD company was no longer going to be called Netflix anymore, and he decided the best way to announce that was a video.

Hi, I'm Reed Hastings, CEO and co-founder of Netflix. We've been working for the past 14 years to build Netflix year by year into the best possible service we could build. We're making this video today to apologize in person, or at least on camera, for something that we did recently. This is a weird video. It features Hastings sitting outside at a patio table wearing a bright teal button-down shirt. It's also weird because he's not really apologizing. He's saying he's going ahead with this plan that everyone hates.

Oh, and he's got a new name for it, too. We think that the DVD service needs its own brand so that we can advertise it. So we've named our DVD service Quickster. What the hell is a Quickster? Why is it being spelled Q-W- And why is the CEO of this tech company shooting lo-fi apology videos outside his office?

This video and that name were so widely panned that even Saturday Night Live went after it. And now a message from Netflix.com. Hi, I'm Reed Hastings, CEO and co-founder of Netflix. This is Jason Sudeikis as Reed Hastings, and Fred Armisen is next to him as one of his underlings.

Fake Reed Hastings, by the way, is wearing that teal shirt. We knew you loved Netflix because it was an easy-to-use website for all your movie needs. To make it better, we split it into two separate, slightly more confusing sites. Netflix for streaming video, and Quickster, which will handle DVD rentals. Did we spell it Quickster in a normal way?

No, we didn't. No. Q-W-I-K. Annoying, but easier. Right. Yeah. And by the way, we know it's off-putting to see the CEO of a powerful company rocking a goatee and teal shirt, but trust us. We know what we're doing. This is a great video, by the way. It is definitely worth looking up.

And Netflix got lucky. The skit never actually ran on SNL itself. It was only online. And do you remember the SNL video? Yes. You're wincing. Steve Swayze handled PR for Netflix during the Quickster debacle. The thing is, Netflix moves fast on everything.

And when it's to the consumer benefit, everybody loves it. But when it's a mistake, it's amplified. And that's when we really started to feel the hurt. That's when people really revolted. The non-apology apology video did not work. More subscribers left and Netflix stock sank even lower. And Reed Hastings, the super logical guy who was convinced that he was right and everyone else was wrong, finally got the message. He was left with no choice. Netflix has abandoned Quickster, its wildly panned movie streaming service.

Netflix says it was just too quick with its plan for Quickster. In other words, Quickster is dead. Even today, Hastings says he was wrong, but not that wrong. The big thing was we did a 60% price increase to 20 million American families in the middle of a recession. So there's no communications that's going to make that go down well. So to recap, you raise prices, you make a simple service complicated, you create a terrible name for a new product that people do not want, and tell everyone who hates it that

they're wrong. This was not a great run for Hastings, and he put the life of his company in danger. But Netflix survived. Eventually, subscriber numbers started ticking up again, and since that's all Wall Street really cared about, the stock went up again, too. And while the Quickster name has gone to heaven, Hastings still ended up going forward with his plan

to make DVDs separate from Netflix's streaming service. Today, if you want to get Netflix to send you DVDs, you can. You go to a service called DVD.com and you sign up there and you pay another eight bucks a month. The lesson for Hastings was not that he screwed up or that he was too early pushing streaming or maybe he should have worn a different color shirt in that video. It's that lots of people around him could have told him he was going to make a mistake, but they didn't. They lost their own self-confidence. It wasn't me suppressing it. It was them overly deferential because of the track record of the beating blockbuster, all these like crazily unlikely

and hard things. And so afterwards, what we realized is, okay, we need to be much more active at farming for dissent. Hastings vowed to run a company where everyone, everywhere could tell everyone else what they thought of them and their ideas. And specifically, Netflix came up with this idea where you could take a crazy big swing at something, but you better ask other Netflixers to troubleshoot it first. This is what Hastings and Netflix call Farming for Dissent. You're trying to get your coworkers to tell you what's wrong with your idea. If you tell everyone about your plan and you get their feedback and they hate it and you still want to go ahead, you can. And if it fails, you'll be okay in theory. But if you haven't farmed for dissent in advance and you also fail, you're going to have a problem. Because then they all see each other. It's just an open Google Doc.

So they all see how each other feel. And then everybody has to vote in public in writing of do they think this would be wise, stupid, not stupid. And then it's up to me to write a summary of, OK, this is what I heard. And it might be that we're still doing X or Y, which might not be the popular choice. So no one it's not advertised as a democracy. Let's vote it up like the Senate or something. But it's everyone on record. I'm still not 100% sure that employees will ever be as candid with Hastings or their boss as they might be with people who can't lay them off and ruin their lives. So you're suggesting that it's one thing to tell me that you don't like my salad choice and another thing to go tell our CEO that you don't like the direction the company is going?

Exactly. Yeah, that makes sense. Oh, and Reed Hastings made one other decision after Quickster. He hid that teal shirt in the closet, and he never wore it again. And a few years later, he gathered his employees and held a ceremonial burning. Where did you burn it? Just in that same patio where the video was. That's awesome.

Reed Hastings is happy to tell you he got Quickster wrong, but in Netflix, everyone is supposed to tell you how they got something wrong. And if you're at a high enough level and you screw up, it's not enough to just admit that you screwed up. You have to do it in public. Shalini Ramachandran at The Wall Street Journal wrote about this process. It's called sunshining. Sunshine is when you have done a misdeed and you're forced to be in front of various numbers of people,

whether it's your team or a bunch of executives, the whole e-staff that they call it, all the VPs and above or the full directors level and above, which would be hundreds of people. And you're supposed to go up there and you're supposed to say, this is the bad thing I did. I'm sorry. These are all the ways that I was wrong. Maybe depending on how you think about work or the people you work with, that can sound like a good idea or a super awkward one. But it's hard to think that many people would be comfortable with one of Netflix's most radical ideas, the keeper test. Keeper test is what managers are supposed to apply constantly to anybody on their team, which is the question of, are you the best person for this role? And if the answer is no, what the keeper test says is that person should no longer work at the company. Many people come there knowing that

they might get cut anytime. This all comes to this keeper test. Ronnie, I got to say, I am not comfortable with the keeper test. I don't think I'd be comfortable with it during boom times when it's relatively easy to get a job. And now we're in a giant recession. Yeah, but Netflix argues that doesn't mean it's firing people left and right. Its total turnover rate is something like 11 or 12 percent, which it says is in line with the rest of the tech and media industry. But even people who like working at Netflix say the keeper test and the idea that you're

constantly having to prove yourself or at least prove that you're applying the keeper test to people who work for you, can be just as nerve-wracking as it sounds. Is every single person in my team the right person to be here? Do they deserve to be here? And it's something you're supposed to be constantly asking yourself. And some managers even told us that they feel pressured to fire people or else they risk looking too soft. The knowledge of this keeper test and the fact that people know about it, that their managers are constantly judging them, it makes them worry that, well, I could be fired any minute. The keeper test is supposed to apply to everyone, including the person who helped Reed Hastings create it. That's HR Director Patty McCord.

Ultimately, I had to make the decision that the company would be better with someone else in that role. In 2012, Hastings decided that McCord was no longer passing the keeper test. She knew the deal. It's a team, not a family. And so he let her go. Because we had made that clear, they can respect me making a judgment for the benefit of the team, even if it's hurtful to them, and still be great friends and allies and do things together. So I agree

that it's unusual, but again, it falls out of being clear upfront that we're working together for the benefit of the company. And it's not a family, so then it's not a violation of a social norm. If you ask either Hastings or McCord about what happened, both of them say they don't have hard feelings about it. The company had grown and changed, it was becoming more of a Hollywood company and less of a pure tech company, and McCord didn't fit there anymore.

But even Patti McCord, who discusses firings and layoffs with such ease, who at one point laid off a third of the company, still has a difficult time discussing her own departure. Of course it was an emotional experience. I'd worked with this guy for 20 years. This is my company. I still talk about it as my company. I still believe it's my company.

It was very, very sad to leave, but it was completely reasonable. You know, I really was not the right person. I'm not the right person. Other top executives that Hastings has unkept include Neil Hunt, an early product executive and a longtime friend, and Mark Randolph, who co-founded the company with him. To me, that's a little jarring.

So I asked Hastings about what it was like to let go of some of his closest and earliest collaborators. Were either of them surprised that you fired them? You know, you use the word fire, which is in some sense accurate because I get a severance package. But at a senior level, it's not like I walk into an office and do the you're fired. We, in both cases, talked about it over many, many months. So I don't think there was any surprise, you know, at the end. That sounds difficult, but Hastings says he's gotten better at it over time. The key, he says, is to not be too human about it. The first time I was a CEO, I couldn't do it at all because I was so focused on kindness and the human value. Hurting someone was just too hard for me. Then it's like, if someone really needed to be fired, I would sit there and fumble around.

I couldn't even say the words. It was like that total bad leadership situation. Ultimately, I realized that honesty is very valuable. As long as I was doing it for the right reasons, because I thought it was better for the company, I could live with myself, even though it hurt me that it hurt the person. When Hastings started running the company

back at the turn of the century, Netflix had a few hundred employees. And the big challenge was figuring out how to move discs and envelopes around the country. Now it's about buying and making content for the world and streaming it over the internet and managing more than 7,000 employees. So what if it turns out that Reed Hastings isn't the right guy to run Netflix one day? I asked his number two, Ted Sarandos. Who's going to tell Reed that he failed the keeper test? Nobody. Why would they? But Hastings knows

that one day he is going to be replaced. How are you thinking about your succession plan and your keeper test? You know, I'm not the best judge. For me, the board is really the best judge. I'd love to stay at Netflix for a long time. I've got no other plans besides philanthropy. And if the board is looking for a reason to keep Hastings, all they have to do is run the numbers. Here is the most important one. It's stock price.

In 2002, when Netflix went public, a share of the company is worth about a dollar. Today, as we're recording this, it's worth about $440. And Reed Hastings will tell you he has the Netflix culture to thank for that. Okay, Peter, you passed the keeper test for this episode. For the rest of the season, we're going to discuss how Netflix has revolutionized what we watch, how we watch, and more. Like how Netflix has forced huge companies like Disney, Apple, and Amazon to chase after it? Yep, we're diving into the streaming wars and what the future of streaming looks like. But we're also going to look back to a time when Netflix changed your Friday night trips to the video store. Tonight, make it a Blockbuster night. Blockbuster understood that

only 20% of customers who came in would get the movie that they wanted, and they would have to get something else the other 80% of the time. I had people tell me, I saw you in here when I dropped it off. You tell me you didn't check it in on time? I'm not paying that. It got heated. That's right. We are going back to Blockbuster Video and how Netflix killed the video store. That's next time on Land of the Giants, The Netflix Effect. This podcast is a production of Recode by Vox and the Vox Media Podcast Network. This episode was produced by Bridget Armstrong and Zach Mack. Our editor is Charlie Herman. Gautam Srikashan engineered and scored this episode and composed our theme. Zach Mack is our showrunner and Shat Kerwa is the executive producer. Quick disclosure, Vox.com and Vox Media make shows for Netflix. None of the people working on this season of Land of the Giants

are involved in the production of those shows. I'm Peter Kafka. And I'm Ronnie Molla. Thanks for listening.