I worked in Marketing at Netflix for eleven years, so I frequently get asked to have conversations about the Netflix I knew, its transition to what it is doing now, and how it is structured. The undercurrent of these questions is always the same: how can the magic of Netflix’s meteoric success be recreated?
Netflix seems like they can do no wrong. They are fearlessly expanding internationally and creating some of the most compelling entertainment available anywhere and being rewarded with continued record share prices and revenues. Who wouldn’t want to replicate that?
Their success is a combination of smart decisions based on strategy, timing, and a little luck. And while timing and luck can’t really be replicated, you can learn from their smart strategic decisions. Below are some examples of how this has played out in shaping the direction of the company and how applying that same lens to company culture enabled its success.
First, What is Strategy?
Strategy is, by definition, “a careful plan or method for achieving a particular goal usually over a long period of time.” While there are many strategies that can be deployed, the goal is to always make sure you know where you’re going. Being clear on this point will guide tactical execution and inform what you should and should not do.
1/ Early switch to subscription model
Early on, Netflix was a portal that also rented and sold DVDs one at-a-time. That business model was highly replicable and wasn’t going to work. So they switched to a subscription model that started allowed a specific number of DVDs per month for one fee. If a customer went over that amount they paid more. That lasted less than 6 months. Based on data, the company realized that subscriber growth and customer advocacy would come from an unlimited subscription model. So the switch was made to unlimited. In making the strategic shift they not only found product/market fit but also counter-positioned themselves to every competitor in the DVD rental market. If any competitor at the time tried to adopt the subscription model for renting DVDs it would have severely damaged their core business. Of course, it didn’t hurt that the main competitor, Blockbuster, dismissed the business model as a niche.
Takeaway: Having a strategy not only provides long-term direction but the right one can also be used to thwart possible competition.
When I started at Netflix in 2001 the brand position was, “The best way to rent DVDs.” As brand positions go it was functional at best. We had been moderately successful marketing the service with a few different messages. But we had no real foundation upon which generate future messaging and not a clear understanding of what we needed to be for the consumer in order for them to consider our offer.
So around 2004 we conducted research, distilled it down, and came to the position, “Movie enjoyment made easy.” From that point on, everything had to pay off that position. It was the research-driven foundation we needed to not only continue to create marketing messaging but align how we thought about features, envelope designs, etc.
Takeaway: A well-researched brand position provides strategic guidance for everything the company does.
3/ Getting the jump on streaming
Up until around 2004 the company’s strategy was to grow and be the biggest DVD rental company in the world. Increasing Internet speeds, however, signaled to us that streaming was eventually going to be the way to deliver entertainment. But streaming lowered the barriers to entry for competition. So, our strategy shifted to “get big on DVD, then transition to streaming.” The idea being that we create momentum such that by the time competition showed up we would already have a huge installed base of customers. Remember, this was a full four years before we would even launch the very sparse library of titles as a free add-on to the beloved DVD-by-Mail service.
Takeaway: Obviously, no one can predict the future. But shifting strategy to anticipate or react to market changes means you won’t get caught opting for a short-term gain that sinks your long-term goals.
4/ Killing the Netflix Box
In 2007, we were so far down the path with the Netflix branded streaming device that we were shooting promotional videos for it to have on the site. It was a done deal. Then the hand brake was pulled — and hard. The decision to stop something we had spent so much time and money on was not easy. But it was absolutely the right thing to do. The company didn’t focus incessantly on sunk costs- with new information and views, the future is what matters to Netflix, not the past.
Our strategy was to have Netflix on every device capable of connecting to the Internet. To do that we would have to convince major brands like Samsung, Microsoft, and Sony to include Netflix on their Blu-ray players, game consoles, and streaming devices (in some cases not only convincing device manufacturers that they should have their devices connected to the Internet but also helping them figure out how to do it). It would give us first mover advantage and ubiquity which would give us a tremendous head start on the competition. So the Netflix Box was created as both a proof of concept to get manufacturers onboard and so we would have a streaming device for consumers. Though we had an in-house team developing hardware and software for the prototype, we had no experience in launching and scaling such a device. Enter Anthony Wood, CEO of Roku whom was hired to lead this effort. But then the realization came. If our goal was to be on all devices, why would we compete with them by getting into the hardware business? So the decision was made. Kill the Netflix Box instead of killing our strategy. And even though the Netflix Box was killed internally, it did see the light of day as the Roku Player.
Takeaway: In strategy, knowing what not to do is just as important as knowing what to do. And it is always a good idea to gut-check decisions along the way. Even if it comes at a short term-pain, reversing a decision to align to the long-term strategy for the bigger payoff is the right thing to do.
5/ Original Content
The original content hits of “House of Cards” and “Orange is the New Black” are not the first foray into original content for Netflix. Back in 2006, Red Envelope Entertainment was launched by Netflix in an effort to take movies that didn’t have distribution and get them in front of members who would value them. But the timing was off. Our strategy at the time was to “get big on DVD, then transition into streaming.” Original content is expensive. At the time, were we to pursue original content, the money would have had to come from somewhere else in the company and it just didn’t pencil out. Plus, our content partners didn’t exactly appreciate the competition of us purchasing content.
Fast forward to 2011, when Netflix launched it’s most recent original content. CEO Reed Hastings stated that the goal was to become more like HBO before HBO could become more like Netflix. While that was true, it only tells part of the story as to why the decision to create original content was so strategically brilliant.
Until around 2011, we had to build a brand around Netflix, the service, because really all we had was others’ studio and network content. We were marketing Netflix as a service (NaaS?). But in a world where Netflix was competing for the same pool of content, they were going to be quickly outspent by those with deeper pockets like Amazon or YouTube. With original content Netflix had a point of differentiation fulfilling the HBO comparison above. But there’s more.
First of all, let’s be clear, Netflix knows how to use viewing data to provide more value. For over a decade they’ve been refining their recommendation process that surface movies and TV shows to their members which does just that. So when they decided to create originals they were able to leverage the same data to make “smart bets”. Ok, that’s not really fair because they’re not really bets at all. They’re very well-informed investments. It’s the reason no creator has to shoot a pilot and why Netflix doesn’t use focus groups for any content. They have confidence in their data-based decisions (note: it isn’t all machine learning, there is a deep understanding of actors, directors and Hollywood by Ted Sarandos, Cindy Holland, and everyone else on the content team. This matters significantly as data will only get you so far). By surfacing the right content from other sources including recently watched items and making the right original content they provide even more value to the customer. More value equals higher retention. Add in the tidal wave of quality entertainment and the frequency in which it’s released and it turns out to be an impressive retention play.
But the volume and frequency of original content pays out in another way too — international expansion. I participated in a lot of in-country international market research to help determine likely success. I can say with confidence that there are countries that Netflix has announced they are going into now or soon that would have been completely unprofitable under our NaaS model. And I mean, guaranteed unprofitable.
Take South Korea, for example. Piracy is commonplace and accepted there. People load up credits using their credit card and download TV shows and movies. Even movies that are still in the theatre (for only a couple dollars too) are available. It isn’t super easy because you have to search for it but it also isn’t hard. Without original content, Netflix would have marched in with older content that would have be readily accessible should anyone want to see it. No one we talked to was interested.
The only thing different between then and now? Original content. Of course, the original content is layered on top of an amazing, established brand with great service, an unbelievable UI, and a ridiculous value proposition but the thing that puts them over the top is the original content.
So in South Korea the introduction of Netflix Originals suddenly offers a non-stop, high volume stream of high quality original content that is exclusive to the platform. Technically it can be pirated. But if the massive file aren’t enough of a deterrent, the sheer volume and frequency of original content being churned out by Netflix renders piracy more trouble than it’s worth for most consumers.
Redefining What a “Hit Show” Really Is
To be sure, the analysts and external observers were impressed by the splash that “House of Cards” made. Suddenly here was this company that had never made original content taking on the grandfather of original content, HBO. And Netflix nailed it. House of Cards was a huge success and ubiquitous. Even politicos continue to talk about it.
Fast on the tail of that they had another big hit in Jenji Kohan’s “Orange Is The New Black.” And expectations were set.
Now some analysts are maintaining that Netflix will be no better or worse at creating successful content than anyone else. But thinking that what has always defined a “hit” still holds true is misguided. Those analysts would do well to think more contextually about what defines a hit now, especially for Netflix. For them, a hit does not have to be a House of Cards level success. There are no Neilson/Arbitron ratings to worry about. It merely has to succeed in engagement metrics for the intended audience. “Sense 8” or ”Marco Polo” does not have to be talked about in People magazine like “House of Cards” was. It has to engage the members who would likely love it — the fans of the genre, actor, or director.
This success metric has two facets that are intrinsically intertwined — retention and acquisition. If the TV show or movie succeeds with the existing members it boosts retention. But it also turns those members into evangelists. And you can be sure there is a proxy in the great big pool of non-members that will sign up based on this word of mouth from the newly minted evangelists. It was that way with content created by others and you can be sure it is that way with Netflix created content. Sci-fi fans may not trust People magazine to tell them about new, interesting titles but they will believe like-minded members talking up latest sci-fi series from Netflix.
Takeaway: Making a timely strategic shift can have multiple payouts.
6/ Company culture
One of the reasons I liked Netflix was that when I was interviewing for my role there, I learned that employees had to buy their own snacks and soda. Also, the headquarters was in a “beat-down” building. When compared to the excesses of dotcom culture that were imploding all around Silicon Valley in 2001, this was a clear signal that the money they had was going exclusively toward growing the business and not wacky perks. Still, when I first started at Netflix, culture did not exist explicitly.
But still, there was no deliberate, published, purposeful strategy for culture in place. Then came the “high performance culture.” It was a bit frightening at first because it was such a huge departure from typical company culture as it existed then. Chief Talent Officer, Patty McCord, and CEO, Reed Hasting, spearheaded this change and the employees helped refine what it really meant. Processes were stripped away, and ultimately what emerged was a culture in which one was trusted to be a responsible adult. Which also meant you had to make own your decisions. And live with the results, for better or worse. This was all codified in the slide deck below but by the time it was shared with the world we had been living it for over 5 years.
Not long after it impacted the hiring process (which happened quickly) and it started to really make a real difference. As more and more people were able to focus on the role they were hired for, the more efficient and innovative we became. Everything from content to IT, engineering to marketing, we all started thriving.
Quick aside, much has been made about the “no vacation” policy. To truly understand how this came about you have to read the deck above or listen to Patty McCord discuss how her approach to HR was to strip away policies and processes that only served to sap the time and energy of employees. Rather than track hours, approvals, etc., they just did away with it all. And it fit in with the rest of the “high performance culture.” A company adding benefits like this without the other having the other aspects of company culture in place is a recipe for disaster for a variety of reasons. For more, here’s a great read on why copying company culture, or even merely aspects from it, is not a good idea.
Customer at the center
At Netflix, everyone was relentlessly focused on the consumer (members, non-member, and rejoins). We had our own department in-house that led all qualitative and quantitative research. At any given time, everybody from admins to C-suite execs were behind the glass listening to consumers. And the research was constantly shared within the company. In fact, at company meetings, aside from Reed’s wrap up, there were only two permanent spots reserved. One for Finance and one for consumer research. That says a lot about how strategic consumer input was to the company.
Takeaway: Strategic thinking as applied to company culture provides clarity for everything from hiring to policy development and can lead to amazing gains.
7/ Subscription as the only revenue stream
Though Netflix dabbled in having banner ads on the website, it was ultimately decided that to stay true to what Netflix was, there should be no ads. Ever. Until HBO launched their standalone offering, HBO Now, earlier this year, there was no pure competitor for Netflix. You might think that there is plenty of streaming content competition out there, and there is. But a closer look from a mainstream consumer point of view reveals how they don’t really offer the same thing:
The main reason for Prime’s existence has been, and continues to be fast, free shipping. Yes, they added streaming movies and TV shows (some of which isaward winning original content) but they’ve also added streaming music, Kindle ebooks, and other benefits. So the consumer sees a hodgepodge of “stuff” bundled under Amazon Prime. Add in the fact that it’s a yearly subscription that looks expensive relative to Netflix and it only gets harder to sell. And yes, it only looks expensive. The monthly breakout is actually cheaper, but when a consumer is eyeing $9.99 a month vs. $99 a year, they perceive the monthly price as lower. What are the results of this muddled offering? Only 36% of Amazon Prime members use Prime exclusively. That may change soon as the first signs of OTT aggregation have surfaced with the rumors that Amazon may be bundling other streaming services in their Prime offer.
Hulu’s offering has always been tied to commercials. But then their audience is older so ads are nothing new. Some people are just fine with paying a monthly fee and seeing commercials, after all, that’s the model of cable and satellite, right? Even their “no commercials” plan still has commercials. Plus, while they have picked up shows that appeal to a younger audience, their foray into original content hasn’t panned out in popular culture the way the Netflix Originals have.
Again, until this year, they always had the albatross of requiring a cable or satellite TV subscription in order to stream. With HBO Now they are a true Netflix competitor, but only from a consumer proposition standpoint. They still don’t have the data savvy that Netflix has in both merchandising and content development.
When YouTube recently announced its ad-free channel, Red, it piqued a lot of people’s interest. The video leviathan is finally going for an all-you-can-watch service for $10 a month. It will be a blend of current YouTube content plus a lot of new content being made exclusively for Red. The thing is, it won’t really be ad-free, just not interrupted by ads. Some people will be ok with these “native ads” in the content they are paying for but here you have a company whose legacy is placing commercials in front of videos, now placing them in the videos themselves albeit in different form. Another uphill battle they’ll face is the perception that they are for short form, user-generated videos, not TV shows and movies. So it’s not really a true Netflix competitor.
Expensive, bloated, and bundled with a thousand channels with “nothing to watch.” Plus ads, lots of ads. And worst of all, it is all on their schedule, unless you are a wiz with the DVR. But even that has limitations.
Sure, you can get a lot of stuff for free — illegally. And it’s getting easier to do. But from a mainstream consumer standpoint it’s still not as easy as hitting the Netflix button on a remote.
You get the idea
The Netflix strategy is unlimited, low-cost subscription. It’s an easy-to-understand consumer proposition. And until recently, if any of the business competitors listed above tried to offer the same thing it would have seriously damaged some if not all of their revenue streams. The only competitor that has a similar product offering from a consumer standpoint is HBO. But they don’t have the data chops Netflix has when it comes to creating originals. Yes, Amazon and HBO can definitely develop the means to create original programming in the future since they have a direct pipeline allowing them insight into consumers’ viewing habits. But the fact that Amazon still does “pilots episodes” is telling.
Takeaway: A clear strategy for your offering allows for clear consumer understanding and adoption. It can also help guide pricing structure, product/feature development, and more.
So, They’re Perfect Then?
No. As they grow, so to do the complexities. From the company having to hire more and more people which introduces managerial layers to the increasing number of original titles that will continue to eat larger portions of the budget. Layer in creating locally relevant, in-language content and you can see that they will need dollars. In fact, it’s estimated that they have over $10 billion in content liabilities over just the next five years. And to keep things rolling they’ve already taken on additional debt (albeit at a ridiculously low cost). But low cost money may not be available forever. Also, their big splash of a debut benefitted from the “first mover advantage.” The novelty of which is now starting to fade. So with everyone else starting to make original content they will have to keep it up. And if you remember the Qwikster debacle, then you know they aren’t perfect.
Despite all of that, the downturn so many analysts have been betting on over the last couple years hasn’t materialized. That’s due, in part, to the goodwill Netflix has generated by continuing to grow year-over-year and that content liability is being plowed back into the business to create the original content that is fueling their growth.
So you can see why I am of the opinion that Netflix is poised to be THE global leader in streaming entertainment. That didn’t happen by accident. It’s a combination of innovation, strategic thinking and, to be fair, a little luck. Copying that exactly would be impossible.
I should note, I have no financial stake in the company nor am I affiliated with them any longer. This is was written based on my experience and analysis.
UPDATE: Since publishing this post I have had the privilege of direct and honest feedback (and I do mean that sincerely as it was one of the aspects of the Netflix culture that allowed us to be very efficient) from great former co-workersWalter Underwood, Bill Scott and Dax Eckenberg. The section on the Netflix Box has been revised to reflect that feedback. Thanks guys! Also, this is in no way intended to be a comprehensive list. Areas like IT and Ops innovations were not part of my purview and thus not included. Rest assured, Netflix applies strategic thinking in all areas of the company.
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