Blockbuster is a thousand times our size.
The CEO of Blockbuster, John Antioco, who was reputed to be a skilled strategist aware that a ubiquitous, super-fast internet would upend the industry, welcomed us graciously. Sporting a salt-and-pepper goatee and an expensive suit, he seemed completely relaxed.
By contrast, I was a nervous wreck. Marc and I had cofounded and now ran a tiny 2-year-old startup. We had 100 employees and a mere 300K subscribers and were off to a rocky start. That year alone, our losses would total $57M. Eager to make a deal, we’d worked for months just to get Antioco to respond to our calls.
That night, when I got into bed and closed my eyes, I had this image of all 60K Blockbuster employees erupting in laughter at the ridiculousness of our proposal. Of course, Antioco wasn’t interested. Why would a powerhouse like Blockbuster, with millions of customers, massive revenues, a talented CEO, and a brand synonymous with home movies, be interested in a failing wannabe like Netflix? What did we possibly have to offer that they couldn’t do more effectively themselves?
I am often asked, “How did this happen? Why could Netflix repeatedly adapt but Blockbuster could not?” That day we went to Dallas, Blockbuster held all the aces. They had the brand, the power, the resources, and the vision. Blockbuster had us beat hands down.
It was not obvious at the time, even to me, but we had one thing that Blockbuster did not: a culture that valued people over process, emphasized innovation over efficiency, and had very few controls.
Corporate culture can be a mush marshland of vague language and incomplete, ambiguous definitions. What’s worse, company values — as articulated — rarely match the way people behave in reality. The slick slogans on posters or in annual reports often turn out to be empty words.
Seek to hire the very best and then inject fear into your talented employees by telling them they’ll be thrown back out onto the “generous severance” scrap heap if they don’t excel? This sounded like a surefire way to kill any hope of innovation.
Blockbuster’s story is not an anomaly. The vast majority of firms fail when their industry shifts.
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.
I was sorry to see them go, but I believed that this was what happens when a company grows up.
Then 2 things occurred. The first is that we failed to innovate quickly. We had become increasingly efficient 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 and process.
The second is that the market shifted from C++ to Java. 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.
At most companies, policies and control processes are put in place to deal with employees who exhibit sloppy, unprofessional, or irresponsible behavior. But if you avoid or move out these people, you don’t need the rules. If you build an organization made up of high performers, you can eliminate most controls. The denser the talent, the greater the freedom you can offer.
Netflix assumes that you have amazing judgment. And judgment is the solution for almost every ambiguous problem. Not process.
Blockbuster made most of its margin from late fees. If your business model depends on inducing feelings of stupidity in your customer base, you can hardly expect to build much loyalty.
By early 2001, we’d grown to 400K subscribers and 120 employees. I tried to avoid the leadership fumbles of my Pure Software days, and although we avoided implementing excessive rules and controls this time, I also couldn’t characterize Netflix as a particularly great place to work. But we were growing, business was good, and work for our employees was OK.
We didn’t have any obviously poor performers. So we divided the staff into 2 piles: the 80 highest performers who we would keep and 40 less amazing ones we would let go.
The day of the layoffs arrived, and it was awful, as expected. Those who we 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 the 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’d just let go of a third of the workforce, yet the office was suddenly buzzing with passion, energy, and ideas.
We learned that a company with really dense talent is a company everyone wants to work for. High performers especially thrive in environments where the overall talent density is high.
If you have a team of 5 stunning employees and 2 adequate ones, the adequate ones will:
- sap managers’ energy, so they have less time for the top performers
- reduce the quality of group discussions, lowering the team’s overall IQ
- force others to develop ways to work around them, reducing efficiency
- drive staff who seek excellence to quit
- show the team you accept mediocrity, thus multiplying the problem
For top performers, a great workplace isn’t about a lavish office, a beautiful gym, or a free sushi lunch. It’s about the joy of being surrounded by people who are both talented and collaborative. People who can help you be better.
Jerks, slackers, sweet people with nonstellar performance, or pessimists left on the team will bring down the performance of everyone.
You’re upset with me, but you go around my back instead of just telling me how you feel?
While I was saying things like, “Family is the most important thing to me,” I’d been missing dinners at home and working all hours of the night.
Afterward, I tried to take this 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 feelings, opinions, and feedback out onto the table, where they could be dealt with.
That’s when we coined the expression “Only say about someone what you will say to their face.” I modeled this behavior as best I could, and whenever someone came to me to complain about another employee, I would ask, “What did that person say when you spoke to him about this directly?”
And for good measure, after stopping at the coffee machine, you visit with another colleague to mention that he came across as defensive when he was asked to explain a recent decision of his in the all-hands meeting last week.
At Netflix, it is tantamount to being disloyal to the company if you fail to speak up when you disagree with a colleague or have feedback that could be helpful. After all, you could help the business — but you are choosing not to.
Few people enjoy receiving criticism. Receiving bad news about your work triggers feelings of self-doubt, frustration, and vulnerability. Your brain responds to negative feedback with the same fight-or-flight reactions of a physical threat, releasing hormones into the bloodstream, quickening reaction time, and heightening emotions.
Despite the blissful benefits of praise, people believe corrective feedback does more to improve their performance than positive feedback. The majority said they didn’t find positive feedback to have a significant impact on their success at all.
The first technique our managers use to get their employees to give them honest feedback is regularly putting feedback on the agenda of their 1-on-1 meetings with their staff.
In his teens, he took a job in a video store and, during long, empty daytime hours, he began ploughing through the 900 films it stocked. He developed an encyclopedic knowledge of film and TV — plus a pretty good instinct for what people liked.
360 is always a very stimulating time of the year. I find the best comments for my growth are unfortunately the most painful.
Natural human inclination is to provide a defense or excuse when receiving criticism; we all reflexively seek to protect our egos and reputation. When you receive feedback, you need to fight this natural reaction and instead ask yourself, “How can I show appreciation for this feedback by listening carefully, considering the message with an open mind, and becoming neither defensive nor angry?”
Rose felt she was being attacked:
Each raised hand felt like another challenge. Everyone seemed to be shouting, “Do you know what you’re doing?” I heard myself talking faster with each challenge and the frustration in the room cycling up. The more the group questioned me, and the more worried I became that I wouldn’t finish my content, the faster I talked.
The Netflix culture has great ideals but sometimes the gap between the ideals and practice is big, and what should bridge that gap is leadership. When leaders don’t set a good example. I guess I’m what happens.
It is always interesting to note how often the adjectives “smart” and “simple” describe the cleverest of innovations.
The Netflix ethos is that 1 superstar is better than 2 average people.
Give freedom to get responsibility.
Because of our culture of candor, if anyone abused the system or took advantage of the freedom allotted, others would call them out directly and explain the undesirable impact of their actions.
Months later Grant resigned. “When I saw how senior management spends their time, I lost confidence in the company.”
The only situation we could agree on was that if an employee steals from the company he should lose his job. But then a director named Chloe piped in: “I stole from the company on Monday. I had to work until 11pm to finish a project. I didn’t have anything to give my kids for breakfast the next morning, so I took 4 mini boxes of Cheerios from the kitchen.” Well, that seemed reasonable. It only served to underline why setting rules and policies can never work well. Real life is so much more nuanced than any policy could ever address.
We saw quickly that spend company money as if it were your own was not actually how we wanted our employees to behave. One of the VPs used to joke that because of his love for luxury he lived paycheck to paycheck. The spending that accompanied this type of lifestyle is not what we were going for.
Before you spend any money imagine that you will be asked to stand up in front of me and you own boss and explain why you chose to purchase that specific flight, hotel, or telephone. If you can explain comfortably why that purchase is in the company’s best interest, then no need to ask, go ahead and buy it. But if you’d feel a little uncomfortable explaining your choice, skip the purchase, check in with you boss, or buy something cheaper.
Had she expensed her family’s dinner?
I waited until Michelle and I were both in the office to ask her about these charges. But when I did, she froze. She had no explanation. No apology, no excuse, nothing to say. I let her go the next week. When she was packing her boxes, she kept saying that this was all a big mistake. I felt horrible and still don’t understand clearly what happened. She’s gone on to have a great career somewhere else. The freedom we offer wasn’t a good match for her.
As companies grow from fast and flexible startups into mature businesses, they often create entire departments to monitor employee spending, which gives management a sense of control, but slows everything way down.
Claudio’s story demonstrates the curious impact of rules. When you set them, some people will look eagerly for a way to take advantage of them. If Viacom told employees, “Order one starter, one main course, and one bottle of wine for two people,” they might order caviar, lobster, and a bottle of champagne. That’s within the rules but very expensive.
All these rules meant that going to work was less fun — and our most maverick employees, who were also the most innovative, left the company for more entrepreneurial environments. Those who chose to stay preferred familiarity and consistency.
That summer, I realized that Netflix had reached a point where it was likely to go down the same route as Pure Software if we didn’t actively work against it. The company was getting big, and it was increasingly difficult for our leaders to keep track of what everyone was up to. This would normally be the time to introduce more policies and control processes in order to deal with the complexity that comes with growth. But after the success of our vacation and expenses policy experiments, I began to wonder whether we could do the opposite.
At most places, there are some great employees and some just okay ones. The okay ones are managed while the stars are relied upon to give everything they can. At Netflix, it’s different. We live in a walled garden of excellence, where everyone is a high performer. You go into these meetings and it’s like the talent and brain power in the room could generate the office electricity. People are challenging one another, building up arguments, and each of them is practically smart than Stephen Hawking. That’s why we get so much done at such incredible speed here. It’s because of the crazy high talent density.
We determined that for any type of operational role, where there was a clear cap on how good the work could be, we would pay middle of market rate. But for all creative jobs we would pay one incredible employee at the top of her personal market, instead of using that same money to hire a dozen or more adequate performers. This would result in a lean workforce. We’d be relying on one tremendous person to do the work of many. But we’d pay tremendously.
People are most creative when they have a big enough salary to remove some of the stress from home. But people are less creative when they don’t know whether or not they’ll get paid extra. Big salaries, not merit bonuses, are good for innovation.
The big surprise when we decided not to pay bonuses on top of salary was how much more top talent we were able to attract. Many imagine you lose your competitive edge if you don’t offer a bonus. We have found the contrary: we gain a competitive edge in attracting the best because we just put all that money into salary.
Imagine you were looking for work and received 2 job offers. One place offered your $200K plus a 15% bonus and another offered you $230K. Which would you choose? Of course, you’ll choose the bird in the hand over the bird in the bush: $230K. You know your compensation up front — no games.
If a fairy godmother suggested he could silently and without duress swap a few of his current programmers for Devin, would that be good for the company? Yes.
At first, a new hire will feel motivated by his top-of-the-range salary. But soon his skills will grow and competitors will start calling to offer higher salaries. If he is worth his salt, his market value is going to rise, and the risk that he’ll move will grow. So it’s paradoxical that when it comes to adjusting salaries, just about every company on earth follows a system that’s likely to decrease talent density by encouraging people to find a job elsewhere.
You’ll get more money if you change companies than if you stay put. The average raise was between 10% and 20%. Staying in the same job is bad for your pocketbook.
At that spot, Matias mentioned that he was going to give me a 23% raise in order to keep my salary at top-of-market rate. I was sho shocked I had to sit down next to the dim sum.
I continued to have lots of success and felt I was very well paid. A year later, at annual salary review time, I wondered if I’d get another enormous raise. Matias surprised me again. This time he said, “Your performance has been excellent, and I’m delighted to have you on this team. The market for your position hasn’t changed much, so I’m not planning on giving you a raise this year.” That seemed fair to me. Matias said if I didn’t think so, I should come to him with some data showing the current market for my position.
By definition, what she is offering is exactly market value at that moment. If you really want to know what you’re worth, talk to recruiters.
Recruiters call Netflix employees frequently, trying to get them to interview for other jobs. You can bet the hiring company’s got money and they’re willing to pay. What would you like your employees to do when they get these calls? Take the phone into the bathroom and turn on the faucet while they whisper into the phone? If you haven’t given them clear instructions, that’s probably exactly what they do — and they did the same thing at Netflix, until 2003 when the company started having pay-top-of-personal-market discussions.
At just about every company on earth, interviewing for another job anger, disappoint, or alienate your current boss. The more valuable you are to your manager, the more annoyed he will be, and it’s not difficult to see why. When an excellent new employee decides to go and just check out a job at the company down the road, you risk losing your entire investment. If during the interview, she finds the new position is so much more exciting than what she’s doing now, you’ll lose her — or at the very least her enthusiasm. That’s why managers at most companies make their employees feel like traitors for speaking to recruiters at other companies.
Since then all financial results, as well as just about any information that Netflix competitors would love to get their hands on, has been available to all of our employees. Most notable is the 4-page “Strategy Bets” document on the home page of the company’s intranet.
My goal was to make employees feel like owners and, in turn, to increase the amount of responsibility they took for the company’s success. However, opening company secrets to employees had another outcome: it made our workforce smarter. When you give low-level employees access to information that is generally reserved for high-level executives, they get more done on their own. They work faster without stopping to ask for information and approval. They make better decisions without needing input from the top.
Earlier in my career, in the early days of Pure Software, I was too insecure to talk openly about mistakes with my staff, and I learned an important lesson. I was making a lot of leadership mistakes and it weighed on me heavily. Beyond my general incompetence at people management, I had indeed hired and fired 5 sales directors in 5 years. The first 2 times, I could blame the person I’d hired, but by the 4th and 5th failures, it was clear the problem was me.
Two fascinating things happened during that meeting. One was that, as expected, I felt immense relief because I had told the truth and come clean about my errors. The other was more interesting: the board seemed to believe in my leadership more after I had opened up and made myself vulnerable to them.
The pratfall effect is the tendency for someone’s appeal to increase or decrease after making a mistake, depending on his or her perceived ability to perform in general.
A woman introduced herself, not by mentioning her credentials and education, but by talking about how she’s been awake the previous night caring for her sick baby. It took her months to reestablish her credibility. If this same woman was first presented as a Nobel Prize winner, the exact same words about being up all night with the baby would provoke reactions of warmth and connection from the audience.
A leader who has demonstrated competence and is liked by her team will build trust and prompt risk-taking when she widely sunshines her own mistakes. Her company benefits. The one exception is for a leader considered unproven or untrusted. In these cases you’ll want to build trust in your competency before shouting your mistakes.
That was when I began to understand the dangers of the standard decision-making pyramid. I’m the boss and I have strong opinions, which I share freely, but I am not the best person to decide how many movies to order or to make a slew of other critical daily decisions at Netflix.
Dispersed decision-making can only work with high talent density and unusual amounts of organizational transparency. Without these elements, the entire premise backfires.
I’d spent weeks now on this proposal and, if he shot it down, it would all be a waste. Monday, Tuesday, Wednesday, I worked day and night writing the most convincing argument I could put to paper. Noon I put it in an email addressed to Jerret. Before I sent the email, I whispered to my computer, “Please let Jerret say yes.”
The day of the meeting I was so nervous I had to put my hands in my pockets to stop them shaking. But Jerret spent most of the meeting talking about hiring challenges. I could barely listen I was so stressed. I took a big breath and jumped in. “Jerret, I want to make sure we have time to discuss my Narcos proposal.”
If Sheila comes to you with a proposal you think is going to fail, you need to remind yourself why Sheila is working for you and why you paid top of the market to get her. Ask yourself 4 questions:
- Is Sheila a stunning employee?
- Do you believe she has good judgment?
- Do you think she has the ability to make a positive impact?
- Is she good enough to be on your team?
Netflix does not operate in a safety-critical market, like medicine or nuclear power. In some industries, preventing error is essential. We are in a creative market. Our big threat in the long run is not making a mistake, it’s lack of innovation. Our risk is failing to come up with creative ideas for how to entertain our customers, and therefore becoming irrelevant.
The announcement provoked a customer revolt. Not only was our new model way more expensive, but it also meant customers had to manage 2 websites and 2 subscriptions instead of one. Over the next few quarters, we lost millions of subscribers and out stock dropped more than 75% in value. Everything we’d built was crashing down because of my bad decision. It was the lowest point in my career — definitely not an experience I want to repeat. When I apologized on a Youtube video, I looked so stressed that SNL made fun of me.
We thought it was crazy, because we knew a large percentage of our customers paid the 10 dollars but didn’t even use the DVD service. Why would Reed make a choice that would lose Netflix money? But everyone else seemed to be going along with the idea, so we did too.
You’re so intense when you believe in something, Reed, that I felt you wouldn’t hear me. I should have laid down on the tracks screaming that I thought it would fail. But I didn’t.
Somehow, at the same time, I also felt liberated. One of the reasons I left Yahoo was that I didn’t feel ownership for anything. Even though I might have come up with an idea and started an initiative, by the time it got approved by everyone and his mother it didn’t feel like mine any more. If it crashed, I’d feel: “Well, 30 other people agreed! It’s not my fault!”
But it also helped all of us in marketing to remember our goal at Netflix is to create moments of joy. So don’t run a campaign that’s a little creepy. Don’t try to spook the public into watching our shows. Instead, a good campaign should be exciting, joyful, and just plain fun.
To achieve the highest level of talent density you have to be prepared to make tough calls. If you’re serious about talent density, you have to get in the habit of doing something a lot harder: firing a good employee when you think you can get a great one.
One of the reasons this is so difficult in many companies is because business leaders are continually telling their employees, “We are a family.” But a high-talent-density work environment is not a family.
Of course families aren’t just about love and loyalty. In families we cut each other slack and put up with quirks and crankiness because we are committed to supporting one another for the long term. When people behave badly, don’t pull their weight, or aren’t able to fulfill their responsibilities, we find a way to make do. We don’t have a choice. We are stuck together. That’s what family is all about.
In the early Netflix days, our managers also worked to foster a family-like environment. But, after our 2001 layoffs, when we saw the performance dramatically improve, we realize family is not a good metaphor for a high-talent-density workforce.
A professional sports team is a good metaphor for high talent density because athletes on professional teams:
- Demand excellence, counting on the manager to make sure every position is filled by the best person at any given time.
- Train to win, expecting to receive candid and continuous feedback about how to up their game from the coach and from one another.
- Know effort isn’t enough, recognizing that, if they put in a B performance despite an A for effort, they will be thanked and respectfully swapped out for another player.
If a person on your team were to quit tomorrow, would you try to change their mind? Or would you accept their resignation, perhaps with a little relief? If the latter, you should give them a severance package now, and look for a star, someone you would fight to keep.
We must ask ourselves on an ongoing basis which employees were no longer the best choice for their positions and, if they were not able to become “best choice” after receiving feedback, we would need to have the courage to let them go.
We encourage our managers to apply the Keeper Test regularly. But we are very careful not to have any firing quotas or ranking system. Rank-and-yank or “you must let go of X percent of your people” is just the type of rule-based process that we try to avoid. More important, these methods get managers to let go of mediocre employees, but they kill teamwork at the same time. I want our high-performing employees to compete against Netflix’s competitors, not one another. With rank-and-yank what you gain in talent density you lose in reduced collaboration.
My first months on the job, I was filled with terror that my colleagues would discover I was not worthy of their dream team and I would lose my job. I saw firsthand the quality of my colleagues. I would think, “Do I really belong here? How long will it take for them to figure out I’m a fake?” Every morning, I would get into the elevator at 8am and as I hit the elevator button, it was like a trigger. The air would catch in my chest. I was sure that when the doors slid open my boss would be standing on the other side waiting to fire me.
I felt that if I lost my job, I would be losing the most important opportunity of my life. I worked like crazy — deep into the night — and pushed myself harder than I had ever done before. But the fear continued.
Candor is like going to the dentist: a lot of people will avoid it if they can.
When you don’t respond to emails from my team, it feels hierarchical and discouraging, even though I know this is neither how you work nor how you think. Perhaps it is because we need to establish more trust, but I need you to be more generous with your time and insights, so my team can serve your organization better.
Others like them just about as much as Reed enjoys those annual trips to the dentist. They know it’s useful, but they dread it until it’s over.
I hated that evening at the Waldorf, but without it eventually I would have failed the Keeper Test.
It doesn’t matter what I think. You’re the doc guy, not me. We pay you to make these decisions. But ask yourself if it’s the one. Is it going to be a massive hit? If it’s not, that’s too much to pay. But if it’s the one, you should pay whatever it’s going to take. If it’s the one, get the movie.
When considering whether to lead with context or control, the second key question to ask is whether your goal is error preventing or innovation.
If loose coupling is to work effectively, with big decisions made at the individual level, then the boss and the employees must be in lockstep agreement on their destination. Loose coupling works only if there is a clear, shared context between the boss and the team. That alignment of context drives employees to make decisions that support the mission and strategy of the overall organization.
The no.1 goal for these meetings is to make sure that all leaders across the company are highly aligned on what I call our North Star: the general direction we are running in.
When I spoke with him he explained that, in some of our locations around the world, we’d grown out of office space far faster than expected and that had meant financial waste. “If I had a 5-year hiring plan, I could get the best space for the cheapest price and not make the same mistake we made last time. That’s why I asked each of the various departments to develop one.”
The idea that preventing errors or saving money with long-term plans is not our primary objective. Our North Star is building a company that is able to adapt quickly as unforeseen opportunities arise and business conditions change.
Adam did believe Icarus was going to be a massive hit, so he took the bet. Netflix paid a historic $4.6M to get it.
In the first few months Icarus struggled to get off the ground. No one was watching. Adam was crushed.
The direct corrective feedback given by a German boss might seem unnecessarily harsh in the US, while an American’s tendency to give copious positive feedback might come off as excessive and insincere in Germany.
When it comes to delivering criticism, the Netherlands is one of the more direct cultures in the world. Japan is highly indirect. Singapore is one of the most direct of the East Asian countries, but still to the indirect side of a world scale.
More direct cultures tend to use what linguists call upgraders, words preceding or following negative feedback that make it feel stronger, such as “absolutely,” “totally,” or “strongly”: “This is absolutely inappropriate” or “This is totally unprofessional.” In contrast, more indirect cultures use more downgraders, when giving negative feedback. These are words that soften the criticism, such as “kind of,” “sort of,” “a little,” “a bit,” “maybe,” and “slightly.” Another type of downgrader is a deliberate understatement, such as, “We are not quite there yet,” when you really mean, “We are nowhere near our goal.”
In English we usually state the subject followed by a verb and an object. We rarely drop the subject, or the sentence doesn’t make sense. In Japanese, however, the syntax is flexible. The subject, verb, and object are all optional. It is possible to have a sentence in Japanese with only a noun. Often the sentence might start with the main topic, followed by some content, and the verb at the end. Sometimes the speaker assumes everyone knows what the subject is, so he drops it. And this aspect of Japanese language lends itself nicely to a conflict-avoidant culture. At these moments, you have to consider what is being said in context in order to know who did what.
The Industrial Revolution has powered most of the world’s successful economies for the past 300 years. So it’s only natural that the management paradigms from high-volume, low-error manufacturing have come to dominate business organizational practices. In a manufacturing environment, you are trying to eliminate variation, and most management approaches have been designed with this in mind. It really a sign of excellence when a company manages to produce 1M doses of penicillin or 10K identical automobiles with no errors.
It’s jazz, not a symphony.
Even during the industrial era there were pockets of the economy, such as advertising agencies, where creative thinking droves success, and they managed on the edge of chaos.