On Netflix

June 18, 2016


I found the article on Netflix by The New York Times very interesting.

Mainly for two themes:

1. They created a culture of cutthroat high performance.
At any given time, an employee will be evaluated on this: if Netflix were to fill this position all over again today, is this the person I would hire? If not, that person is fired.

Nothing personal, just business, they rationalize. They only want high performers, this isn’t a family but a team, the article says.

Sometimes the fired employees would weep in the HR office, because their life will be devastated by this, but it had to be done, corporate would say. Everyone abides by the same rules, except I guess the CEO since he’s king of the castle.

The grand irony is that the person who convinced CEO Reed Hastings about enacting this policy ended up being fired by him, a victim of the same rules of procedure she set up.

2. Netflix seemingly created a monster they can’t control.
They thrived by finding inefficiencies in the market.

The whole experience of renting from Blockbuster and other video stores sucked, so they created a dvd by mail business. Free shipping both ways. No late fees. Keep the dvds as long as you want.

Next, they became a digital syndicator of movies & shows.
People prefer to watch shows at their own schedule, without ads. They also like binge watching. Traditional networks and cable channels could not provide this for consumers.

Traditional entertainment companies underestimated Netflix. So they gave away streaming rights to their content pretty freely and cheaply.

This was a big mistake because people stopped watching tv and started cutting out cable altogether. Which means less revenue for traditional media.

Netflix grew like weeds, now with more than 81 million subscribers.
Old media caught on to their mistakes and are now charging higher fees for their content. They’re also being more protective, by launching their own competitive streaming services.

So, Netflix started making their own content. Their own acclaimed shows.
The problem is that making great shows people love is hard.
And VERY costly.

So much so that Netflix is losing money.
As the article states, Netflix has a negative cash flow of $1 billion. They’re borrowing money to make hit shows, hoping that will be enough to retain and attract more subscribers.

It’s kinda like putting two dollars into a vending machine and getting back 4 quarters. Hoping that once in a while the machine messes up and gives them 10 quarters instead.

The irony again is that Netflix is becoming the thing they tried to vanquish. They’re essentially an entertainment media company now, needing to make their own shows. The challenge is that old media has a much bigger bankroll to find and fund hits.

The Future:
I have a soft spot for Netflix for a few reasons.

1. I had nothing but dislike for Blockbuster back in the 90s, with their high joining fees, bad customer service, trickily-designed return times to maximize late fees, and of course low selection. So I was glad when Netflix came around to put them out of business.

2. I made a lot of money (relatively) on their stock in late 2000s. It was one of the few home-run stocks that funded my retirement the past few years. I don’t own any position now.

3. And of course, Netflix is a good product.
Who doesn’t love binge watching shows whenever they feel like it, without ads? I spent many days catching up on Breaking Bad and Battlestar Gallactica. I currently don’t have an active account with them though. I got tired of scrolling through pages to find something to watch and also wanted to limit my binge viewing tendencies.

Hastings and his team have thrived thus far and may figure it all out.

I am concerned with their Survivor style corporate culture though. That’s not a good long term plan. Employees (superstar or not) don’t want to constantly be wary of the sword of Damocles.

Can Netflix Survive In The New World It Created? – NYTimes
Sword of Damocles – Wikipedia