Innovating Beyond Boundaries Lessons from Netflix’s Disruption

Well, good morning. It has been quite a week for Netflix. As I'm sure you're aware, on Friday, uh, Netflix entered into an agreement to purchase Warner Brothers for $82 billion. And I will confess I never saw that coming. I haven't worked at Netflix for quite a few years and Netflix continually surprises me.

I would have argued they're never going to crack down on password sharing. Wrong. They are never going to accept advertising. Wrong again. And the same thing for Netflix entering gaming, entering sports, starting restaurants.

And I think the conclusion is I've realized I am really bad at predicting the future. But I'm not alone. With AI, we're on the verge of perhaps the biggest disruption of our lifetimes. But I challenge anybody here to tell me definitively what's going to happen, how it's going to happen, and when it's going to happen. But I'll be honest, I don't worry about that.

I don't lose any sleep about my inability to predict the future because I'm focusing on something very different. I'm making sure that all of my companies are not worrying about the future. They're worrying about putting themselves in a position to react quickly and confidently to whichever direction the future happens to go. And I've learned that the trick to being able to react quickly, confidently, and effectively to whichever direction the future goes is not investments in new technology. It is not hiring more AI engineers.

It's making an investment in people. It's making an investment in culture. And I'll go even further and I'll say that I believe the single most important factor that led to Netflix's success or Looker's success or any of my other five companies was the culture. Now you might be aware that Netflix has a fairly distinctive culture and I just want to get a sense of who's familiar with it. Does anyone here know what the Netflix vacation policy is?

Ah, see that was a trick question. There is no vacation policy. Okay. How about the travel policy? No, there isn't one of those either.

And of course, the expense or travel or vacation. There's none of those policies. There are no policies at Netflix. And in fact, if there might be a policy, it's a singular one and it's four words long. It's simply use your best judgment.

There are no rules. And I can imagine you're thinking, no rules? How can that possibly work? And where did a crazy idea like that come from? And well, to understand that, I've got to take you back to the early 1990s.

And I was working for a large multinational software company called Borland International. We were going head-to-head with Microsoft. And in order to compete for the best and brightest talent, we decided we needed a corporate campus. And we spent $230 million on a state-of-the-art campus. And it was a work of art.

We had an Olympic size swimming pool. We had tennis courts. We had a squash court. We had restaurants. And yes, we had a hot tub.

And one day I was walking back from lunch and I noticed that in the hot tub were some of our software engineers. And I stopped by to say hello. And as I got closer I recognized that what they were doing was complaining about the company. And at the time it was funny, but it made me think that if people could be sitting in our $220 million hot tub complaining about the company, then what was it that made somebody want to work someplace? And I didn't know.

But one thing I knew for sure was that there was something seriously wrong with corporate culture. And looking back, the answer was right in front of me. But it took me almost 10 years to see it. Fast forward now to 1998. Reed Hastings and I founded Netflix.

It was a DVD video rental by mail company. And at first things went well. We began to get some traction. We found our repeatable scalable model. We had product market fit.

We worked up to about $5 million in revenue. But then the wheels began to come off the cart. We had accumulated losses of $50 million to get to that point. And as you know, it does not take a room full of finance professionals to realize that a $50 million loss on 5 million in revenue is not what we consider the repeatable scalable model. And so we decided to do what prudent entrepreneurs do when faced with that circumstance.

We decided to pursue strategic alternatives. And you may recognize that as code for we have got to sell this company and sell it fast. Now the obvious strategic alternative was Blockbuster, the world's largest video rental store. And they were in a totally different class than we were. We had 5 million in revenue.

They had $6 billion in revenue. We had a hundred employees, they had 60,000 employees. And we finally managed to get a meeting and we filed into a conference room that felt like the size of this auditorium. And we sat down and made our pitch that we would combine forces. Blockbuster would run the stores.

We would run the online business. we'd build a blended model and everybody wins. And it was going great. They were asking good questions. They were leaning in.

But then they asked the big question, how much? I mean, what are we talking here? And we of course had rehearsed on the plane and we figured, well, we're $50 million in debt. $50 million. And that's exactly the reaction we got.

this silence at the hubris that this little company with 5 million in revenue and $50 million in debt could possibly be worth $50 million. And it was a long quiet ride on the plane back to California and I remember being crushed and realizing there was no easy way out. We had to do some hard things and we did. We got home and we laid off 60% of the company. But something remarkable happened.

We became more focused and effective. We had stripped away layers and rules and bureaucracy and our talent density was through the roof. And we saw firsthand how energizing it was to work surrounded by other amazing people. The energy was unbelievable and we vowed then and there we would never go back. And in many ways that was the birth of the defining characteristic of the Netflix culture which we called freedom and responsibility.

And freedom and responsibility is easy to understand. I'll give you the freedom to solve the problem any way you want. I don't care how you do it, but I'm partnering that with the responsibility to achieve the things I expect of you. Now, that is not a unique model. Every single early stage company has that because you have to.

You have a hundred things broken, but you have the resources to do 10 of them. There is not time for command and control. All you can really do is gather your group of responsible people, talented with good judgment, and tell them, "You see that mountain over there? I'll meet each of you there in two weeks. And here's what you have to get accomplished.

Here's what you have to do. Here's what you have to do." And I set them off. And two weeks later, they're there. And they might be bruised.

They might be bloody. But each of them has accomplished the things I needed. and they solve those problems independently. But something interesting happens as a company gets bigger. Someone shows up and they're late and the well-meaning CEO says, "I can't have that."

Okay, from now on I need status reports from everybody and everyone holds their head. And then someone shows up on time, but they overspent and the well-meaning CEO says, "Oh, I can't have that. I need to preapprove every expense over $5,000. And little by little, you put in place these guard rails to protect you from people with good judgment. And the Netflix experience is really quite simple.

We asked ourselves, what would happen if we built a culture for people with good judgment? Because think about the impact when you have those guard rails and rules on the person who does have good judgment. They might be a sales manager. They might have a $10 million nut that quarter. And you trust them to be effective and hard charging and creative, but you don't trust them to decide how many vacation days they can take.

You don't trust them to decide what they can spend money on. It's so much more powerful when you can turn people loose. But what does it feel like to have a culture of freedom and responsibility? And I will give you an example. Several years ago, an engineering manager came to me and said, "Mark, I got great news.

I'm in love." And if you work much with engineering managers, you realize that's actually very good news. And I said, "What's the issue?" And he said, "Well, the problem is she lives in San Diego. I live in San Francisco, but I've got it worked out.

I'm going to leave work Thursday evening, fly to San Diego. I'll work from there on Friday, spend the weekend, work from there on Monday, and come to work on Tuesday morning. Is that okay?" And I said, "It depends what you're asking me. If you're saying, is it okay that you work from San Diego?"

Well, sure. I don't care where you work from. You can work from the moon. You can work one day a week, whatever. But if you're asking me, am I willing to lessen my standards for you?

Am I willing to not hold you to the same expectations? Well, that's easy, too. The answer is no. And you decide. And what can I say?

That relationship did not last very long. But that's one person. And Netflix has 14,000 employees. and they all have freedom and responsibility, but it is not the chaos you might expect. And it all comes down to how Netflix thinks about management, about what a manager does, or more accurately, what a manager doesn't do.

And a manager at Netflix has two responsibilities. First, you have to make sure the right people are in the right seats. And we spend a disproportionate amount of time on that. And the second responsibility is ensuring that every person has all the information and context to make good decisions. And that's it.

And I hope you noticed what's missing. It's not make decisions. It is not review decisions. It is full empowerment. For example, content decisions are rarely made by Ted Sarandos.

They're rarely made by his lieutenants. Those decisions are made by the people at the very edges of the organization in local geographies where they understand the culture and the taste and the talent. They have pushed their decisionmaking to the very edges of the organization which allows them to quickly and effectively respond to whatever the future happens to throw at them. Culture is not something you write in a poster and you put in a breakroom. Culture is a magnetic field that ensures that all 14,000 people are aligned and pointing in the same direction.

so they can make independent good decisions. Well, what I'd like to do is let me leave you with four last thoughts about culture to reinforce why this is the key to transcending whatever the future throws at us. So, number one, culture is not aspirational. Culture is observational. Any of us who has children knows this.

It is not what you say, it is what you do. I can't tell you how many times I've been called to keynote a conference and the CEO takes me aside backstage and says, "Mark, we have the entire company here. This is critical that we impress upon everyone the importance of taking risks, of innovation." And I go, "Okay, chief. I I got you."

And then he goes on stage and goes, "In a minute, we're bringing out Mark Randolph, but first let's recognize our sales leaders. He has said one thing and done another." And that is critical because your 10 direct reports, yes, they pick up culture from you, but the next 90 pick it up from that 10 and the next 900 from that first 100 and add infin item. If you don't get it right at the beginning, you're doomed. Number two, you can't have freedom and responsibility without high talent density.

You can't build a culture for people with good judgment unless you only have people with good judgment. So, you have to focus on creating an atmosphere where people want to work. And that brings me to number three. Remember the story of the hot tub? Well, it turns out that $230 million hot tubs is not why people want to work someplace.

Neither is it fireman poles or nap pods or kombucha on tap or any of the other garbage that companies these days throw at their employees hoping that that's going to turn the trick. It's actually remarkably simple and it's simply treat your employees the way you would want to be treated. Give them agency. Give them control over their days and over their weeks and over their objectives. Give them context, not control.

And if you do that correctly, it is amazing. And once you have created the space for them to be amazing, well then my last piece of advice is get out of the way. get out of the way. And sometimes, just sometimes, that is enough magic to change the world. Thanks very much.

Good luck with all the challenges. I'm counting on you.