Netflix Says Culture Trumps All. It’s Wrong.

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This week is a big one for Business Casual. I mean, every week is a big one, but this one feels especially big. We’re talking about Netflix...its impact on the zeitgeist, its positioning in the streaming wars, and its capacity for rendering Wall Street spellbound.

Who better to discuss those things than Reed Hastings, Netflix cofounder and co-CEO? He’s my Tuesday guest—and he does not disappoint.

On Thursday, I speak with Peter Kafka, Recode senior correspondent and one of the people who hosted an entire podcast season—Land of the Giants, Season 2—dedicated to understanding Netflix.

After recording these episodes, I already know the highlight of my next Netflix & chill session will be asking “Want to hear about the time Blockbuster could have bought Netflix for $50 million in September 2000 and didn’t?”

Suffice it to say, I’ve got a lot of thoughts on this one. I’ll start by disagreeing with the entire premise of Reed’s multi-decade tenure at Netflix. Let’s get into it...

Reed Hastings is the kind of leader who attributes his success to his company’s strong morals, principled processes, and a distinct culture of innovation and risk-taking within his company. Those things all matter, but...Netflix is what it is today not because of culture, but because of the magic of a well-timed pivot.

Before you say it, let me: Building a business that can pull off a massive gear shift like Netflix did, from DVD rental service to content juggernaut, does require a distinct culture of innovation and risk-taking—to some degree, any business move comes down to the firm’s culture in one way or another. I agree with that.

What I don’t agree with? Reed’s assertion that culture is the cornerstone of Netflix’s success. That success is the product of a whole lot more than radical transparency. Allow me to explain.

First, a primer on Netflix’s current state of affairs, so you get exactly what I mean when I say success:

• Quarantine has been good to Netflix. The platform added 10.1 million subscribers in the second quarter and 15.7 million in the first. It had 192.9 million customers worldwide at the end of Q2, leaps and bounds ahead of No. 2 streamer Disney+’s 60.5 million.
• That shows on its balance sheet: Netflix reported $6.2 billion in Q2 revenue, up from $4.9 billion a year earlier. Profit rose about 165% in the last quarter to $720 million.
• It would take about four years to watch all of the content on Netflix.

Second, a primer on Netflix’s particular culture:

• It’s exemplified in the famed Netflix Culture Deck, a 2009 manifesto on how to run a company that sits next to The Lean Startup on founders’ bedside tables.
• The tl;dr? Value people over process, as Reed puts it. Flexibility over efficiency. Inspiration over management.
• Those are all esoteric ways of saying Netflix doesn’t believe in micromanagement and offers an unlimited vacation policy.

Now consider the two largest, most fruitful pivots of Netflix’s lifetime: first, the transition to streaming from DVD rental and, second, its refocus on original content instead of licensed content. Which cultural mores explain them, exactly?

It was timing, not a culture of “freedom and responsibility,” that made Netflix the kind of corporate success story that deserves a whole week of the Business Casual treatment. 

• Netflix introduced video streaming for the first time in 2007, a full decade before anyone started spewing about the streaming wars. 
• And as for the shift to original content, Netflix’s now co-CEO and content chief Ted Sarandos had this to say in 2013: “The goal is to become HBO faster than HBO can become us." I’d say it succeeded.

And in fairness, I’d attribute Netflix’s successes more to its unique culture if not for a little mishap called Qwikster. 

Qwikster was Netflix’s spectacularly failed attempt in 2011 to spin off its DVD rental service as the video streaming side of the business began to find its legs. 

• It splintered Netflix’s business—anyone who wanted both DVD rental and streaming subscriptions had to pay for two different packages. 
• Within about two months of announcing the Qwikster plan, Netflix stock lost half its value. The dilemma cost Netflix roughly 800,000 subscribers in the U.S. during Q3 of 2011.

This ordeal is a shining example of good culture, bad timing. Qwikster happened fast, as things tend to at Netflix. “There is a difference between moving quickly—which Netflix has done very well for years—and moving too fast, which is what we did in this case,” Hastings said at the time.

The timing was all wrong, though. It was 2011—people were already moving away from DVD rental, and asking them to pay more money for a service that was already losing steam is nonsensical. I can’t remember the last time I cracked open a DVD, but I’m almost positive that it was pre-2011.

Since I’m not one to dwell on failures, let’s shift to the most important triumph of Netflix’s history: its tech-first approach from day one. Consider this from Thursday’s interview with Peter Kafka and tell me you’re not thinking, “Wow Reed had great timing.”

• Back in the early ’90s, when Netflix was still mailing DVDs in envelopes, Reed was adamant that the future of the business was online.
• “…And I think that is the story. Whereas now you're seeing a lot of companies, they’re competing with, sort of switching their business model from an older model to one that is Netflix. The reason it's a Netflix-like model is because [Reed] saw this coming 20 years ago,” Peter says.

Even if you took away good timing and stripped this conversation down to nothing but culture, Netflix’s groundbreaking values, it turns out, have a lot in common with those of this era’s tech superstars. But I didn’t spend half my weekend staring at Google’s homepage.

Reed says the company’s leadership is decidedly oriented on the big picture. Employees are taught to stimulate creativity and ask questions both individually and on teams. And if you’re not the best possible person to do your job, you’re replaced. Sound familiar?

At the end of the day, Netflix has already won the streaming wars. But its success is due more to well-timed pivots and incredible focus than company culture. Because no matter how unique a company’s morals and values and standards are, they don’t get Tiger King onto your laptop; good-old-fashioned corporate strategy does. 

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Thanks for reading, everyone. Reed Hastings is one of the most important people in modern business and speaking to him and to Peter was tremendous fun. I know you’re going to love the episodes.

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