Reed Hastings on Building a Streaming Empire | Blitzscaling 16

This is session 16 of Technology enabled.

Blitzscaling, a Stanford University class taught by Reid Hoffman, John Lilly, Allen Blue and Chris Yeh. This class features Reid Hoffman interviewing Reed Hastings, the co founder and CEO of Netflix. This podcast has been produced by Greylock Partners.

For more podcasts, class notes, slides and.

Videos, please visit greylock.com as a quick intro. Reed Hastings is widely known within the Valley as being one of the most principled, purposeful, rigorous in his analysis and intelligence about being a founder and being a CEO. He gets requests all the time to join people's boards, including mine, you know, eight years ago, or whatever that was, which he was like, yeah, I'm focused on education, go away. Which is a part of focus is one of the things that makes Reed unusually strong. So we are extraordinarily lucky to have him with us here today. And I think what I will open with is another piece of something where you are famous for, which is the Netflix culture and the culture deck. And how did the first culture deck end up coming about getting published? There's version two, which we'll get to. But what led to that creation of that deck, the publication of it, what was that as an act of management thought leadership?

It's not a. Wasn't a pre read, there's no pressure on it, but how many people have already read it? So I said kind of Netflix culture deck. Okay, that's fine, thank you. So about eight years ago, we were getting tired of new employees joining and I would meet with all the new employees and go through this hundred page slide deck and 2 out of 3 really got it and understood and their managers had properly described to them Netflix. And one out of three were in shock because the deck has some aggressive statements like adequate performance gets a generous severance package and we're a team, not a family. And so if you know that going in, you can love it. But if you don't know it and you didn't expect it, you feel bait and switched. And so the big driver was we realized every candidate should get it. And then of course, if every candidate's going to get it, it's going to be public. So let's just make it public.

And was the construction of it a way to essentially, you know, as you're doing scale, to kind of keep a cultural norm as you scaled, was that one of the central tools for doing that?

Yes, I wouldn't quite say keep a cultural norm, but it was to share and debate. One of the great things about putting things in writing is that makes it more debatable and so it's not just hearing a sermon and it's like, okay, that's nice, but you can comment on, you know, this part here that we wrote down doesn't really seem appropriate or doesn't seem what we do or, you know, to some degree, it's a bill of rights, rights for employees, which is here's a set of things that we, the company, want to and aspire to operate by. And if we don't, you can call us on it, and then we'll either fix the articulation because it's too easy to misunderstand, or live up to what we want to. So in some ways it's aspirational. And then by putting it in writing, which probably started five years before that, it allows all the people in the company to collaborate on it and to suggest improvements.

And what other things do you do to keep a healthy culture at scale? What are the other kind of techniques in addition to the deck, addition to the onboarding?

Yeah, I mean, I would say in our first couple years. So we were founded about 20 years ago in 97 to when we went public in 2002, all we were concerned with is not going bankrupt because the first big Internet recession was 2001. And so we had built up a big expense rate and contingent on future financing. And NASDAQ fell 75% that year. And all the venture capitals felt over leveraged. They were barely going to be able to support their existing investments. Certainly no one wanted to take on new ones. And so while the year before in 2000, to raise money was as easy as taking a tin can and shaking it, like $50 million would show up in the can. It was incredible. Never seen anything like it until last year. And then the following year after the crash, you take your tin can out and shake it and someone would steal the can. And so it was an enormously sharp and short change, which is why you see so much talk today about bubble is the memory of no one cares about the bubble, they care about the fall. So suddenly we didn't have enough money. We had to lay off a third of the company in 2001, and we eked into profitability and survived. But until that point, we really spent all the time just on how are we going to get the business to be. We were DVD by mail at the time. So it was, how was it going to be profitable? And only after 2002 we realized, wow, we're going to survive that. We started to think, well, it would be awful to not want to work Here. So we should try to figure out what cultural attributes were there of what we wanted to work in. We didn't set out to try to say like, what's the most theoretically efficient culture? What's the, you know, and in some abstract sense, it was literally about us. And we realized that what we valued most, even more than success was working with really talented people in a productive way. That that joy of excellence was incredible. And of course, if you can get that joy of people excellence in talent density, then you're very likely to win. So they come together. But at the core, it was about having dense talent. And part of it was after we did this one third layoff, it was 120 people to 80. We had expected to basically grind to a halt and really not be able to make any improvements because it would take 80 people just to keep the lights on. But in fact, we got more done with only 80 people. And we tried to figure out why. And we realized now there was no more dummy proofing necessary. And so it was just everybody was going fast and everything was right. And so we realized with the right density of talent, there's very little process needed. And that that was the joyful thing. So at first we said, well, let's do a 1/3 layoff every year. That was the key.

That's a long term winning strategy.

That's a long term winning. It might be back to the blitz scaling thing. And then realized, no blitz shrinking. Well, you want your gross ads to be 100% and just your net adds or less. But talent density matters so much. So then we figured, no, let's not do a layoff every year like that. Let's just do continued focus. And the big evolution we came to is for managers, they have to each year testify for each of their people that if that person were trying to quit, they would try to change their mind. And so it's up to the manager to decide, yes, I would want to change their mind. But sometimes you find that you have people working for you and if they quit, you'd be like, oh, that's pretty good. And that's the case. We wanted to proactively not wait for them to quit, but proactively give them a generous severance package.

Yep. And that's how it got into the culture deck. And what in addition to kind of performance? Because this is actually I'm to some degree leading the witness on this or leading the question, but what were the key things about establishing that culture which enabled you to scale? Because this is the highly aligned, loosely Coupled part of your version two of the deck.

So I think when we went public, we were 150 people by then. Maybe people worried internally. Now that we're public, everything's going to go to shit. And because so many companies had done that, put in a lot of process, be very cautious, et cetera. And we've made great progress, really every year of pushing back on that and doing something either symbolic or real, that increased employee freedom essentially incented more variance in what we're doing. And we realized if we're going to run really loose, like very little rules, then you do want to set a broad context. So we set context, and this is what Reid's referring to, which is we added essentially a chapter to our slide deck, which is context, not control. And so we try to get managers to inspire and lead people rather than micromanage them. And they inspire and lead them through setting the context. What are we trying to do? What are the constraints? Is it a really big problem or a little problem must be done right or we do an approximate version and fix later? There's a lot of context to. To any problem area. And if you get good at setting context, then you don't have to direct the micro specifics, but it's an art. So there's context about the problem, and then there's context about behavior, which is really the culture, which is what are the behavioral norms in terms of honesty and sharing and forthrightness.

And in terms of setting the context, I mean, one of the things when I read we've actually never talked about the version two of the deck. And when I read that and compared and contrast and looked at it, I was like, all right, well, one of the key things is people usually want command and control, and you have an exemption slide on control. But people usually want to be able to do something. Like a bold new innovation usually requires somebody going, this is my idea. I'm driving it home. How does setting the context and that kind of innovation, how do those line up and what do you do about those?

Well, I think you might be mixing. The manager shares a lot of context, but a lot of people make decisions. And so, you know, and we definitely have decision owners. There's almost nothing by consensus, but you gotta know the context. And then you make decisions. And a lot of things happen that I don't even know about, about different deals or different things or hiring. Like, you guys are gonna get lucky and meet with Marissa in a week or two. And one of the things that sadd when she went to Yahoo, which was very brave of her to do was this idea that she was going to review every resume to raise the bar on hiring. And to me, that's a suicidal methodology for a senior executive because you got 1,000 people and you're so tactically buried trying to do 1,000 resumes. And I think what she was going for, and you can ask her, is a symbol of. I care about the details, but a better way to do. There are better ways to do symbols. And so, like, I don't review resumes, I don't block hires. I look at it as my job is to evangelize the benefits of super great talent density. But we don't even try to hire perfectly because, you know, when you are interviewing, it's six or eight hours with someone, you know, it's something. But you know them so much better after they've been in for three months. So I'm like, you know, if you have an instinct, you want to try, try, take the person in. If it doesn't work out, we'll give them a severance package and we'll move on. And it's not the end of the world. So we're experimental with people in the same way you might be experimental with a product feature or something. And it's important to be honest with a person when you're doing that. But we don't look at it as a marriage. There's no need to. And that's essentially an adaptation to the growth.

Well, actually, I think what Marisa is trying to do a little bit because we had Eric in here a couple of. A couple weeks ago, three weeks ago, anyway. And part of what Eric was expressing about how they built the Google culture was you can actually only hire people with certain kinds of degrees from certain kinds of universities where they were actually, in fact, reviewing every resume, every CV before. And I think she's like, okay, we gotta get to that kind of setting in the bar. And that actually kind of leads naturally to kind of one of the.

That's like mistaken in so many ways. First of all, it's trying to do it the Google way, which, you know, anyway.

Well, that's precisely the question I was getting to, which is like, there are other attempts at building strong cultures. Google's one of them. How would you kind of compare and contrast the people that understand that there isn't just Netflix is the only strong culture, but here is some way of understanding the variances between strong cultures.

Well, I think the key thing, it's a great point, is there are many different cultures and as long as you're really clear about your culture, you can get the employees who love that culture and not everyone will be the same fit. There are some things like integrity that are pretty universal, but there are other things of how to deal with dissent where there's perfectly reasonable, different ways and effective different ways of dealing with things. And so the literature on culture is pretty clear that strong cultures work and weak cultures are diffuse. So in a weak culture, it's really a diverse culture. You get many people acting very differently, differently, and then they don't understand each other and they feel undercut and political. Even in a, let's take a Hollywood studio that many of you would not like to work in, they have a very clear system of how to operate in terms of how they manage the politics. And it's internally consistent, okay? And everybody knows it and the people who get good at it love it. And a lot of people don't. And that's just a different. It's not inherently awful or ineffective. It just wasn't right, say for us. And so that's why I think culture is an expression of what you and your senior team want to be. It's a bit aspirational in that way.

Do you have a cult as part of the interviewing process? Do you have essentially a culture check?

Yes, but not like a checklist. Culture is always something that we interview for of kind of curiosity. And you know, it's easy to find people who say, oh, I read the nephews culture deck. I love it, I really want to be there. You know, what's harder is what are the main things you disagree with and why? You know, and when we get a blank stare, we're like, okay, not really a first principle thinker. And when they say, well, I thought the way that you didn't talk about how to acculturate and you know, if I'm not great in day three, am I out, you know, or is there, you know, do you look at it like an athlete where it's over, over some time period to prove yourself? And if so, what's that time period? And why haven't you clarified that? Then we're like, oh yeah, that's a good insight. First principle thinker. So we're looking for people who are curious, typically self confident, and they're questioning everything around them.

Last culture question before we move on to some of the other kind of interesting lessons from Netflix missions. So I think you can only have a strong culture when you actually have a mission in the company. How do you define the Netflix Mission. And how is that embodied in the strategy in the workplace?

Well, I would say I've always believed that a strong mission statement's really important. And I have to say, we've never succeeded at it. It's like this odd thing. We've had them every year for 15 years, and they're constantly different. And now we're all so cynical. We're like, come on, we're trying to make people happy. I mean, that's the fundament in consumer service. We're trying to be better. And us and Disney and Mission aren't that different. There's a bunch of different tactics at it. But we're an emotional product. We cater to the things that are important but not necessary. And I love that part about it. Cause when you're selling milk or penicillin, you're selling something somebody needs, and we get to sell something you want that you choose to do. Because it's really cool as humans, you know, to be entertained and connect to people over entertainment. And so we celebrate that a lot, and we want to change the industry. But in terms of, like, a mission statement, like so many companies have, you know, Facebook talks about a more connected and open world. And then you see that phrase again and again and again, and it's a powerful mantra. We don't have an equivalent. And I think we probably would have been stronger if we do. In the early days, it was to connect people with movies they'll love. And it's okay, but it's kind of like the long, kind of awkward phrase, connect people with movies they'll love. And, you know, it's just not punchy. And then so, like, we used it. We had T shirts, you know, and then it didn't really motivate anyone, didn't really stick. But we knew we were trying to make people happy with DVDs, and then eventually was dreaming and original content. So it didn't hold us back much.

Yeah. So let's go to some of the lessons from Netflix. So if you were to call a younger version of yourself and tell yourself to do kind of what key lessons that you would do differently through Netflix, through the history of Netflix. Obviously, you've been a founder of companies before, Rational, et cetera. But what were the key lessons? This is an inflection thing that I wish I'd done differently.

So we were growing. We went public in 2002, growing nicely in 03 and 04. And Blockbuster, which then was 20 times larger than us, finally counterattacked in a very.

I'm vaguely curious how many People raise your hand if you know what Blockbuster is.

They know what it is.

Okay, but it's not quite a more.

Accurate question was you remember actually renting a dvd? Well, and Redbox is still quite popular. So you know, in 03 and 04 were growing really fast. 05 blockbuster attacks. And so we thought we were very clever. We came up with a number of ways to counterattack. And remember that everybody's got every dvd. So you've got basically the same Blockbuster and us had the same content offering because it's non exclusive licensing to get DVDs so we could differentiate on our service, fulfillment levels were 99% and theirs were 89. But that's like a really abstract for a customer thinking of signing up doesn't mean anything, right? And then they discounted massively. So it's like half our price. And so we were losing share.

So.

We were struggling with what to do about it. So we did three or four big efforts. One is in the end of 05 we added Netflix Friends, which was our own social network. Remember in 05 Facebook's just on a few universities. So our own social network amongst our members. And if you enabled each other, you could see what each other were renting and rating. And we thought, wow, the viral effects of this would be really powerful, et cetera. We added ad sales back in the day. It was like Yahoo type banners and we sold banners above the choosing interface. We added used DVD sales on our site to consumers. So of course we had some excess DVDs from four years ago. So we added an operation to sell them for four bucks a pop. And it's a different logistics but we added all that and we added Red Envelope Entertainment, which was a group that we brought in to buy DVDs, buy films out of Sundance and similar festivals, to then publish them on DVD. So getting into content. So we did these four efforts and each one was a dozen people, 15 people and made us feel great. The employees loved them because here was a tangible thing that was not just 98% versus 89%. Here was the thing that they couldn't do or weren't doing. It was a differentiate. And wasn't management so clever? And we went through these waves of battles in 06 and 07 and in the end we won. They ended up closing down their online thing and two years later going completely bankrupt. But we looked back and none of those four efforts made any contribution to our victory. And one by one we had closed them down along the way. Every single one of those four. And so in Hindsight we realized when attacked we should retreat to do the core better and not try to broaden the surface of attack, essentially. And it was a great lesson for us of focus. And so now when people say, aren't you getting into news or sports? We're like, absolutely not. And we're really confident of our answer. Movies and TV shows on a global basis, enormous market. We're much less subject to being prone to go off and chase the shiny object to try to have something in a checklist to differentiate and to trust. And in hindsight, if we had just gone from 98% perfect to 99.9, we would have done a lot more for the business. And you know, and it's hard work. It's operational logistics, how to get DVDs not to break. I mean the amount of polycarbonate analysis we had to do is all this stuff. We would have beaten Blockbuster sooner than we did. And so that's one of the great lessons out of that time.

What about Qwikster?

Yeah, Qwikster we got some lessons out of. So we looked at. So I'll give you some context on it. We're growing. 070809 we're adding stream streaming. It's a hybrid plan. You got DVDs and streaming O10. We launch in Canada as a test in a way of both international and streaming only because there's no DVDs and we expected X and we got 10X. It was 10X. Bigger reaction and customer signups than we expected. I mean it was just massive. Even though it was just streaming, no DVDs. And we realized, oh my God, you don't need DVDs.

Wasn't a part of the plan from the beginning.

Well, we were always going to use them as a hybrid way. This was our differentiator against Hulu because Hulu was about equal size at the time. Okay, but we have DVDs too. That's our differentiator. Okay? We're streaming. And DVDs, which was going to be compelling, was compelling to half the market, but was going to be compelling to a shrinking percentage of the market every year. So it's not what you want your brand image to be around. So we realized, wow, we cannot afford to use the crutch of DVD now because pure streaming works. And so we want to win as the best place to do pure streaming, not be the best place to do hybrid because that wasn't a long term benefit. So we had to not rely on DVD. So I think correctly we separated the two businesses. The huge mistake we made is remember 00:10, 2010, we're in the middle of a recession still pretty deep is we said, well, $8 is a good price for the DVD plan. It's a good price for the streaming combination, which is $16 is the new price. And the old price was 10 bucks. So from the customer standpoint, one day the price went up 60% in the middle of a recession and now they had to deal with two user interfaces instead of one. So this was not well regarded and if we had done grandfathering on the price for a couple of years, it would have been fine. Now fortunately we realized, wow, we've got to make amends. But now it's too. A lot of people have left us and changing the price would be hard. But the symbol of Quikster was much hated, even though the name tested quite positively. Before we did this, it had attracted a lot of negatives. So if we kill the symbol, maybe people will forgive us. And so that's why we killed Quickster and people mostly forgave us and we moved on.

And one of the things I thought I learned from that, from you when you were doing that is I actually thought that your letter to the public on the blog was actually masterfully done. It was personal, it was open. Was that just a natural reflex as part of leadership to write that kind of letter and make it as an open statement about look, we need to over communicate, we need to be humble? Or was that something that kind of was a result of a ton of internal discussion about how to do crisis management?

Well, I think everyone who has both Oxford and Stanford degrees love that letter.

Oh, so I love that letter.

Yes.

No one else did.

I know. No, in hindsight, it actually was a very boneheaded move for your typical consumer because new lesson, it was an explanation of basically why we needed to do this thing and they didn't really care, you know, it was about our survival, blah, blah, blah. And so there was a few more people than just you that liked it. But by and large it was tone deaf consumer marketing, because what's in it? They didn't hate the letter. It had some positives of being authentic, but it just stirred things up. And a better thing would have just been to change the situation that is Quickster or whatever, as opposed to get into these. It's just too intellectual.

So streaming wasn't part of the initial plan. What was the initial plan? Was it just DVDs?

No, streaming was in 87. I took Tenenbaum's networking class here and those of you, I don't know if they still use the same textbook or some adaptation of it, but you have to calculate the bandwidth of a station wagon filled with backup tapes driving across the country. And of course it turns out to be terabits per second. And you know, it's got high latency three days to get any bit to the east coast, but it's super efficient digital distribution network. And in 97, when someone showed me DVD, it was the first time I'd seen it. I was like, oh my God, that's the station wagon. That's five gigabytes on this one ounce plastic disk. And I bet you can mail that. And there's my network, there's my station wagon. And so we always conceived of DVD by mail as a digital distribution network with high latency. And someday we'd use the Internet to take the latency out. And early Internet was more expensive to deliver five gigs than mail. You know, it only took another three or four years of Moore's Law to make that crossover. But we always conceived of DVD as temporary Internet streaming as the long term.

Was there anything in the initial plan that turned out to be radically wrong, that your engagement with the market changed?

Yeah, in 97, when we were first seeking funding, we thought it would be mostly streaming in five years by 2002. And in 2002 there was nothing. And it was still dial up. AOL was, the company was in trouble, but dial up was still king. And so around then said by, within five years, streaming will be half our business. And by 2007 it was still zero. Okay. And then so we said once more, next five years it's going to be half our business. And we were wrong, but the other way. But the next five years it was like 60%. So we just kept repeating the same thing and eventually you turn out right. Yeah.

One of the things that I sometimes like to say about predictions is the only prediction about the future that is generally true is that most predictions of the future are false. But you know, it's the paradox of this. So because we're going to have some number of people here are actually entrepreneurs, some of them are planning on starting companies. What was like, is there anything in the financing process for early Netflix that you would lessons you learned that you would redo, like in terms of how you ran the financing.

So more relevant? I think so, let's see. I graduated in 88, worked at a research lab, worked at a networking company, work at a startup that failed where I was just a hardcore engineer and Then I had an idea. And you really want to do the entrepreneurial thing. When you have the right idea, there's no point of deciding I'm going to do it this year with the best idea I've got. You're probably going to have crap results. And so it's when some idea is just shaking you so hard that you'll go into poverty to see that idea materialized and the idea is really important to you and then you change your life to become an entrepreneur to do the idea. And so the concept, whatever it is that you have. And it's good to constantly be thinking about what could that concept be. But. But I would approach it that way. So my first company was funded 20 people, 20k a piece. So classic. Well broader family and friends and angel round. Only one or two semi professional. No one close to Sam Altman or someone like that. And it was a little less developed 20 years ago in the ecosystem. On that money we were able to launch a product, get some initial traction and then we got our first venture capital which was the predecessor to Benchmark, Merrell, Pickard and Mayfield. And that worked out I would say very well. We got people that we trusted and really helped us grow the business. So I had an enormously positive venture capital experience in that way. And what you realize is many third party like vendors and banks and things, they will screw with your company because they don't really care, but they care a lot about their reputation with your board members and your board members, when they're venture capitalists, become the guarantor that you won't get screwed with at least much less anyway because of their long term reputation is with your board members, not with you typically. And so that's a big subtle value add. In Netflix's case, I could self fund. I had done well enough on the first company which got sold in 97 that I self funded the first couple rounds rounds. So it's not relevant probably for a typical situation, but nothing. I mean I probably would have taken hindsight. We wish we had done more debt and less equity and all the normal things.

The prediction from success.

Yes, that's right. Nothing too dramatic.

How about your first hires? How would you think about. Because you've now done this twice, both times successfully, once massively successfully. How do you think about the first five to 10 people? How do you think about doing that hiring? How do you run it?

It's people you want to work with. But you can't be afraid to change. You can't let friendship get in the way of Professional judgment. So you've always got to be thinking, do I have the right team? And I owe it to the whole team, to the marketplace, to my investors, to my sales, to do what I think is the right thing for the company. And when I was first a CEO, I had never managed anyone. So I'd never written a review for anyone or anything because I was an individual engineer. And I found a lot of those communication things difficult. And in particular, I couldn't possibly fire someone. It felt so cruel. It felt inhuman. And I just, you know, it's like breaking up with a girlfriend or boyfriend or something, but worse. And so it felt awful because it was selfish. So it took me probably three years before I came to a view that I had and the rest of the company was depending on me to do the right thing and that it wasn't about me being selfish and pushing the person out. It was about me protecting the company. And once I could neutralize the value scales that way, I could comfortably say to someone, I'm sorry for this, but I think it's best for the company if we end your employment. Once it was, and I think it's best for the company, I could get there. Now many of you are probably more sophisticated, more mature, you've broken up with more partners, so it's easier for you. But could you. It just takes practice. Right? And we don't get enough practice in that.

Actually, there's a book I recommend to people, which I don't know if you've encountered by Fred Kaufman, called Conscious Business. And I'll get you a copy. But it's actually very similar, which is thinking about compassion and compassionate management. The compassion is not only to the individual, the compassion is the company, the compassion is the customers. Compassion to shareholders. You actually have to integrate all of that compassion. Once you're doing that, that actually makes the. Oh, yeah, I understand this is painful for you, but actually, in fact, it's still a compassionate act. And that was actually one of the things I found really good in how Fred thinks about these things.

Yeah. And I think one part of compassion is a severance package. Because when you cut someone loose and it's a week or two of pay, it really can be difficult for them. But our minimum is four months and goes up from there. So even if, like two weeks in, we realize there's a mistake as long as the person has lied to us or something, but we've made a mistake, they get a four month severance package. And that does a couple things. One is it makes the person feel better about it because they know that's a material amount of money. And again, four months is the minimum. And two, we get a legal release in exchange for that. And so despite the fact that we've separated from 1,000 people, maybe we've never had an employee loss of because of this. And then third and most subtly, managers are really nice people. They're human beings and they're good with people. So they don't like doing mean things. And so you can think of the severance payment as like a bribe to the manager to do the right thing because it makes it easier. And without that, what they do is they put an employee on a performance improvement plan and then the two of them go through this excruciating dance, you know, where, you know, it takes two or three or four months and then they break up. But it's clearly documented and that's just a lot worse. So that's why we avoid that and essentially buy out. And then the person's good, they'll take a month or two off and then they'll get snapped up somewhere.

When did you start with the four month severance package?

It was three months from the very beginning.

That's unusual for a startup.

Yes. I mean, it's real money, but it's, it, it's worth it because again, otherwise the people, the person, it's costing you anyway. It doesn't really cost you anymore. Okay. Because you're going to spend the three months managing the person out and so you're going to end up with that hit.

It's kind of the classic. All right, so let's actually know one thing. Has your hiring changed as you scaled like your hiring practices because you're very familiar with all blitzscaling pieces that hire, how all these things change at each different magnitude. Was there anything notable when you look back at hiring that you said, oh, these are things we added in as we got to larger scales?

No, I would say we have a very big people judgment process. Some companies try to standardize and put a lot of statistics and analysis in and we've never believed in that. We say about data, use a lot of data when you're picking stocks, but probably don't use a lot of data in picking a spouse, that the more that you're in an emotional element and a gut feel element, the less useful data is and the more you want to really listen to your intuition and judgment. And so we spend a lot of time with candidates trying to get them to talk and feel, but then we don't do like, how long did it take analysis? Or I don't know, something like that. And then we do a lot on references. I'm always stunned how many companies don't do good references, how many employees that I don't get called about. And I'm like, really? He didn't even call. And so we're manic on getting and always blind. I mean, we never even ask the person for references. There's this great tool, LinkedIn, and so you can find the reference that has changed the game in references.

So let's go to some of the areas where Netflix has done some very interesting and actually unique strategies that as far as I can tell, no one else ever did them. And there may be additional ones, the ones I'm about to ask you about. But let's start with the prize for the recommendation algorithm, where you kind of said, okay, this is one of the most important parts of our business. Which other movies should you also see? How do we essentially crowdsource and get network intelligence for the best possible ideas? Let's do a prize. How is that conceived? How did it work? Would you do it again? Would you do it differently?

I'll tell you the story of it, but unfortunately it's disappointing because it turns out that we did one, it was epic, and we've never been able to do another. So it's not like a general purpose thing that you can use a lot. Once in a while there's a problem that is amenable to outside analysis. That one was we hit the right tones on it. It was transformative for Netflix in the machine learning community in 2007 and really help move things up a notch. And still today we get residual goodwill from it. And so of course we wanted to do prize two and prize three and prize four. And we still have not found even a single other one problem that was amenable to that kind of formalized architecture. So very specialty, exotic tool. As you grow companies and say a.

Little bit about how you did the tool, is there anything you would have changed? I understand it's rare. And then what you got out of.

Was an open contest. We put out a data set and it's like crack this data set to this too. It was reducing the root mean squared error by 10%. And you could submit these attempts because you do a new algorithm, but you could think of it like cracking a cryptographic thing or any of those, like pay for bug bounties is a good one that people do as an example of a crowdsourced one. But again, there Are these little pockets where it's a workable solution.

Did you end up getting better algorithm or did you end up getting mostly better goodwill?

There's much bigger benefit in goodwill. Some benefit. The algorithm worked and we put it in place, but then we grew past it. So it wasn't like a permanent step function. It was a one time thing.

So now let's go to original content. This is probably one of the things that has probably most stunned most classic Silicon Valley people. Because we think we're good at tech. That's what the talent base here is. We're bad at content programming. That's what you go down to LA for. It's the kind of thing where intensely engineering and technology driven culture will be intrinsically bad at this because it'll be bad at people, it'll be bad at emotions. And so when you start doing this, I think the general received wisdom in the Valley was, oh, that's a mistake. And then of course you pull it out. You do it much more successfully than Amazon also doing it. And then later following and then other folks, what led to the strategy? Why is it that you just literally trounced conventional wisdom on this? What were the lessons from that?

I'd say Amazon's doing a pretty reasonable job, but we can come to that. You know, necessity is a mother of invention. Every cable network, fx, amc, hbo started on other people's content and then got some scale and distribution and then went into doing their own original content. So the path for Netflix was well understood like other cable networks. So it wasn't like, oh my God, we never thought about this kind of thing. You get more differentiation and love and value from if you do the content. Well, again, we tried it early in 2005 on a DVD basis. We only had 5 million subscribers. And the economics were roughly, for a movie like we got this cool Maggie Gyllenhaal movie at Sundance, we would have normally bought. Suppose Sony Classics had bought the film. We would have bought 20,000 DVDs at 20 bucks or $400,000. But instead now we could buy the film for $2 million and put 2 million in marketing. So we had 10 times the cost and we still didn't need more than 20,000 DVDs. Okay? So we're like, wow, this sucks. We're paying 10 times as much. And meanwhile, Sony bought some other movie, made it popular enough with our members that we still had to buy at the 20,000. So we didn't really save anything. Right. And we realized we're just not nearly at scale and we got out of it. And then in 2010, we were spending enough on big ticket TV shows from a licensing standpoint that my partner Ted, who lives in, Ted Sarandos, who lives in la, said now's the time. And we were like, oh my God, are you crazy? We're put $100 million. It was like a quarter of the content budget. And he was like, don't worry, I've negotiated. We don't have to pay for it till 2013.

The bill will come due later.

The bill will come due later. It's due on arrival. I'm like, oh yeah, I feel great now. But man, it was transformative. So he picked incredibly for what we need. And I don't get any credit for that. That was all him then. Now Ted's built a team from studios that are cherry picking some of the best people out of cbs, NBC to do exactly that. And they really know how to run shows. And the main thing is the cultural attributes that we talked about before, context, not control, freedom and responsibility. Those have played extremely well in our relations with the showrunners or the producers. And so it's been a very consistent model. And it turns out that really our culture is designed at inspiring and motivating creative people. And you can be creative software person, creative marketer, creative content producer. It's really in the creative world. And the creative world, the hallmark is you do your best thinking in the shower. You have a huge idea the day after Thanksgiving on a mountain bike ride, trying to recover cover. You know, it's not like, you know, you need 8, 10, 12, 15 hours in the office doing something, because in the creative community it's synthesizing all of these things. And that's true in a number of fields.

And is this was the cost reason, the reason you did. Because most of, I think all of your original content's been TV shows, not movies. Or is it most?

Most. We just had a big one. Beasts of no Nation was our first big movie. And then we have one with Bradley Pitt next year called War Machine.

And was the reason the cost of TV the reason you focused on tv, or was there a different reason to initially focus on TV and build there?

The economics of TV are much better. And there's too much capital chasing movies because of its historic legacy. So the returns in the movie business are just much harder to make money. And so, yes, TV's less expensive per hour typically, but not for any inherent reason, just because that's what other people spend. So to be as good as them, that's all you have do to so it's really influx of capital. And then of course when you fall in love with the show, then there's a built in market for season two. So that's a great thing.

And how is the original content playing now? What are the current things that are knocking out of the park? What have you learned from them?

Huge hit right now. Master of None. Anybody seen it? Couple the rest of you, you have got to go see it. I'm telling you. Watch the first two or three episodes. Aziz Ansari and it's his commentary and it's unbelievably funny and he casts his parents in it and gets away with it. And it's both warm and delicious and biting and hugely original. So that's our current one. Narcos was a big one this summer, which was American company US contracting with Galman, which is the oldest film producing company in the world. It's a French company filming in Bogota, Colombia with Brazilian talent and it's super popular in Germany. And so let's define globalism. That's right. And so this is why Netflix is racing to get as global as quickly as possible is we want to produce content all over the world to share with the world. And so it's not a Hollywood to the world. You know, it's really connecting great stories. Stories.

Is there anything that you, when you look back at Netflix, you think was kind of a strategy that you pioneered that we didn't cover that would be useful for the students.

Once you're public, which would be a great day, you're going to have an issue around stock volatility and stock comp options and rsu that really frustrates people because most of our company stocks are pretty volatile and then if the stock goes down, people feel cheated. I think the mechanism, if you get to that stage, look up how Netflix does stock options. Because it's from my experience in the first company, Pure Software, with dealing with that volatility that we did a big adaptation in Netflix that I think works much better. Better. And it's basically price averaging if you follow stock markets.

So let's switch to a little bit of the kind of the classic role of a job, like the role of the CEO. How do you define the role of the CEO?

That definitely varies by stage of company. In the first couple years, you do everything. You're doing dishes at night, you're coding, maybe you're writing marketing materials. For sure. You're dealing with customers and investors. And you have so many disadvantages as an irrelevant Little nothing as a company that you have to make up for it with talent and hard work and brute force. And so if you're lucky, that's only a couple years, as opposed to 10 years where you're just on call constantly in a very intense way. And then the trick is, as you get to 50, 100 people, you've got to evolve your management style. As you get to, to 500 people kind of each 10x, maybe even just 5x. You've got to adapt to be more strategic because it used to be you knew every person and now you don't. So now you gotta manage a little bit differently. And still you wanna be a great leader for those people. So when you get to real scale, most of what I do is vision about what markets we should be in. Like we should go global, we should do original. But I'm not picking countries and I'm not picking shows. You know, vision of we should spend 5 or 10% of revenue on marketing as opposed to 50% or 2%. So some big macro decisions like that, but not what's the campaign. So there's vision there, there's vision in terms of culture, what are the rules of the road of how the firm operates, what's our character, so that it's a healthy place. So vision, focus, inspiration. But you really, you can't do much of the work because it's just too big. And so if you try to, you'll A, burn yourself out and B, you know, get everyone else upset. So it, in my first company, it's probably a more relevant example for all of you. So I, I was 33. The company's growing about 50 people, and I was still trying to code at night. We had 50. Yeah, 50 people. I was still writing product at night and then trying to be CEO a day and sleeping at work. And I wasn't careful enough about taking showers. And finally someone said to me, like, shower. It's just gross. We don't want our leader to be granted gross. We get that you're working hard and by the way, when there's bugs in your code, it's really hard.

It's a different definition of culture.

Yeah, it's really hard to get you to fix things because you're off doing other things. And so I was trying to hold on too long to the dual roles.

And so how do you improve your ability as a CEO? How do you learn? How do you be on a constant improvement curve?

In my first company, I think I made a mistake and I felt like investing in me Was sort of selfish. I should be working. And so, you know, I got invited to ypo, which is young presidents organization. And it's a good learning type paradigm. And I looked at it a little, but I was like, no, it's way. It's like a day, a month. I can't take a day a month off of work. And for me it was like off of work. And in hindsight, that was a real mistake because I didn't, you know, I was too busy chopping wood to sharpen the axe. And so that as a later stage CEO, you need the skills and personal maturity and growth and reflection. And I should have cross fertilized. I should have spent more time with other entrepreneurs, see how other people do it, learn and invest in myself. Maybe that's, you know, do more yoga or do meditation or be more, you know, it's like that great Gandhi quote about, oh my God, I've got so much to do. I've got to meditate for at least two hours this morning. And I didn't have that perspective. And really until that company sold. And then I did a wonderful thing that Reid Hoffman also did. Being a Crown Fellow, I didn't understand that connection, that by making myself better both as a person and a leader, I was actually helping the company, even though I was away from work. And it sounds so obvious to say it, but I just didn't have. I didn't give myself permission to do that.

Is there anything you encounter? Because one of the things you also have a general reputation for is a deep certainty of conviction of belief, are the things that you encounter as CEO that cause you to question yourself.

I would say that's not an accurate attribution. It may come across that way. Way. But I'm very much like Hank Poulsen and you can never know anything for sure. And maintaining our reservoir of doubt's really important. And we often try to do the exercise, like at Netflix, every year, 18 months, we'll do an exercise. What would be different at Netflix if you were CEO? And it's a way for me to gather all the things. And some people say, oh, it changed the pricing. We would do this different. We'd be in the ad business. And then I'll really try to think through a lot of would I really do that? Am I sure? How confident am I? So we call it farming for dissent. You can never be confident of anything. You want to constantly be curious and yet you have to be executing really firmly. So it's a little bit like your lovely Isaiah Berlin piece Simultaneously knowing that there is no certainty and yet working really hard to what you think.

Think this is Isaiah Berlin. Two concepts of freedom is. Anyway, for the.

For another class. For another class, you should hear Reid's discussion of it. I guess Reid is waiting till the end for the questions.

Yes, we have about 25 minutes.

Okay. Okay, then we'll go to questions.

So also partially to get. This is in part a portrait of how you think. Right. So that people can then go and ask specific questions and the things that they know that you will actually be be amazing at. Board of directors. How do you compose them? Is there such a thing as a high performance board of directors? And what would you do differently with your years of entrepreneurial experience doing this?

When you are interviewing venture capitalists, you definitely want to pick on the people as opposed to the valuation. The quality of the people in your boardroom is super important to you. And I say quality, it's probably not the right word. The rapport you have and the connection you have and your trust makes a huge difference. And so if the people in that very. That's like a marriage. It's very hard to get divorced from your board members. So you gotta spend some time with them and then say, okay, if they're in, they're in. And then you gotta listen to them. And you definitely have to be honest with them. You'd be amazed how many CEOs are not very honest with their board members. And that's poison because then the investor has to constantly be pushing and probing and trying to figure out what reality is, because that's their job. So you want to really lay everything on the table and be the paradigm of honesty and straightforwardness with your board members. And if you've got the right ones, they won't freak out. They'll be very thoughtful. So I would say there's no perfect board members. It's unique to each of you of you know, someone whose judgment you trust, whose integrity you trust and you enjoy being with.

Do you think the role of the board changes as the organization changes size? And if so, how.

Yeah, when you're small, your board members know a lot more than you as a company. And because they pattern match on a lot of different things, the larger you get, the more any board member. I was on the board of Microsoft for a number of years and on Facebook, you spend two days a quarter on a public board and your just level of depth is not nearly as strong as the CEOs and the senior leadership teams. So you're more of a safety Net then than you are able to contribute.

Then the last in terms of the roles, and then we'll get to the blitz scaling part of this. But how should someone think about knowing whether or not they're a capable founder or not? How do you kind of say, I am like, I should actually do this versus I shouldn't do this?

It's a good question. I'm not sure. I didn't know. I just cared about the product. This first product idea I had, I wanted to see that out. And I was definitely reluctant CEO, and a couple times I'd screwed up badly enough that I said to the board, you know, let's get someone in who knows what they're doing and I'll be VP of engineering and that'll be fine. And both times they said, no, yeah, you did screw up, but you know, we'd still rather have you than someone else. And the dislocation that that brings. So that's why I say I was reluctant. And the whole first company, which was 91 and 97, I was kind of miserable. I was always underwater. The company was always. As soon as I learned something, the company was, was bigger. And so, you know, and I was killing myself, you know, physically, mentally, trying so hard, you know, and just underwater. Then that got acquired in 97 and we started Netflix. You know, that's like 15 people. It was like, compared to the other company had been 700. So it was like so easy, you know. And so then Netflix has been fantastic and total joy for me because it's kind of like your second kid or something where your first kid, you know, it's a panic. Oh my God. You know, and depending on the kids, you know, as long as they're both healthy, your second kid's much easier and you're much less freaked out. So for me then, I have enjoyed, you know, the last 18, 19 years tremendously because I've been able to keep up with the challenges.

So let's shift to scaling and blitzscaling. So. So one of the things that you and I have actually had a conversation about before is sometimes these things are just normal scale up, and sometimes there's blitzscaling. Netflix is actually more an example of just regular scaling. There's relatively little blitzscaling within it, but it's one of the things where actually, in fact, the consistency of expecting growth also matters. And being systematic about how you change size, what's your sense of, of the key characteristics to know in advance in order to scale. And then what's your kind of reflections on the kind of the different levels.

Well, let's see. There are scale economies in businesses like Amazon and Netflix. The bigger you get, the cheaper the marginal customer sale is. And those are power powerful, those merit you investing forward to get to scale. And so running losses for the first couple years doing things like that. So call that normal business. And then there's a couple of rare businesses like LinkedIn, Facebook that are network effect businesses. And then the prize of getting big first is so much larger than just a scale business that in those businesses it's worth selling 90% of the company to raise a billion dollars. To be the big one, you must be the winner. It's such extreme winner take all. And so I think it's the degree of winner take all and network effect that gets you to either take the risks and the stress of blitz scaling rather than the more like Netflix, like Amazon in the early years were going 80% year over year and then 70 and 60 now we're 25 and 25 at our size are Amazon's are big numbers. But that's like a normal great scaling business. And both Amazon against Walmart and us against cable and satellite, we have huge markets. So growing at these rates is great and hopefully we'll be able to grow for 20 years and Amazon same. But then there's a couple businesses again, Ebay was one of the first where it's real network effect. And in those businesses I think you do kind of crazy practices because you've got to grow 300% to maximize the opportunity. So you're going to be sloppy on a number of things. So you probably don't worry about talent density and you don't do a bunch of the things that I described, which are the things that are appropriate if you're trying to be a careful, disciplined operator. But if it's get big or go home, then that's the interesting thing. But again, most businesses is not that it's businesses that have network effect.

Well, some of the things that I think interesting about it is sometimes it's network effect. Sometimes you have to get to a minimum scale, which is Amazon and you. And there's a number of other businesses. The thing I think would be fun to get some perspective on here for you is like when do you think I think that it's necessary to move fast because of competition. So for example, another thing I think drives scaling fast is you say, okay, I've got to occupy the greenfield market before them because presumably this is a little bit of how you're thinking about global now in terms of. It's not just a question of content and globalism, but it's a question of, look, we've proven this thing and in every relevant market in the world, this is something we should do.

Be there. Is it no, no or yes and no. A company can get started two or three years before us in Germany and we can knock them out in 12 months. So because it's as. We have great scale and it's not a network effect where when ebay tried to knock out Yahoo Japan, they. They didn't succeed. And, and that's been permanent. And so if you're in a network effect business, then you get more of first as far as forever because the barriers are really strong. But if you're just in a scale business, you can go in with a lot of content and energy depending on what your market is. And that's why Amazon, it's like, how quickly did they wipe out CD now in 1999? Really quickly, because it didn't matter that CD now had started earlier or something or had more scale in that side. So again, I think it's really related to barriers. And these network effect barriers are so strong.

Although just as you're saying, scale barriers are relevant too because once you get to a certain size, you can leverage your size in order to win. Because that's precisely your Germany point.

There are scale economies that are just not as strong as a barrier. So you can think of barrier as how much pricing power do you have, which could either be how much advertising or what the literal price is. And if you've got a ton of pricing power, then you can raise prices a lot. And it's still very hard to come after you because you've got that network.

Were there any. As you got larger in terms of the organization, were there any new strategies that you added? For example, a classic one is corporate development in terms of. That's something you now do when you're hundreds of people versus earlier or a thousand. Were there any kind of key strategies that got added? Obviously original content was one that came in on scale.

Yeah, not particularly for us. So in 17 years we have never done an acquisition. Obviously we haven't been acquired. And corporate development is M and A. So again, we haven't had those kind of dynamics in our market. There's other markets where the key thing is to buy up a bunch of companies they might be competitors or are joining to get to scale and differentiation.

Yeah. So let's do a last few questions on kind of Silicon Valley and then open up to the group. So what do you think makes Silicon Valley so unique in the world?

Well, there have been a lot of companies like Amazon that are scale businesses, not network effect that are successful outside of Silicon Valley because you don't have to be here, I think to do a scale business business. So far all the network effect businesses are here because it's. This network effect is when you need to do blitzscaling, you need to be in Silicon Valley or it's like 10 times better, as opposed to only 50% better.

It's here or China.

10 cents in their markets. Yes, fair enough. So China is such a self contained market, it's an isolated island because of the great firewall that it just might be a different place. It's got its own ecosystem.

Yeah. A huge island. Yes. Okay.

It's an island for the rest of the world. You know that headquarters has been here.

And why do you think Silicon Valley tends to be network effects?

I think it's, I mean it's historic factors that get Detroit to be the center of the car world and then there's more talent there to build car companies. And you know, you get those kind of. You get Manhattan and London for financial products, so you get density. It's almost irrelevant why it started. It's just that once it happens, then it's the best place to be and then continues to be a better. I mean it's a much better place now than it was 20 years ago for entrepreneurs and then that was better than 20 years before that. The more of you that do companies, the more there's that ecosystem. And so our benefits as an area continue to go again. But if you've got like a minor idea that will be a $10 million business in 10 years, like pretty good, really move to Austin. Do not do that here because you're competing with blow away ideas for people and talent and money and cost of talent.

Are there any myths that you think we tell ourselves as Silicon Valley people that are worthy of exploding?

Not obviously.

I'll give you one that I think is kind of. I think it's kind of funny. It's actually, in fact, I think a lot of Silicon Valley people think that they're actually very good at managing. And actually in fact they're not bad at managing. But actually in fact, it's the composition of how you put together network of X businesses. How do you do a disruption in industry? Those kind of things create a lot of things. It's not actually, in fact kind of like genius management techniques.

I don't know. Do you think Larry Page or Steve Jobs would have said they're good at managing? I think like Larry Page is an amazing scientist and he's like a really deep thinker and he's an amazing guy to inspire and lead Google, but visionary in so many ways. But it's not like he would go into GE and be that successful. He doesn't think of himself as a general manager. And so I don't think most Silicon Valley people, Tim Cook might, because he grew up in that, in operations and he is very talented manager. So it just goes to show that, I mean you look how successful Tim Cook's been at Apple. It's been phenomenal. And as I was a very different person than Steve was a different management style which just says there's multiple styles that work. I think you shouldn't try to be someone else. Don't read about Steve Jobs and then start wearing mock black turtlenecks. Be yourself. God, here I am in black. You want to figure out what your emotional center is and be that really great and don't try to be other people. I mean, it's fine to read about them, but there's no one style that's. And if you look at the varieties of the really successful companies, the variety of leaders is quite, quite wide. Could you talk a little bit about the switch from DVDs to streaming and how you internally organize the product teams? Did you fire everyone and bring in a different team or did they change their duties? The question is, how did we evolve the internal management to move from DVD to streaming? Because the first streaming product offering was integrated into dvd. If you were a DVD subscriber from Netflix, you then got a little bit of free streaming and then you got a little more free streaming. It was pretty integrated as opposed to. It was a separate offering. So it only got really difficult when we got to a separate offering. There's a streaming service from Netflix and there's a DVD service. And the only really painful part was probably 2010 or 2011 out of 30 VPs, we had five who focused on DVD. DVD. And this was a close knit exec team. And then we kicked the five out of the meeting and we realized we have to eat, sleep and breathe streaming like Hulu and not also have this great five people. And of course they felt bad and eventually they realized they're great at DVDs and they should follow that. So there was a time of separation, but in the first part it was integrated. But it's because the product offering was integrated.

In the back.

I'm curious how regulatory risk has affected your strategies, especially with technicality and international expansion. Well, as you grow, you know, repeat the question. Yes, thanks. The question is, how have regulatory strategies been important? We've had to fight for net neutrality and a big threat for us was that cable companies who are most abroad based on would get to charge us a tremendous amount to be able to serve our customers as opposed to be pretty open and that they would have an advantage because they wouldn't charge themselves. So we've had to fight that regulatory battle over the last four years. And then every company that gets large faces antitrust concerns over time. And you see that with Google and Europe right now. Why do police users sharing their accounts with other users?

There must be some.

So question is, why don't we police or crack down on users who share with other users? So when a wife shares with her husband the password, it's probably okay. Okay. So when the dad shares with the kids that are 6 years old living at home, it's probably okay. When that kid goes to college, it's probably okay. Remember, 90% of kids live at home when they go to college. So that's definitely okay. So now the kids in the apartment next door, that maybe that's okay or is it not? Or when the kid graduates from college, is that okay? So the only thing that's really not okay is the dorm room. So the dorm, so the dorm gets an account or the fraternity gets an account and 30 people don't do it. And there's an easy check on that, which is you only get one or two concurrent streams at the same time. And so you're not going to share too broadly. And to get more concurrent streams you get, you know, it's more cost. And so that is an effective limiter on broad scale sharing. And then we don't have to try to police people's living situations. You know, is it three friends? You know, it's like three friends in an apartment. Is that legitimate or not? You know, so we get to get out of all of that.

Sorry, Chris. Second, but first I'll remind you.

So I read about Netflix on the website. It talks about sports mentality when it comes to managing. I'm just curious, what's the benefit and like some like side effects on that? Sure. The classic, well, it's probably not for you guys, but used to be a classic metaphor for companies was the family. And you'd hire them and you'd be like, we're a family, you know, we look after each other and it's Kind of baloney, because you know, you'll lay someone off in a way that you wouldn't, you know, your sister. And so, you know, it's like you want them to work for you like they were a family member for free and cheap, but you're not really prepared to treat them like a family member if you're honest. And so really, the professional relationship is like a sports team. And if you want to win a championship, you got to have incredible talent at every position. And so we say, look, we're like a professional sport, not like your kid's soccer team, but no, like a professional sports team where we pay people well, we want them to win. And if you have one good bad game, you don't, like, lose your position, but ultimately you're fighting for your position every year. And that's how we feel about it. And as long as we're honest about it, it's exciting because then you can play really sophisticated. So to do a blind pass in soccer and you just know the person's there, that's an art. You need great teammates. You know that you are so well rehearsed and, you know, so to do that, you need great talent and it's fun to be around.

So we'll get to Chris's question in a second, but that's too good of a layup. Comments on Chris and Mai's book the alliance.

Meaning in terms of terms of duty. Yeah, now you're signing up to get something done, which is like a player's contract. We don't tend to use contracts in Silicon Valley, but Hollywood does. Their practice is formalized, and you sign up for three years or five years, and they mostly stick. And so the next evolution of the alliance is introducing contracts in Silicon Valley, where, again, we're not used to it from a labor standpoint, but large sectors of the economy work that way, and it works fine. You know, it's a different system.

So first part is, can you talk.

About a few of the other things.

That you decide to deliberately do differently versus pure software? And then the second part is you've talked about investing in yourself. Like, what are the things that have been most productive in terms of return on investment in yourself?

Sure. The things. The big thing that we do differently is in pure. We were really trying, which was 91 and 97, to be efficient, efficient. And so we were engineers running a company. And so every time something went wrong, we would put a process in place to make sure that didn't go wrong again, which is a very semiconductor yield frame. Of reference. And we saw everything as a magic set of processes. But then the market shifted on us in that case from C to Java. And it turned out that everyone at the company were well adapted to following the rules and implementing the processes. But that doesn't make them the people who are well adopted to rethink the market and how should we approach this other market? And so the company struggled mightily and ultimately was sold because of that. And so what we realized is we were over optimized for one business and we had let the company become it's like monoculture agriculture. We had one strain of wheat over a huge area, very efficient in the short term. And then what we should have optimized for is flexibility. And that in fact all companies face challenges when market shifts. And we should have been more tolerant of inefficiency and mistake and error and more focused on flexibility because I think in the long term flexibility is what's chosen for. So if you think of human evolution, you know, we're not very well adapted to many specific things and we humans are super well adapted to be flexible. And so our life form has conquered the world because of that flexibility, despite many maladaptations for any particular climate. And so of course there's many examples if you think about it. And the trick is management's generally short term. You're focused on making things better next year. And that's mostly efficiency seeking. So you have to balance that with some long term about the value of seeking flexibility. And then the second part was best thing for it probably varies by person. For me it's been reading a combination of Western Civ and leadership and management books. Beyond Entrepreneurship's one of my favorite, Jim Collins before he did Good to Great and Built to Last this book in 95 or 96 he published it and the first 80 pages, like you could read that every year for 10 years. It's really, really perfect for the entrepreneur. Beyond entrepreneur entrepreneurship theory here, can you talk more specifically about how you incorporated the machine learning and AI side of things with your own data set at Netflix and the wild crazy world of Hollywood in producing, how do you evaluate content that's passed on? Especially now since you're gonna have a lot of pitches. We basically it's a good insight. The question is how do you apply machine learning to picking content or developing content? We basically don't. Your intuition is how would that be relevant? So what shows up when you open Netflix on your iPhone or on the web or on a TV is a ranking problem and the ecosystem is Pretty good at ranking problems. And so it's a big ranking problem. What are the titles most relevant and interesting to you? So it's really big on that aspect. Now, we can apply that in marketing also with real time bidding and personalized marketing. But in terms of picking shows, that's like picking employees. It's a human judgment task of what's going to be big. Once the show's produced, we can selectively promote it on statistical techniques based on who's enjoying it, who's watching it really quickly, versus watching it slowly, what other people are like that. So promoting the content to the right subset of the audience, which is critical when you've got a big global audience, is a very machine learning problem. But the actual production, like other people have tried to do script analysis systems, you know, where you take a script and you code it up in all these dimensions and then try to do predictions and none of it's worked. So there's so much in the artistic execution that you as a consumer then love that from the script. It's super. And once it's produced, there's no value in predicting it. You're just going to like, put it out and try. Sorry. As a quick bug. So is the focus of Netflix going to be one show for larger audiences or smaller shows for niche audiences? The question is, are we focused on big shows or small shows? We're agnostic. We're focused on intensity. So we want you to love what you watch. And sometimes that will be a big show because you're in the mainstream of the society that you live in. And sometimes it will be a niche show because you're not in the mainstream. But again, it's all about intensity. We have to match cost of production to the expected size of the audience. But we're just as happy to do small shows as big shows, especially as you get to personalized marketing externally. And of course, you've got personalized merchandising within the service. So it seems as though you guys give a lot more creative direction to the people that don't make these things. I was just wondering how you balance that with making sure that these are actually going to be good shows in terms of risk. So the question is, how do we ensure these are good shows and how much creative direction do we do? It depends upon the show, generally. Generally, we like to meet with a team and then if we like them and back them, let them run. Okay. So we're very hands off once we've made a decision to back them. If they want input, we'll give it to them. We'll do these things but relative to other studios we're much more letting them run and we've won a reputation for that in the creative community.

So last question from the side your jacket.

So especially when you're first starting out how quickly should you grow your board, I mean your board of advisors and how do you think about those individuals? What characteristics do you, you know it's a much better ecosystem for that especially the board of advisors level now than it was 20 years ago. I ended up not having any board of advisors and it wasn't that common and so I think Reid Hoffman would be a much better much more insightful for you on that sort of you know the subtlety of the current startup ecosystem or Sam Altman that you met. I'm just not that qualified for it.

So with that let's thank Reid for joining us. We're a little over time.