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Full Stream Ahead

coverwebIt was launched in Scotts Valley, went nuclear and is now one of the most successful companies in America. The Netflix story.

At a glance, it doesn’t look like much. It’s red, square and fits neatly between your bills in the mailbox. But for Netflix founder and Santa Cruz resident Reed Hastings, his now-famous red envelope represents something more: A revolution in the way America watches movies.

What began as a small business in Scotts Valley 13 years ago has become the world’s largest subscription service streaming movies and television shows on the Internet and mailing DVDs. According to its website, Netflix members add 2 million movies to their Queues every day. With more than 15 million members as of June 2010, paying $8.99 a month to instantly watch movies online or have them delivered to their homes, the company has rapidly become a force to be reckoned with.

Netflix has not only thrived—becoming a fiery competitor for companies such as Blockbuster, Hollywood Video and others—but it has also expanded its reach in a challenged economy, forcing up-and-coming, as well as already established companies, to adapt to its business model.

cover_netflixworkersGetting the business off the ground wasn’t easy for Hastings, however. Prior to Netflix’s 2002 stock-market debut, he had co-founded another company that went public, which meant that he knew several venture capitalists. But his idea to provide a DVD-by-mail service was considered by many cynics to be a risky venture. “Basically that meant I got to hear a lot of people say no,” Hastings said in a 2005 interview with The New York Times. “They didn’t think we had a workable model.”

There is no doubt that Netflix has its own set of challenges—Cable TV, Hulu, Amazon, Apple, Best Buy, Google, Microsoft, News Corp, Sony, Time Warner, Verizon, Wal-Mart—of course, but with the motto “only the paranoid survive,” Hastings and his crew of innovators have been confident in their ability to expand exponentially since day one.

In 2005, Time magazine added Hastings to its “Time 100” list of the 100 most influential global citizens, and in eight consecutive surveys since then, Netflix has been ranked No. 1 in customer satisfaction across all of e-commerce by ForeSee Results. Today, Hastings, who graduated from Bowdoin College in Brunswick, Maine, in 1983 and has a masters of science in computer science from Stanford University, sits on Microsoft Corp.’s board of directors and is a member of a the Video Business Hall of Fame.
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While no late fees and the convenience of ordering movies from home have helped Netflix gain much of its clientele, Steve Swasey, vice president of Corporate Communications, credits the company’s growth to its streaming compatibility with more than 100 technological devices like the iPad, Wii, and Blu-ray disc players, as well as its cost efficiency, collaboration with engineers around the world, ability to learn from history and unique corporate culture. By 2012, the company predicts that DVD-by-mail shipments will peak and slowly decrease until 2030, when streaming will become the dominant method of Netflix use.
All this seems to be sending people flocking to conferences at which Netflix executives share secrets to the company’s success. At one such fireside chat on Oct. 5 at the Del Mar Theater in Santa Cruz, Sarah Lacy, technology reporter for TechCrunch, will interview Hastings about the company’s successful use of crowd sourcing for innovation, as part of the What’s Next Lecture Series.

At the talk, Hastings will discuss Netflix’s recent $1 billion streaming deal, its TV content approach and how they improved the accuracy of their recommendation software, which manages more than 3 billion movie ratings from members. Designed to provide insight for businesses that want to thrive in the next decade, the lecture will give him the opportunity to share his innovative strategies with the town that gave birth to the Netflix enterprise.
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Though the company is now based in Los Gatos, its significance as a local business-turned-global-model-for-success is something Santa Cruz County can take pride in. Soon to be launched in Canada—its first foothold outside of the U.S.—it looks like it won’t be long until Netflix becomes the premier go-to movie rental service around the world.

To get a better idea of Netflix’s business model, strategies in this economic climate, work environment, philosophy for building a franchise that can sustain itself in the future and ability to stay ahead of the curve through innovation, Swasey has broken down exactly what makes Netflix such a well-oiled machine.

GT: Netflix redefined the way that we watch movies today.
Steve Swasey: Netflix changed American behavior. Before Netflix came along, you had to drive all the way to the video store and suffer punitive late fees, a small selection of movies and poor customer service. Now, you don’t even have to put DVDs into the player anymore, you can just push play on the Internet and stream them. Very few companies have had a consumer revolution—we’ve had two. Our first revolution was sending DVDs out by mail, and our second was streaming movies and TV shows online. Most companies follow the lead of others, but just like Apple, we set the pace.
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What do you think sets the company apart from its competitors, like Blockbuster?
Convenience, selection and tremendous value—in equal measure for people who like to watch movies and TV shows. If you think about shopping at Big Lots, for example, that store has many good quality products and great value, but you won’t be able to find the high-end stuff. For just $9 a month, the Netflix video quality is outstanding and you get to see all new releases, foreign films and documentaries. People want what we offer: it’s easy, inexpensive and there are tons of choices. You don’t get that with other companies.

What’s your success strategy?
We post our strategy on our website for everyone to see, while most companies keep it one big secret. We want to be the place you go on the Internet for all of the TV shows and movies that you watch. We want Netflix to be on every device that connects the Internet to a screen. You can watch Netflix from anywhere now without having to look for it. It’s so simple; our goal is to get bigger and stronger with more content, devices and better user interface. We hope to grow domestically and internationally as well as provide an amazing consumer experience.

The company has not only survived, but also expanded with the economic downturn? How?
Netflix did really well when the economy was robust and has continued to do well even with the economy as bad as it is now. The reason for this success is because Netflix provides such great value. For $9 you can get unlimited movies with convenience, big selection and value. Innovation is also key. There is no textbook on the shelf that explains how to run an Internet movie distribution site; Netflix is writing that book as we go.

What is the story behind the development of Netflix’s recommendation software?
We recently organized a contest like ‘Who Wants to be a Millionaire’ for geeks to see who could improve our recommendation software or how Netflix presents options based on the ratings that you and others have given movies. For instance, if you like When Harry Met Sally, we would recommend Sleepless in Seattle. Every Netflix member gets recommendations, but we wanted to make them more accurate. Four years ago, Reed met with engineers about how to improve the recommendation system and tried to find out whether we needed to hire more people. Since Reed is a history fanatic, he thought about the scientific contest for the Longitude Prize in 1714, in which the British Parliament offered 10,000 pounds to the person who could figure out how to determine longitude at sea. He thought that we could similarly offer a prize of $1 million to anyone in the computer science community who could solve our recommendation problem. We launched the project in 2006 and 40,000 teams competed from 186 countries. Seven people—a collaboration of three teams called “BellKor’s Pragmatic Chaos” from Israel, Australia, Canada and New Jersey—were awarded the prize on Sept. 21, 2009, when they met for the first time. But they didn’t do it for the money; instead, the seven men did it for the prestige and the challenge. Netflix got more than $1 million worth of work out of the challenge and it brought 10 percent improvement to our software, or double the accuracy.

What about the company’s TV content approach?
To sum it up, around the years 2002-2004, the studio saw that TV shows were a great revenue generator. About 20 percent of Netflix shipments were TV shows and they have only gotten more popular since then. As a result, we have expanded our collection of TV offerings that you can rent through the mail or stream online. A lot of people seem to enjoy streaming their TV shows online because the average show that is 30 minutes long on TV is really only 20-22 minutes without commercials when you stream it. That short amount of time means that people can easily watch their favorite shows like The Office before or in-between classes or around their work schedule.

What is so unique about your corporate culture?
Anyone who wants to know exactly how we operate can look on the Netflix website where we have a 128-slide presentation explaining what we look for in employees. In a nutshell, We believe in freedom and responsibility. If a salaried employee wants to take time off, they can. If they want to work from home, they can work there as much as they want. Either way, people are expected to bring their A game at all times. Everyone wants to work with what we call ‘stunning colleagues.’ We always say that an adequate performance at most companies will get you a modest raise, but at Netflix it will get you a generous severance package. For that reason, we have a high attrition rate. Not everyone can handle working in that kind of environment. Lots of people need structure in the workplace where they get assigned tasks, but we have a lot of entrepreneurs who don’t want to be told what to do. We have 600 salaried employees that create things to do for the company. It’s a revolutionary culture.

What are three things that up-and-coming companies should do in order to be successful, particularly in this economy?
I’m speaking for Reed because I’ve heard him say this a million times: The first thing is to follow your passion. Secondly, if you have a good idea, don’t let others tell you it’s not a good idea. And finally lots of hard work is essential to finding success.

What can already established businesses do in order to improve operations and prepare for the future?
If your passion has made your business suffer; you may have to adjust it. It’s extremely important to have your peripheral vision, 360-degree vision and night vision on at all times for the sake of your business. Some business is going to come after your company and offer to provide the same service for less money, faster and easier. You should always be innovative and vigilant or you’re going to end up defending your business instead of growing. Do not rest on your laurels.”

cover_Reed-HastingsWhat’s Next Lecture with Reed Hastings
Interested in learning more about Netflix through the eyes of the founder? TechCrunch and Yahoo Finance reporter Sarah Lacy interviews Netflix Founder Reed Hastings at 7 p.m., Tuesday, Oct. 5, at the Del Mar Theatre in Santa Cruz, 1124 Pacific Ave., in Santa Cruz. On the agenda: Netflix’s successful use of crowd sourcing for innovation, its $1 billion streaming deal, its TV content approach, recommendation software and corporate culture. The year-long lecture series, hosted by UC Santa Cruz, NextSpace Coworking + Innovation and the City of Santa Cruz, is designed to look at innovation from business, policy and social change vectors, providing inspiration and the tools necessary to succeed in the next decade. The fifth and final lecture (in December) focuses on “The Power of Many” and involves a panel at UCSC on Gaming & Social Media. For more information about the Netflix event or to purchase tickets ($15/$5 for students), visit whatsnextlectures.com.

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