No Rules Rules

by Reed Hastings

  But that humiliation was a valuable wake-up call, because afterward dozens of Netflix managers and VPs started coming forward to say they hadn’t believed in the idea. One said, “I knew it was going to be a disaster, but I thought, ‘Reed is always right,’ so I kept quiet.” A guy from finance agreed, “We thought it was crazy, because we knew a large percentage of our customers paid the ten dollars but didn’t even use the DVD service. Why would Reed make a choice that would lose Netflix money? But everyone else seemed to be going along with the idea, so we did too.” Another manager said, “I always hated the name Qwikster, but no one else complained, so I didn’t either.” Finally, one VP said to me, “You’re so intense when you believe in something, Reed, that I felt you wouldn’t hear me. I should have laid down on the tracks screaming that I thought it would fail. But I didn’t.”

  The culture at Netflix had been sending the message to our people that, despite all our talk about candor, differences of opinion were not always welcome. That’s when we added a new element to our culture. We now say that it is disloyal to Netflix when you disagree with an idea and do not express that disagreement. By withholding your opinion, you are implicitly choosing to not help the company.

  * * *

  • • •

  Why did everyone keep quiet when they saw Reed piloting the ship into the Qwikster storm?

  Part of the reason is our natural human desire to conform. There’s a funny candid-camera-style video that shows three actors riding an elevator with their faces turned toward the back, away from the door. A woman enters the elevator and, at first, she looks confused. Why are these people facing the wrong way? But then, slowly, although she obviously thinks what they are doing is weird, she also starts to turn around. Humans are much more comfortable when going along with the herd. In many areas of life, this is not bad. But it may push us to go along with or even actively support an idea that our instinct or experience tells us is crazy.

  The other part of the reason is that Reed’s the founder and CEO. That makes things more complicated because it is also deeply ingrained in all of us to follow and learn from our leaders. In Malcolm Gladwell’s book Outliers, we learn that a major plane crash was caused when Korean Air staff refrained from telling the lead pilot that there was a problem because they wanted to show respect for his authority. This tendency is human.

  A few months after the Qwikster crisis had passed, at the end of a weeklong executive staff retreat, everyone sat in a circle and went around the room taking turns saying what they had learned. Jessica Neal, a VP in Human Resources who today is chief talent officer, recalls, “Reed went last and just started crying, talking about how bad he felt that he put the company in the situation he did, how much he learned and how appreciative he was of all of us for sticking through it with him. It was a very moving moment that likely doesn’t happen with most CEOs at other companies.”

  * * *

  • • •

  I can’t make the best decisions unless I have input from a lot of people. That’s why I and everyone else at Netflix now actively seek out different perspectives before making any major decision. We call it farming for dissent. Normally, we try to avoid establishing a lot of processes at Netflix, but this specific principle is so important that we have developed multiple systems to make sure dissent gets heard.

  If you are a Netflix employee with a proposal, you create a shared memo explaining the idea and inviting dozens of your colleagues for input. They will then leave comments electronically in the margin of your document, which everyone can view. Simply glancing through the comments can give you a feeling for a variety of dissenting and supporting viewpoints. For a sample, see the memo on the next page, which discusses Android Smart downloads.

  In some cases, an employee proposing an idea will distribute a shared spreadsheet asking people to rate the idea on a scale from –10 to +10, with their explanation and comments. This a great way to get clarity on how intense the dissent is and to begin the debate.

  Before one big leadership meeting, I passed around a memo outlining a proposed one-dollar increase in the price of a Netflix subscription along with a new tiered-pricing model. Many dozens of managers weighed in with their ratings and comments. Here are a few of them in abridged format:

  Alex

  -4

  Making two changes at once is a bad idea.

  Dianna

  8

  Timing is perfect just before big market launch.

  Jamal

  -1

  Certain tiering is right move. Don’t think amount is right for this year.

  The spreadsheet system is a super-simple way to gather assent and dissent, and when your team consists entirely of top performers, it provides extremely valuable input. It’s not a vote or a democracy. You’re not supposed to add up the numbers and find the average. But it provides all sorts of insight. I use it to collect candid feedback before making any important decision.

  The more you actively farm for dissent, and the more you encourage a culture of expressing disagreement openly, the better the decisions that will be made in your company. This is true for any company of any size in any industry.

  . . . OR SOCIALIZE THE IDEA

  For smaller initiatives, you don’t need to farm for dissent, but you’d still be wise to let everyone know what you’re doing and to take the temperature of your initiative. Let’s go back to your employee, Sheila, the woman who came to you with an idea you’re against. After explaining why you don’t agree, you can suggest that she socialize the idea with her peers and other leaders in the company. This means that she sets up multiple meetings, where she outlines her proposal and enters into discussions in order to stress-test her thinking and collect numerous opinions and data points before making her decision. Socializing is a type of farming for dissent with less emphasis on the dissent and more on the farming.

  In 2016, I had a personal experience where socializing an idea led me to change my own opinion.

  Up until then I believed strongly that kids’ TV shows and movies would not bring new customers to Netflix or even retain the customers we had. Who signs up to Netflix for a children’s show? I was convinced adults choose Netflix because they love our content. Their kids will just watch whatever we have available. So when we began producing original programs, we focused on adult content only. For kids, we continued to license shows from Disney and Nickelodeon. And when we did release our own Netflix kids shows, we didn’t put much money into them, not in the way Disney did. The kid’s content team disagreed with this approach: “These are the next generation of Netflix customers,” they argued. “We want them to love Netflix as much as their parents do.” They wanted us to start producing original kids’ content as well.

  I didn’t think that was a great idea but I socialized it anyway. At our next QBR meeting we placed our top four hundred employees at sixty round tables in groups of six or seven. They received a small card with this question to debate: Should we spend more money, less money, or no money on kids’ content?

  There was a tsunami of support for investing in kids’ content. One director who is also a mom got up onstage and passionately declared, “Before working here I subscribed to Netflix exclusively so my daughter could watch Dora the Explorer. I care a lot more about what my kids watch than what I watch myself.” A father came up and announced, “Before coming to Netflix I only subscribed because I could trust the content for my children.” He explained why: “My wife and I don’t watch TV but my son does. On Netflix there’s no advertisements like on cable and no dangerous rabbit holes for my son to fall down like when he surfs on YouTube. But if he hadn’t been crazy about what Netflix was offering, he’d have stopped watching and we’d have canc
eled the subscription.” One after another our employees were stepping onto that stage and telling me I was wrong. They believed kids shows were critical to our customer base.

  Within six months we’d hired a new VP of kids and family programming from DreamWorks and started making our own animated features. After two years we’d tripled our kids’ slate, and in 2018 we were nominated for three Emmys for our original kids shows Alexa and Katie, Fuller House, and A Series of Unfortunate Events. To date, we’ve won over a dozen Daytime Emmys for children’s programs like The Mr. Peabody and Sherman Show and Trollhunters: Tales of Arcadia.

  If I hadn’t taken the time to socialize the idea, none of this could have happened.

  INNOVATION CYCLE STEP 2: FOR A BIG IDEA, TEST IT OUT

  Most successful companies run all sorts of tests in order to find out how and why customers behave the way they do—and the results of those tests usually influence the corporate strategy. The big difference at Netflix is that the tests take place even when those in charge are dead set against the initiative. The history behind Netflix and downloading is a clear example.

  In 2015, if you were taking an airplane and wanted to watch your favorite Netflix show during the trip, you were out of luck. There was no way to download the content onto your phone or any other device. Netflix was all live internet streaming. If you didn’t have the internet, you didn’t have Netflix. Amazon Prime did offer downloading, as did YouTube in some countries, so the topic was a hot one at Netflix.

  Neil Hunt, chief product officer at the time, was against offering downloads. It would be a big, time-consuming project and would distract from the core mission of making streaming work better, even on poor connections. Also, the internet would become faster and more ubiquitous, so the feature would become less useful every month. Neil is quoted in the British press explaining that downloading adds considerable complexity to your life: “You have to remember that you want to download this thing. It’s not going to be instant, you have to have the right storage on your device, you have to manage it, and I’m just not sure people are actually that compelled to do that, and that it’s worth providing that level of complexity.”

  Neil wasn’t the only one against downloading. Reed was frequently asked at employee gatherings why the feature was absent. Here are his replies to questions in a 2015 document accessible to all Netflix employees:

  Employee question: Now that other services are ramping up off-line downloads, do you think Netflix refusing to offer this service will have a negative impact on perceived brand quality?

  Reed’s response: No. Soon we’ll be announcing our first airline free Wi-Fi streaming deals with full Netflix. We are focused on streaming, and as the Internet expands (planes, etc.) the consumer desire for downloading will go away. Our competitors will be stuck with supporting a shrinking downloading use case for years. We’ll end up far ahead on brand quality sentiment on this issue.

  Employee question: There is an earlier comment in this doc about not offering download-and-watch capabilities due to content costs. Could we buy this right for just the top shows and movies and offer it only to the top tier?

  Reed’s response: We think streaming will get everywhere, including planes, over time. The UX [user experience] complexities of downloading are material for a one percent use case, so we are avoiding this approach. It’s our judgment call for utility against complexity.

  The big guys, Neil and Reed, were set against the idea publicly and privately. At most places this would be end of discussion. But Todd Yellin, VP of product, (who worked for Neil) had doubts. He discussed with Zach Schendel (senior user experience researcher) about running some tests to find out if Neil and Reed’s claims were accurate. Zach remembers it like this:

  I thought, “Neil and Reed are against this idea. Is it okay to test it out?” At any of my past employers, that would not have been a good move. But the lore at Netflix is all about lower-level employees accomplishing amazing things in the face of hierarchical opposition. With that in mind I went ahead.

  YouTube was not available for download in the US but it was in a few places like India and Southeast Asia. That was interesting because Netflix was getting ready for a massive international expansion in January 2016 and these countries would all be important to us. We decided to run interviews in India and Germany to find out what percentage of customers used the download feature. In India we would interview YouTube users, in Germany Watchever users (a similar type of German platform), and in the US we would interview Amazon Prime users (because Amazon Prime offered downloads).

  In the United States, 15 to 20 percent of Amazon Prime users used the downloading function according to our findings. That was a lot higher than the one percent Reed estimated, though clearly a minority of customers.

  In India, our research revealed that over 70 percent of YouTube consumers used the download function. That number was enormous! Common responses included: “I have a ninety-minute commute and I ride to work in a car pool so I spend an hour and a half in traffic each day. Cell phone streaming isn’t fast enough in Hyderabad, so I download everything I watch.” Another case, unheard of in the US: “The Internet at my office is fast enough for streaming but at my house it’s not. So I download all my shows at the office and watch them at home in the evening.”

  Germans have neither the traffic problems nor the commute distances of Indians. But the internet isn’t as ubiquitously reliable as in the US either. “When I watch a show in my kitchen it stops every few minutes to spool,” one German explained, “so I download it in the living room, where the Internet is faster, in order to watch while I’m cooking.” Germany came between the US and India.

  Zach pushed his findings up to his boss, Adrien Lanusse, who pushed this up to his boss, Todd Yellin, who pushed this up to his boss, Neil Hunt, who pushed this up to his boss, Reed, who said he and Neil had been wrong—and in the face of its international expansion Netflix had better get to work on the downloading functionality.

  “Let me be clear,” Zach concludes, “I am nobody in the company. I’m just some researcher. Yet I was able to push back against a strong and publicly stated opinion from the top leadership to rally excitement for this feature. This is what Netflix is all about.”

  Netflix now provides downloads.

  INNOVATION CYCLE STEP 3: AS THE INFORMED CAPTAIN, PLACE YOUR BET

  Farm for dissent. Socialize the idea. Test it out. This sounds a lot like consensus building, but it’s not. With consensus building the group decides; at Netflix a person will reach out to relevant colleagues, but does not need to get anyone’s agreement before moving forward. Our four-step Innovation Cycle is individual decision-making with input.

  For each important decision there is always a clear informed captain. That person has full decision-making freedom. In Erin’s scenario, Sheila is the informed captain. It’s not for her boss or any of her colleagues to decide. She collects opinions and chooses for herself. She is then solely responsible for the outcome.

  In 2004, Chief Marketing Officer Leslie Kilgore introduced a practice to emphasize that the informed captain is solely responsible for the decision. At most companies all important contracts are signed by someone high up in the organization. With Leslie’s encouragement, one of her employees, Camille, had begun signing all of the media agreements for which she was the informed captain. One day our General Counsel went to Leslie and said: “You didn’t sign this huge contract with Disney! Why is Camille’s name on it?” Leslie responded:

  The person who is living and breathing the contract needs to be the person who owns and signs the contract, not a head of a function or a VP. That takes responsibility of the project away from the person who should be responsible. Obviously, I look at those contracts too. But Camille is proud of what she accomplished. This is her thing, not mine. She is psychologically invested, and I want to keep her that way. I’m not going to take ownership away from
her by putting my name on the deal.

  Leslie was right, and we follow her example across Netflix today. At Netflix you don’t need management to sign off for anything. If you’re the informed captain, take ownership—sign the document yourself.

  * * *

  • • •

  When you read about Freedom and Responsibility at Netflix, it’s easy to get lost in the lovely idea of Freedom without properly considering the accompanying weight of Responsibility. Being the informed captain and signing off on your own contracts is a case in point. Although Reed certainly doesn’t intend to induce fear and trembling in his workforce, part of the reason that F&R works so well is because people do feel the burden of the responsibility that comes with the freedom and make extra efforts accordingly.

  Among the many people who told me about the pressures of signing their own contracts is Omarson Costa, one of the first employees at Netflix Brazil. His story is about his early days in the company when he was a business development director:

  I had been with Netflix for just a few weeks when I received an email from the legal department. The message said, “Omarson, you have the authority to sign contracts and agreements for Netflix in Brazil.”

  I thought they’d left off part of the email. I replied immediately. “Up until what amount of money? If I need to go beyond that, whose approval should I get?”

  The response was, “The limit is your judgment.”

  I didn’t understand. Were they saying that I could sign deals worth millions of dollars? How can they grant so much power to one employee in Latin America, who they’ve only known for a few weeks?