Netflix's Post-Pandemic Fiasco

"Adequate performance gets a generous severance package"

In 2000, Reed Hastings and Marc Randolph journeyed from their quaint Los Gatos office to Dallas, the mouth of the behemoth - Blockbuster. At the time, Netflix was a struggling business. Reed and Marc were ready to sell their bleeding company and start fresh with Blockbuster’s online video rental arm. As Hastings puts it:

We had one hundred employees and a mere three hundred thousand subscribers and were off to a rocky start. That year alone, our losses would total $57 million. Eager to make a deal, we’d worked for months just to get Antioco to respond to our calls.

The media giant rejected the two co-founders after they asked for a mere $50 million. But, we all know how that story ended. Hastings reminisces about the situation, citing culture as the real reason why Netflix lasted and Blockbuster whittled down to one store.

A culture that valued people over process, emphasized innovation over efficiency, and had very few controls. Our culture, which focused on achieving top performance with talent density and leading employees with context, not control.

300,000 subscribers in 2 years ballooned up to 260 million by the pandemic. Competition from the likes of Amazon Prime, HBO Max, Disney Plus, and Hulu grew strong. Consumer appetite for spending looked more bleak than ever. In 2022, the average rate of inflation was 8%.

Challenges crept strong once again. Let’s first zoom out and understand what Hastings means when he boasts about Netflix’s culture.

Culture Fueled Success

In 2009, Netflix published a slide presentation on the company’s culture. A 125-page slideshow posted on the company’s website laid out the company's values, many of which defied classic corporate America's norms.

With millions of views and over a thousand modifying the thesis, this cultural doctrine made it clear that what may have worked for companies in the past won’t work moving forward. Hastings believed in that very thesis:

As a society, we’ve had hundreds of years to work on managing industrial firms, so a lot of accepted HR practices are centered in that experience…Industrial firms thrive on reducing variation (manufacturing errors); creative firms thrive on increasing variation (innovation).

Increasing variation meant creating an environment that encouraged thought. Unlimited PTO, hiring only “A” players, and giving employees full control over expenses are a few of the practices that Netflix followed. The infamous saying around the company was “adequate performance gets a generous severance package”.

While Hastings spearheaded the cultural revolution at the company, but he wasn’t alone. Patty McCord, Chief Talent Officer till around 2013, was pivotal in changing the tides. Patty recalls several tenets that Netflix upheld to encourage innovation, one of them being to encourage employees to understand how the business that they work for actually functions.

For example, Netflix heavily emphasized subscriber growth during its early years. Every employee was laser-focused on increasing the subscriber count. Oftentimes, this meant missing the bigger picture: growth comes with costs.

We were spending huge amounts buying DVDs, setting up distribution centers, and ordering original programming, all before we’d collected a cent from our new subscribers.

Having employees see their roles through the lens of Netflix was crucial to maintaining quarterly success. All in all, modeling responsible behavior did indeed create responsible employees.

Forging A Future

Responsibility comes in handy in times of crisis. In 2022, Netflix hit yet another snag. For the first time in its 20+ year history, the company reported a loss of 200,000 subscribers with projections for another 2 million by mid-2022. 

A 37% drop in the stock followed the news. Management was stuck with a problem that needed solving. Fast. Blaming performance on macroeconomic pressures worked short-term but unless the real reason was addressed, the public would become wary soon.

Hidden among this pile of excuses by the company was one factor key to their plan over the next coming years. The same year they reported their subscriber loss, Netflix revealed the estimated households sharing legitimate passwords. 100 million households worldwide with 30 million just in the United States.

Boom. Therein laid their next plan. Netflix announced its password-sharing crackdown policies in May 2023, sealing an end to their 26-year-long laissez-faire approach to this practice, which they technically always prohibited in their terms and conditions.

Success came fast. Within just half a year of announcing the plan, Netflix reported growth of 15% and a new 9.3 million subscribers just in the first quarter of 2024. They also realized that they are no longer a fledgling startup. Starting in 2025, we’re no longer going to receive subscriber numbers from the company. This makes sense. After any consumer product gains a critical mass of users, reporting slowing subscriber growth (or even decline) only sheds a negative light on a company.

Following the likes of Facebook and Twitter, ceasing subscriber count reports means the public will be more likely to fixate on other metrics such as revenue growth, profitability metrics, and business prospects.

And those aren’t just buzzwords. Since that disastrous 2022 earnings call, Netflix introduced an ad-supported tier and expanded live sports and video game deals. Combined with increasing existing investment in original content and expanding content licensing from other 

All of this screams the increasing variation that Hastings wants. Pouring money into live programming, Netflix Originals, licensed content, advertising, and even video games means being ready for something to fail. But Netflix will surely be ready to change course when something strikes.

That’s all for this one folks! Apologies for the break there, but we are hopefully back to regularly scheduled programming. If you enjoyed this piece on how Netflix used culture as a lever of innovation, hit the like button or drop a comment with your take. Reach out to us by replying to this email if you have any insider takes or leave a comment on our Substack page!