Iconic Tour

How Reed Hastings grew Netflix from zero to $60 billion in 20 years

Tim Mullaney, special to CNBC.com
Netflix CEO Reed Hastings delivers a keynote address at CES 2016 at The Venetian Las Vegas on January 6, 2016 in Las Vegas, Nevada.
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The video-streaming giant Netflix marks its 20th anniversary this year, touting a valuation of $60 billion. That works out to about $3 billion of added market value a year, on average, for the titan of Silicon Valley and Hollywood, which went public in 2002 in an $82.5 million offering.

Along the way, Reed Hastings, its 56-year-old co-founder and CEO, has learned a few tricks of the management trade, which he has shared at different forums through the years. Here are some of his biggest lessons.

1. Plan for what you want the company to become, not what it may be limited to on Day One

Early on, when the enemy was video-store chain Blockbuster and the business was mailing DVDs to its U.S. subscribers, Hastings would tell anyone who would listen,"There's a reason we didn't call the company 'DVD-by-Mail.com.'" The long-term business was streaming, so Hastings chose a name that covered both the early stages of the business and what he expected it to become over time -- both were about getting flicks over the net.

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2. Telling the truth builds — and helps regain — goodwill

Hastings has taken some flack over the years for requiring conference-call questions to be sent by email in advance rather than letting Wall Street analysts question him in real time. But Hastings also has acquired a reputation as a straight shooter. Investors soon knew his thoughts on how fast broadband would take over the market (slower than others expected, which turned out to be right), which competitors he feared (Amazon more than Blockbuster) and how rapidly the business would grow and turn profitable. And his team's projections generally proved accurate, even as Netflix's 2002 IPO classmate Overstock.com lost Wall Street credibility with a series of antics by its then-CEO Patrick Byrne.

I take pride in making as few decisions as possible. When you get to real scale, most of my job is just vision.
Reed Hastings
Netflix founder and CEO

That bought Hastings the opportunity to restore goodwill at times when he has goofed, especially when it guessed wrong about what would happen when it split the company into essentially separate services for DVD subscriptions and streaming. The company missed earnings forecasts badly in mid-2011, and the stock tanked — but investors gave Hastings time to rebuild, and shares recovered by 2013. They have risen 14-fold from the bottom.

The process was helped along by Hastings' public candor about what went wrong: "Qwikster became a symbol of Netflix not listening,'' he said. How honest was Hastings? He told the press that the idea for Qwikster — the ill-fated name planned for the separate DVD business — came to him while in a hot tub with a friend. (The friend thought it was a terrible idea, so Hastings was also clearly right about the "not listening" part.)

3. Don't let yourself get commoditized. Build slowly

Hastings has managed a delicate balance: focusing Netflix on delivering movies, while expanding gradually into original content. It hasn't been mistake-free: In the mid-2000s Netflix made ill-fated moves into social networking (trying to get friends to recommend movies to each other) and buying original content, mostly documentaries, before it was ready. A few years later, after its transition from DVDs-by-mail to streaming was better established, it had a stronger foundation to build the original content that put it on an equal footing with rivals, like Time Warner's HBO, in luring customers and to build pricing power for a more profitable future.

Here's how Netflix is doing
Here's how Netflix is doing

The lesson: Build outward from your core slowly.

"We're much less likely [now] to chase the shiny object," Hastings said. But at the same time, he said, "when you're not doing original content, you're just iTunes." [That was well before Apple's recent announcement that it is getting into original video content.]

4. Talent management is a key, often overlooked management skill. Not at Netflix

Netflix and Hastings have probably gained more attention for their approach to managing talent than for any other management skill. The company is well known for a no-vacation policy that lets workers set their own hours and time-off schedule, as long as they get their work done. Not everyone likes it — critics suggest that it pressures employees to take too little time off and flirt with burnout — but Hastings says it helps Netflix attract top employees.

The company also offers high pay and generous severance, with the understanding that weaker performers will get fired more often than at other companies. It also gives new workers a slide deck on Netflix culture that has been viewed more than 15 million times online. "They know what they're getting into," Hastings said of Netflix workers. "We want people for whom freedom and responsibility work.''

5. Let go to grow

Hastings often talks about how he makes fewer and fewer decisions as Netflix grows, leaving more decisions to the team he has assembled. A key example he cites comes from the company's content launch: As it was preparing to green-light "House of Cards," Hastings says he personally put only about half an hour into reviewing the decision. The real call, he says, was made by Ted Sarandos, Netflix's chief content officer, and set the stage for more than 100 series produced either wholly or in part by Netflix. Netflix landed nine Emmy awards in 2016. Similarly, while Hastings set the vision for the company's global expansion, lower-ranking executives take the lead on deciding which markets to enter when. "I take pride in making as few decisions as possible,'' Hastings said. "When you get to real scale, most of my job is just vision.''

6. Always come back to the basics, and a book by Jim Collins

Asked to offer advice to entrepreneurs, Hastings hasn't hesitated: Every year, he tries to reread "Beyond Entrepreneurship," by Jim Collins, who would also go on to write another management classic, "Good to Great." Pay special attention to the first 80 pages, Hastings says — two chapters that cover Collins' guide to leadership style and setting a vision for an organization. Collins' keys to leadership: authenticity, decisiveness, focus, personal touch, people skills, communication and a future focus Collins calls "ever forward."

7. Take care of yourself

All work and no play isn't the answer, either, Hastings says. Executives need to take time to develop new skills, cross-fertilize by talking to other executives, even learn yoga. And don't forget the personal hygiene. Even something as seemingly non-managerial as this, when not attended to, can be a sign of poor leadership, especially when things get hairy. Hastings provides an example from an earlier company where he tried to manage the business and write code after hours, leading him to pay less than enough attention to some basic personal requirements.

"I didn't always give myself permission" to think about life beyond the immediate task. "We don't want our leader to be gross."

By Tim Mullaney, special to CNBC.com