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Reed Hastings—Netflix In January 2005, Wedbush Securities stock analysts Michael Pachter called Netflix a “worthless piece of crap.” He put a price target of $3 on the stock that was trading at around $11. Doubters thought Blockbuster, Walmart, or Amazon.com, with their economies of scale and established customer bases, would simply destroy Netflix. Founder and CEO Reed Hastings wasn’t supposed to be Fortune’s Businessperson of the Year in 2010, five years after his demise was predicted. Not only did Hasting earn the No. 1 spot; he and Netflix also killed it.

Netflix was the stock of the year, up more than 200 percent in 2010, while the S&P 500 was up only 7 percent. Netflix shares ran laps around even Apple’s.75 Between 2010 and 2013 Netflix subscribers doubled to over 40 million and its stock price quadrupled to $375, making it again the best- performing stock on the S&P 500.76 Don’t you wish you bought it back in 2005 when it was selling for $11? In Fortune’s List of 2013’s Top People in Business, Reed Hastings was ranked #5, ahead of Amazon’s Jeff Bezos, Google’s Larry Page, Facebook’s Mark Zuckerberg, and Apple’s Tim Cook.77 So how did Hastings do it? A lot of his success is based on how he built his company on a hard-driving and risk-taking culture, and Hastings never stops looking over his shoulder to stay one step ahead of the competition. Unlike Blockbuster, which went into bankruptcy, Netflix wasn’t afraid to change its business model by abandoning the past to build its future.78 How, by cannibalizing its own mail order DVD customers to focus on streaming existing program and even to launching original series, including the highly successful House of Cards that won three Emmy awards, with more to come.79 Although the change in focus from mailing DVDs to streaming with a pricing revamping was clumsily handled, resulting in angry and lost mail customers, it clearly was a good strategic move.80 With streaming, Netflix is now stealing customers from cable and pay movie channels HBO, Showtime, and Starz, as it is the world’s largest video subscription company.81 Growth is also coming from Netflix global expansion from Canada (2010), to Latin America (2011) and most recently to Europe (2012), where streaming is new in many countries.82 Let’s talk about Hastings’s leadership style that led to success. It has changed over the years between the two companies he created. As a young founding CEO of Pure Software, Hastings was considered as hard headed as they come and couldn’t take criticism. He used the autocratic style to push for his ways of doing things, and he sometimes embarrassed employees with nonverbal eye rolling and critical comments about dumb ideas. So much so that Hastings earned the nickname “Animal.” Hastings sold Pure for $750 million, and it made him realize he had helped build a company he didn’t want to be part of.83 So when he used the money to start Netflix, as CEO Hastings was determined to create a culture in which people enjoyed coming to every day. He wanted the company to be run differently, so he changed his style to be participative. He is more honest and direct with employees but not confrontational, but he still has a Steve Jobs–like perfectionist streak.

Instead of simply telling others what to do, he actively seeks out ideas and advice from his employees. Now when he hears ideas that seem silly, he doesn’t roll his eyes and humiliate employees by making critical comments about the idea or person being dumb. Hastings digs deeper by responding with comments like “I don’t understand how your idea will work, so help me to understand how it will solve the problem.”84

Hastings was ahead of the technology curve. Even back in 1997 when Hastings cofounded Netflix, he anticipated that consumers would eventually prefer to get movies instantly delivered via the Internet. This is actually amazing foresight because back then less than 7 percent of U.S. homes even had broadband. Hastings actually had a team working on the technology to bring movies to the home via the Internet back in 2000. They even developed a Netflix-branded box with a hard drive that connected to your movie queue, but it took six hours to download a movie back in the early 2000s. Once Hastings saw YouTube videos, he killed the hard-drive device and put this team to work on a streaming machine, a sort of YouTube-in-a-box. This again was meant to be a branded piece of hardware produced and sold by Netflix. However, even though they built the technology, once again Hasting killed the idea in favor of software that could be embedded in all kinds of devices— the software today is known as apps. 85 No. This wasn’t wasted time. Netflix built on this base to be able to come out streaming a year and a half, in 2007, after YouTube showed the world instant viewing over the Internet. Also, it spun off the hardware technology into an existing company called Roku, which today makes a digital device that plays content via software from Netflix, as well as Hulu, Amazon, and others. Does this mean that Netflix doesn’t face any present and future threats? As Hastings admits, there are plenty of challenges ahead. Analysts like Pachter now are warning that Netflix could be crushed or acquired by the likes of Amazon.com, Google, or Apple. Anyone can come after Netflix by streaming bits via contracts with data-delivery companies like Level 3, Limelight, and Akamai. Who knows what Facebook will come up with? Also, Netflix has to pay the studios for contents. Content acquisition could be denied or costs could go through the roof, and new expensive original series may not have the success of House or Cards. In February 2014, Netflix agreed to pay Comcast extra to speed up its streaming service to its customers, which could lead to having to pay other cable providers extra.86 The European media companies across the continent are girding for battle to stop Netflix from taking market share.87 But Hastings is confident, as he enjoys solving subtle, yet tough, problems alongside the smartest people he can find. He said, “For me the thrill is making a contribution by solving hard problems.” Only time will tell if he can stay ahead of the competition and technology curve. GO tO the INterNet: To learn more about Reed Hastings and Netflix, visit their Web site (http://www .netflix.com). Support your answers to the following questions with specific information from the case and text or with other information you get from the Web or other sources.

1. How would you improve Netflix’s product offerings (i.e., what things can’t you watch that you would like to watch) or processes (i.e., how can it improve its delivery or service)?

CUMULatIVe CaSe QUeStIONS

2. Which level or levels of analysis and leadership paradigm are presented in this case, and did Hastings use the management or leadership paradigm (Chapter 1)?

3. How did Hastings’s Big Five model of personality leadership traits change from Pure Software to Netflix (Chapter 2)?

4. Which University of Iowa leadership styles did Hastings use at Pure Software and Netflix (Chapter 3)?

5. Explain how power, organizational politics, networking, and negotiation are, or are not, discussed in the case (Chapter 5)?


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