The story of Netflix is about the continuing evolution of TV and film, and the journey of one man who turned his annoyance over a late fee into a billion-dollar business. Pass the popcorn.
Our Achiever of the Year, Netflix co-founder and CEO Reed Hastings, 54, has himself evolved, proving fit enough to survive both repeated criticism and wildly fluctuating stock prices as he constantly moves forward into untraveled territory.
In 2014—almost exactly three years after its stock plunged roughly 80 percent from highs near $300 per share—Netflix regained its former glory, surging to nearly $500 a share in the summer and allowing Hastings to claim billionaire status for the first time. Although gravity soon had its way with the stock, it’s hard to argue that the company’s future is any less bright. Netflix is in its most aggressive expansion since 2011, and the company in 2014 embarked on plans to enter France, Germany and four other European countries.
As Hastings said onstage at the Re/code Code Conference in 2014, Netflix is a comparatively tiny tech company that is sitting at the intersection of Hollywood and Silicon Valley, competing with HBO and FX on one level, and Amazon and Apple on another. A business doesn’t reach such heights by accident or by luck.
“From the beginning, Netflix was a company that had a bumpy road, but with Reed at the helm they learned from their mistakes and moved confidently forward,” says Michael Schneider, executive editor of TV Guide. “Like that old Timex ad, they take a licking and keep on ticking.”
With his laid-back demeanor, gray-flecked hair and hipster goatee, Hastings looks less like a high-powered tech entrepreneur than he does a teacher, which he was for a time (and considered pursuing as his career).
Instead, in addition to his day job, Hastings sits on the board of Facebook and is a member of the Bill Gates and Warren Buffett Giving Pledge; he and wife Patty Quillin pledge to give at least half of their fortune to charity.
The couple live a relatively modest lifestyle in Santa Cruz, Calif., with their two teenage children. He reportedly does not have an office in the Netflix complex in Los Gatos, preferring instead to wander and plop down with a laptop at the closest table.
Away from the office, Hastings’ passion project is improving K-12 education. He devotedly advocates for charter schools and tech in the classroom from his high-profile position at the innovative company that captured the zeitgeist when it was founded in 1997.
But Hastings may have become just another Northern California tech guy in jeans and a collared shirt if not for a misplaced rented videocassette and an idea that transformed the way we view movies and television. The oft-told story about how he came up with the idea for Netflix begins with him renting Apollo 13 and forgetting to return it. He racked up a late fee of $40, which he certainly could afford, but he fretted about having to admit the negligence to his wife.
He pondered how this all could have been avoided and proceeded to come up with the idea of an easier way to rent movies and avoid late fees. The groundbreaking video-by-mail plan was born.
While that was the germ of an idea, his real breakthrough was using then-state-of-the-art DVD technology to cheaply send the movies to his clients. He tested the packaging by mailing DVDs to himself and was jubilant when he discovered that the slender discs traveled well.
Once asked by a reader in a Fortune Q&A whether he felt innovative business ideas were born from moments of epiphany or by a process of brainstorming, Hastings replied, “There’s a lot of brainstorming about the nature of the problem that sets the context and gets your juices flowing. But ultimately there is a moment of epiphany when one recognizes the solution.”
The solution for Netflix’s delivery system proved to be that moment of epiphany. But the evolution didn’t stop with one idea, of course. In 2007, the same year Netflix mailed its billionth DVD, the company launched its video-on-demand service. Schneider says that from the start, Netflix knew it had the potential for a killer streaming business.
“Mailing out those red envelopes was game-changing. It was easy as pie but archaic given what we can do now,” Schneider says. “Netflix kept coming up with something new as society and the business changed. There were a couple of missteps, but they kept fixing what didn’t work.”
Hastings recovered from a massive 2011 misstep when Netflix raised its prices and spun its DVD-by-mail operations into a different brand called Qwikster. He knew that broadband streaming represented the future of the business but miscalculated how to make the transition.
The decision to split the DVD and streaming services and increase the rates resulted in about 800,000 subscribers dumping Netflix. The company’s stock price sagged from close to $300 a share in July 2011 to a low of $53. Hastings quickly realized what he had done and attempted to correct the mistake.
“I messed up…. In hindsight, I slid into arrogance based upon past success,” Hastings wrote in a blog posted in the teeth of the raging crisis, for which he vowed to make amends.
“The hardest part was my own sense of guilt. I love the company. I worked really hard to make it successful, and I screwed up,” he told The New York Times in 2013. “The public shame didn’t bother me. It was the private shame of having made a big mistake and hurt people’s real love for Netflix that felt awful.”
As Hastings told the Times, and as anyone who has experienced business failure can attest, it’s hard to recover once the wheels fall off a company.
But Netflix proved it had more lives than a soap-opera husband when it recovered from the stumble by entering the original programming game. Just as cable had learned, the only way to grow subscribers is to offer non-recycled programs. Hastings knew he had to create his own programs even if it meant taking another economic punch.
Chief Content Officer Ted Sarandos told TV writers and critics at a January 2013 media tour that Neflix offers what other programmers do not. “We are programming for the On Demand Generation,” he said. “They will tell us how many episodes they want to watch. They are going to tell us what time to watch them, and they are going to tell us what device they want to watch them on.”
That thinking about what the audience wanted, but wasn’t getting from traditional sources, boosted consumer goodwill tremendously.
Netflix hit big with its remake of the popular British series House of Cards, about a duplicitous politician with no moral boundaries. It scored the kind of coup lead character Frank Underwood would admire by landing noted veteran actor Kevin Spacey for that starring role, along with Robin Wright as Underwood’s scheming wife. The critics adored it, and the public did as well. The series brought in millions of new subscribers.
The company also listened to fanatics of Arrested Development, which Fox abandoned in 2006, and ordered a new season with the same cast and creator, Mitch Hurwitz. The reboot began filming in 2012.
“Netflix is a very interesting company. These guys are really experimental, fresh thinkers,” Hurwitz told writers attending a panel in 2013. The producer went on to relate a story from one of his earliest meetings with Netflix. The idea of partnering with television manufacturers came up. Could Netflix buttons be put put on remote controls? Hurwitz was impressed by the Netflix team’s can-do attitude: “That’s pennies, right?” one exec responded. Other producers on the panel mused over how innovative it would have been for NBC to put a peacock on remotes decades earlier.
“It’s because NBC predated the remote control. Netflix comes in and looks at [everything] fresh,” Hurwitz said. “People like binge-viewing. It’s not how we came up watching TV, but you’ve got to follow the audience; you’ve got to keep challenging yourself.”
That sort of freshness has served the company well. Netflix is the world’s leading Internet television network, with more than 53 million members in nearly 50 countries enjoying more than 2 billion hours of TV shows and movies per month, including original series.
Last fall, the company’s bottom line was hit hard by the investments in providing original content for the service. But it appears the move to ante up for original content will pay off. The second season of House of Cards attracted “a huge audience that would make any cable or broadcast network happy,” Hastings said in a recent note to investors. As momentum builds for Season 3, which premieres Feb. 27, the cycle will probably repeat.
A new season of its acclaimed prison comedy, Orange Is the New Black, returned to high ratings in 2014, and in December Netflix popped out another promising series, Marco Polo, plus the new animated series for kids All Hail King Julien, starring the boisterous ring-tailed lemur from Madagascar. The show, which will run throughout 2015, springs from a deal made between Netflix and DreamWorks Animation (DWA). Under the biggest deal yet brokered by Netflix, DWA will develop more than 300 hours of exclusive programming, and by the end of 2016, DWA will debut 10 additional new series on Netflix.
Among Netflix’s many recent purchases are a psychological thriller from the creators of FX’s critically acclaimed Damages and a new series based on Marvel’s Daredevil.
Most weeknights, Netflix commands more than a third of all Internet traffic in North American homes, exceeding almost all the other streaming services combined, including Hulu and HBO Go.
The company continues building its brand and driving up viewership in its latest foray into creating original films.
Not content to simply stick to original TV series, Netflix in September announced it will take on the next chapter of a popular martial-arts epic with Crouching Tiger, Hidden Dragon: The Green Legend. The film will premiere exclusively on Netflix and in selected IMAX theaters around the world on Aug. 28. It is the first of several major pictures backed by Netflix to premiere on the same day as it is released in selected IMAX theaters.
“The movie-going experience is evolving quickly and profoundly, and Netflix is unquestionably at the forefront,” says producer Harvey Weinstein, co-chairman of The Weinstein Co.
Hollywood heavy-hitters are also keeping a close eye on Netflix as an outlet for the kinds of passion projects that have historically competed for Oscars.
“I think they are offering a lot of people opportunities, and maybe I’ll visit them someday with a project,” Kevin Costner tells SUCCESS. “It’s always good to have another outlet for work we think is important.”
Eric Robinson, formerly of The Weinstein Co. and now with The Gotham Group, a production and development company, quotes his former mentor Weinstein in explaining what separates Netflix from other entertainment industry buyers: “They have a vision for the business model, they have a vision for story, and they have a vision for the people they should be working with.”
Robinson also applauds Hastings’ out-of-the-box thinking, a defining characteristic of all the most successful entrepreneurs.
“[He isn’t] worried about what is going to sell overseas,” Robinson says, referencing most movie studios’ current approach. “[Netflix is] looking at people who want to watch content wherever they want…. They want to partner with people who are bringing the most eloquent storytelling, so they don’t have to pay someone else for content when they can do it themselves.”
Hastings told the audience at the Code Conference last May, “We’re very artist-centric. If you have great creators and you give them freedom, you can end up with a great product.”
He also answered an audience member who asked why he shifted away from disc-by-mail service to put almost all the company’s eggs into streaming content.
“It was obvious the big risk to the company was always to grow and die with DVD. It was clearly a hard problem,” Hastings responded. “We had to be so aggressive it made our skin crawl; that’s how much risk we had to take.”
And when asked about the 2011 debacle, he unflinchingly responded in a candid statement. “It didn’t work out,” he said. “The big thing we missed: If we had grandfathered everyone for two years, it would have worked. The 60 percent price shock was tone-deaf.”
As a leader, Hastings takes responsibility for both the successes and failures of Netflix. He offered up this advice in a New York Times article: “Don’t get distracted by the shiny object [and if a crisis comes], execute on the fundamentals.”
The background that molded Hastings into the fearless CEO he is today started when he was living near Washington, D.C., while his father, attorney Wilmot Reed Hastings Sr., worked for the Department of Health, Education and Welfare in the Nixon administration. In 2006 Reed Hastings told the Times a story that reflected the unique experiences that his father’s position afforded the family. “One weekend, when I was about 12, my parents, sisters and I were invited to Camp David when the president wasn’t there,” Hastings recalled. “We rode around in golf carts, had a tour, and I saw that President Nixon had a gold-colored toilet seat.”
His path to becoming a tech entrepreneur was as twisty as San Francisco’s Lombard Street.
Hastings graduated from high school in 1978 from the Buckingham Browne & Nichols school in Cambridge, Mass., and then took off a year between high school and college to sell Rainbow vacuum cleaners door to door.
“I started it as a summer job and found I liked it,” Hastings said. “As a sales pitch, I cleaned the carpet with the vacuum the customer had and then cleaned it with the Rainbow.”
While attending the liberal arts school Bowdoin College, where he majored in math because, “I found the abstractions beautiful and engaging,” Hastings briefly contemplated a career in the military. He first joined the Marine Corps in its Platoon Leader Class and spent the summer between his sophomore and junior years in Quantico, Va.
Soon Hastings began questioning how things were done in the Marines, from packing backpacks to making beds, but quickly learned the military did not look favorably upon those with inquiring minds. He then turned an abrupt about-face when he chose to serve in the Peace Corps as a high school math teacher in Swaziland, leaving on his graduation day from Bowdoin in 1983. In a world far removed from the comfort of Silicon Valley, Hastings lived in a thatched hut with no electricity, cooking only with propane and wood, and sleeping on a cot.
That decision either “developed my risk tolerance or it was symptomatic of it,” he later told Fortune. “But once you have hitchhiked across Africa with 10 bucks in your pocket, starting a business doesn’t seem too intimidating.”
By 1985 Hastings decided he wanted to return to the U.S. to earn a graduate degree. He did not get into his first-choice school, MIT, but found his way to Stanford, where he earned a master’s in artificial intelligence. Post-graduation, he worked for Schlumberger, then at a startup, and eventually founded his first company, Pure Software, in 1991. He was 31.
The company’s original product was a debugging tool, but it quickly expanded.
“As the company grew from 10, to 40, to 120, to 320, to 640 employees, I found I was definitely underwater and over my head,” Hastings told the Times. “I was doing white-water kayaking at the time, and in kayaking if you stare and focus on the problem, you are much more likely to hit danger. I focused on the safe water and what I wanted to happen. I didn’t listen to the skeptics.”
He took the company public in 1995, and it was acquired by Rational Software in 1997. Hastings walked away a multimillionaire, which brought him to the point in his life when he was free to kill time, watch videos at his leisure and accumulate late fees.
These days Hastings is an active philanthropist for charter schools, currently serving on the board of the California Charter Schools Association and KIPP (Knowledge Is Power Program) Foundation.
In October, Hastings spoke at the first annual Vanity Fair New Establishment Summit held in the San Francisco Bay Area. The panel moderator mentioned Netflix’s trademark release of entire series all at once rather than making viewers wait a week between episodes and asked how that approach might relate to education.
“My first binge was calculus,” he told the audience. “The college I went to had a self-paced program. I could just go at my own pace, and it was a fantastic experience.”
He pointed out that people read entire books at their own pace, and watching TV once a week or having a physics class once a week is artificially regulated.
Hastings has invested both in new education companies and on behalf of charter schools as the future of education in the United States. Hastings and investor John Doerr put $14.5 million into DreamBox Learning, a startup that provides online technology for K-8 math students. He provided funds for the Aspire Public Schools charter network and supports Rocketship Education, which blends adaptive learning on computers with teacher instruction. Hastings feels it is his responsibility, and that of other tech people, to change K-12 education for the better.
But his commitment to education is more than just tossing money at the problem. He’s actively seeking ways to improve the education of schoolchildren. Although he didn’t complete his degree, he worked on a master’s in education at Stanford University and served as president of the State Board of Education from 2000 to 2004.
“I didn’t really want to buy yachts,” Hastings told The Wall Street Journal in 2008. “I started looking at education, trying to figure out why our education is lagging when our technology is increasing at great rates and there’s great innovation in so many other areas—health care, biotech, information technology, moviemaking. Why not education?”
Some of his philanthropic investments have had shaky starts—Rocketship was not a success when it was instituted and is currently being reevaluated. Hastings, however, is determined to change the status quo and isn’t concerned about how long that might take.
And as he proved with his doggedness in keeping Netflix at the forefront of entertainment innovation, he will hang in for the duration when it comes to improving the nation’s education system.
Ultimately, there’s a moment of epiphany when one recognizes the solution.