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February 2023
Netflix: Leading With a Unique Corporate Culture
Yih-Teen Lee
Isaac Sastre Boquet
Nonallotted vacation days. No spending policies. A policy of constant feedback on one’s work
that can be read by the entire organization. And the fact that even though an employee’s
performance might be “good,” he or she might still get fired. After Netflix published its culture
deck in 2009, it was called many things: “weird,”1 “groundbreaking,”2 “terrifying,”3 and “amazing
and unusual.”4 Sheryl Sandberg, former chief operating officer of Facebook (later Meta), called
it “the most important document to come out of Silicon Valley.”5
There was something, however, that was hard to question. With all its disruptive peculiarities,
Netflix’s culture, throughout the 2000s and 2010s, yielded impressive results.
Indeed, during this period, Netflix successfully anticipated—even pioneered—many of the
disruptions that hit the media industry. What began as a movie rental service by post, using physical
media such as DVDs, successfully leveraged digital technologies to become a vertically integrated
video streaming platform, leading the market with 220 million subscribers6 in Q1 of 2022.
Moreover, it had become the fourth largest media company in the world.7 Many of its movies and
shows—such as House of Cards or Stranger Things—shaped pop culture, and in 2021, it secured
36 nominations for the Academy Awards, the most of any studio, eventually winning seven Oscars.8
What made Netflix’s culture so innovative, and more importantly, what made all its elements work?
Netflix Company History
DVD Rental by Mail
Netflix was founded in California in 1997 by Reed Hastings and Marc Randolph.9 It launched as
a video rental service, but one with a completely novel business model. Instead of renting movies
through a network of physical stores—a market then dominated by Blockbuster Video—Netflix
mailed the films directly to the customers’ homes. This saved customers the need to travel to
This case was prepared by Professor Yih-Teen Lee and Isaac Sastre Boquet, case writer. February 2023.
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Netflix: Leading With a Unique Corporate Culture
the video store, and on Netflix’s side, this model allowed a much wider library of titles than what
a physical store could carry, and the inventory was much more centralized and efficient. A key
factor for the success of this new model was the emergence of DVDs, a lighter format than
videotapes and with better image quality. Another important innovation was the creation of a
subscription service (as opposed to paying for each individual rental) in 1999.
Nonetheless, Netflix’s early history was rocky. In 2000, when Netflix had 300,000 subscribers,
the company lost $57 million. Reed Hastings and his partners contacted Blockbuster to offer the
chance of buying out Netflix for $50 million and turning it into a Blockbuster unit. However,
the company refused. Ten years later, while Netflix thrived, Blockbuster filed for bankruptcy.10
First Steps in Streaming
With the improvement in the capacity and availability of broadband Internet in the United
States, digital distribution became increasingly viable as a platform for delivering video. In 2005,
Apple began selling films and TV shows through its popular iTunes platform.11 That same year
also saw the launch of YouTube, which allowed users to upload and watch short videos. YouTube
quickly became the fastest growing site on the web.12 In 2007, an alliance of several large US
entertainment groups (Fox, NBC Universal, and, later, The Walt Disney Company) launched Hulu,
which offered a portion of these groups’ TV programming as video-on-demand.
Netflix began experimenting with streaming in 2007. Its available library was small at the
beginning (around 1,000 titles).13 These were films and TV shows that—in the words of Ted
Sarandos, Netflix’s chief content officer—"you’ve never heard of.”14 Streaming was offered free
of charge to Netflix mail customers, although the number of streaming hours was limited.
Netflix soon started expanding its streaming library, leveraging the fact that cable networks still
did not see streaming as a serious threat, nor did Hollywood studios consider it a source of
significant revenue. Thus, Netflix was able to obtain content cheaply. For example, in 2008,
Netflix signed a deal with the cable network Starz (which had licensed Sony and Disney’s pay TV
rights) to use the network’s content. The deal required Netflix to pay $0.15/month for each
Netflix subscriber (Netflix had 9 million subscribers by the end of that year). As a comparison,
conventional cable distributors were paying Starz $4 per subscriber.15
Eventually, Netflix saw video streaming as the future core activity of the company. In 2010,
Hastings told analysts, “We are very proud to announce that by every measure we are now a
streaming company, which also offers DVD-by-mail.”16
Netflix’s success, however, soon began making content more expensive. Deals signed in the
2010s came at a much more expensive price, and with increasingly onerous terms. For example,
when Netflix signed a deal with Disney in 2012, it had to give up on new releases until 201617
and paid $300 million per year.
By the end of 2011, the company surprised many with a sudden change in strategy. First, Netflix
introduced new split rates for the DVD-by-mail and streaming services (consequently, the cost of
enjoying both services increased from $10 to $16). The company claimed that this price increase
was caused by the higher fees that studios were asking for streaming their content. Moreover,
Netflix would divide itself into two companies: Netflix proper would focus on streaming, whereas
the newly created Qwikster would manage the traditional DVD-by-mail business. Hastings alleged
that this split would allow Netflix to specialize and focus solely on streaming.18
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Customers vigorously pushed back against the company’s intentions,19 and shares fell 50% in
the 2 months following the announcement; Netflix also lost 800,000 subscribers in Q3 of that
year.20 Netflix quickly reversed its plans of splitting the company, although it kept the rate hike
for a combined DVD/streaming service.
Pivot to Original Content
Netflix’s focus on streaming made international expansion more straightforward: Netflix no
longer depended on local post services nor needed to develop a complex logistics network in
order to launch in other countries. Thus, in September 2010, it started operating its streaming
service in Canada, and from that point onward, the pace of expansion skyrocketed: By the end
of 2011, Netflix was already available throughout the entire Americas, and the first European
markets were opened in 2012, with Oceania and Asia following in 2015. In consequence, the
number of subscribers exploded, increasing from 20 million in 2010 to 100 million by the end of
2016, when Netflix was already present in 190 markets.
In parallel to this international expansion, Netflix made a major change to its strategy: In 2013,
it released House of Cards, the company’s first major self-produced series. To develop the show,
Netflix drew upon household names such as actors Kevin Spacey and Robin Wright, alongside
director David Fincher. Overall, Netflix invested $100 million in the first two seasons21 (a budget
close to that of the most expensive shows of the time, such as HBO’s hit Game of Thrones).
Moreover, Netflix upended the established model of producing and broadcasting a TV show.
The company greenlit the full series based on an analysis of data from subscribers, instead of
employing focus groups. Also, it made all episodes simultaneously available to subscribers,
instead of releasing one episode every week, as it was traditionally done.
The success of House of Cards led Netflix to implement an ambitious strategy of original
programming. In the words of Ted Sarandos, chief content officer, Netflix was trying to “become
HBO faster than HBO can become us.”22 By 2022, over half of the new content added to the platform
was now original programming,23 featuring hit shows such as Stranger Things, Bridgerton, and The
Witcher. Besides internal production, Netflix also licensed worldwide rights of third-party
productions, some of which went on to become global hits, such as Money Heist and Squid Game.
However, Netflix’s success and streaming’s growth had not gone unnoticed. Netflix’s old
partners—the major studios that had signed agreements with Netflix to distribute their products
first through DVD-by-mail and later through streaming—were now rivals. One of the best
examples was Disney, which had gone from partnering with Netflix to develop several successful
shows based on Marvel characters (Daredevil, Luke Cage, Punisher, Jessica Jones, Iron Fist, and The
Defenders) to withdrawing from that agreement in 2018, forcing Netflix to cancel those shows. In
the meantime, Disney had already announced its own streaming platform, Disney+. Other major
entertainment and tech groups also invested heavily in their own streaming services, such as
Warner (HBO Max), Apple (Apple TV Plus), and Amazon (Prime Video). Niche and regional
streaming services also thrived. This competition was soon dubbed “the streaming wars.”
Netflix in 2022
Despite the growing competition, by the end of 2021, Netflix was the top streaming service in
the world, with nearly 222 million subscribers around the world. It was followed by Amazon
Prime Video (200 million), Disney+ (130 million), and HBO Max (74 million).24 It had revenues of
$29.7 billion (up 19.7% from 2020) and a net income of $5.1 billion (up 85.2%).25
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Netflix: Leading With a Unique Corporate Culture
By that time, Netflix had become a partially vertically integrated company that performed three
main operations:
x
It purchased or licensed content from third parties.
x
It produced its own content (dubbed Netflix Originals).
x
It operated a streaming platform that delivered content to the company’s subscribers.
The IT infrastructure was provided by Amazon Web Services,26 but other aspects were
managed internally.
Netflix was organized along functional lines, with Finance, Legal, Marketing, Talent (HR),
Operations & Product, Communications, and Content reporting directly to the CEO Reed
Hastings. This structure was shaken up in 2020, when Ted Sarandos (chief content officer) was
appointed co-CEO and elected to the board.27
Additionally, Netflix had several regional and country organizations that managed the local
markets in which Netflix operated. Netflix had a strong localization strategy that considered local
cultures and languages when carrying out marketing and translating content. This strategy also
called for producing Netflix Originals locally, and in local languages, to facilitate entry into and
development of new markets.28
Through its digital platform, Netflix collected detailed data about the habits and tastes of each of
its subscribers. Netflix could, in consequence, offer “hyper-personalization,” searching through its
extensive library for the content that would please each customer and producing shows and films
that would be embraced by them. Ted Sarandos even stated that when making production
decisions, “70% is data, 30% judgment.”29 Netflix used extensive customer segmentation and A/B
testing to personalize and adapt all parts of the Netflix product, even down to which fonts to use
or which cover pictures to show when customers browsed the platform.30
The company’s headquarters were in Los Gatos, California. Netflix also managed several
production facilities (often in partnership with local companies) in Madrid, Seoul, Toronto,
London, Ney York City,31 and Albuquerque (New Mexico).32
Developing Netflix’s Culture
We had to anticipate changes and proactively strategize and prepare for them. We had to hire
stellar talent in whole new areas of expertise and fluidly reconfigure our teams.
We also had to be ready at any moment to cast aside our plans, admit mistakes, and embrace a
new course. The company had to perpetually reinvent itself.33
Patty McCord
According to Patty McCord, Netflix’s chief talent officer from 1998 to 2012, Netflix’s culture was
developed as an evolutive process, as the company tried new ways of tackling the challenges it met
as it grew and evolved. There was not a single big moment at which the whole Netflix approach to
internal culture was developed but rather an incremental accumulation of learnings that eventually
produced a set of principles and practices. This process was not without mistakes, as the company
operated according to the principle that it had to take risks, but it was thanks to these mistakes that
eventually, the Netflix culture was developed.34 What were some of those moments?
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The 2001 Layoffs: Deciding Who to Keep
In 2001, the situation at Netflix was not good. The dot-com bubble had burst a year before, and
Internet-based companies such as Netflix were no longer perceived positively. Although its DVDby-mail service was growing, the company was far from being profitable, and sales to Amazon
and Blockbuster were discussed in order to ensure the future of the business, although none
came to pass.35 Thus, Netflix was forced to eventually lay off 40 employees—a third of the
workforce at the time—in order to survive.36
When remembering this time, Hastings admitted that the decision was extremely difficult. There
were no obvious poor performers at Netflix, so he, Randolph, and McCord divided up the staff into
two categories: 80 exceptional performers who would be retained and 40 less excellent employees
who would be laid off. Many of the employees in the second group had just a few flaws: Maybe
they had a great character, but their work was merely adequate, or they worked hard but needed
more supervision, or they were otherwise great performers but had temperament issues.37
A few months later, during Christmas 2001, the price of DVD players dropped, and they became
a popular gift. The amount of Netflix customers skyrocketed, which put a strain on the company
as it had a smaller workforce than before. As McCord recalled,
We had so many new customers that we didn’t have enough inventory, and we had to put
every tiny cent of profit into buying more product. And yet everyone was so much happier.
I was carpooling to work with Reed one day and I said to him: […] We’re working so hard, but
it’s great. What is it about that we’re doing? 38
Their conclusion was that when Netflix had 120 employees, some of which were not as exceptional
as the others, the company’s talent was dispersed throughout the organization. After the 2001
layoffs, the “talent density” of the company was now greater. Hastings pointed out the following:
We learned that a company with dense talent is a company everybody wants to work for. High
performers especially thrive in environments where the talent density is high. Our employees
were learning more from one another, and teams were accomplishing more, faster.39
After this experience, McCord and Hastings decided that they would strive to maintain the postlayoff level of “talent density” inside Netflix.
Should Netflix Raise the Pay of Everyone Approached by a Rival Company?
Assembling a group of exceptionally high performers, however, came at a price. Netflix soon
found itself targeted by large tech companies vying to acquire some of the company’s talented
employees.
One of them was George, a valuable engineer working in algorithm programming, who
interviewed with Google in the mid-2000s. Neil Hunt, who at the time was the chief product
officer at Netflix, soon learned that Google had offered George a higher-paying job and quickly
reported the matter to Hastings and McCord. Hastings recalled their initial predisposition:
We were both against offering George more money and we felt he’d been disloyal in
interviewing for another job behind our back. On the drive back to Santa Cruz, Patty huffed
“no employee should be irreplaceable!”40
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Netflix: Leading With a Unique Corporate Culture
McCord added, remembering that moment,
I got into a heated email exchange with his manager and a couple of VPs where I argued
that “Google shouldn’t decide the salaries for everybody just because they have more money
than God! “41
However, they soon realized that George’s expertise would be hard to replace and that letting
him go might send the message that Netflix would not fight to keep its talent, which might lead
to further offers to other important employees. McCord and Hastings held a meeting of the top
executive team. The goal was not only to discuss George’s case but to define a company-wide
policy for retaining important employees.42
Ultimately, they decided to match Google’s offer. Furthermore, Netflix also decided to bump the
salaries of other members of George’s team that Google might be interested in. Overall, McCord
believed that this crisis provided valuable lessons:
This experience changed our thinking on compensation. We realized that for some jobs we
were creating our own expertise and scarcity, and rigidly adhering to internal salary ranges
could actually be harming our best contributors financially, because they could make more
elsewhere. We decided that we didn’t want to use a system where people had to leave to
get paid what they were worth.43
From that point on, Netflix employees were encouraged to interview with other companies and
find out their real market value, which Netflix would always match. In fact, Netflix’s salary policy
became to pay every employee the top of their personal market value for what it deemed
“creative” positions that had potential to add tremendous value to the company.
This also generated what Netflix called “the keeper test.” If a Netflix employee was leaving for a
similar role at another company, would their manager try to keep them? Those who did not pass
the keeper test (i.e., their manager would not fight to keep them) were given a large severance
package, and Netflix began the search for someone better for that position.44
Determining the Best Way to Pay Employees
In 2003, Netflix gathered to discuss the compensation package for senior executives at the company.
Netflix was on a path of growth, and the company wanted to be able to offer the same kind of packages
that other large companies were offering to attract the kind of top talent that Netflix was seeking.
Hastings remembered that:
We spent hours coming up with the right performance objectives and trying to link them to
pay. Patty suggested to link the bonus of our chief marketing officer, Leslie Kilgore, to the
number of customers we signed on.45
However, when, on the back of a very successful subscriber campaign, Hastings went to inform
Kilgore of the new bonus structure, she replied,
My team has done an incredible job. But the number of customers we sign on is no longer
what we should be measuring. In fact it’s irrelevant.46
Kilgore then posited that given the current stage of the company’s growth, customer retention
was a far more important metric. This made Hastings consider that bonuses were ultimately bad
for flexibility because what was an important key performance indicator when the bonus system
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was designed might no longer be relevant after a few months, and the company’s growth would
then be saddled by a workforce focusing on the wrong metrics.
Thus, Netflix dispensed with tools such as salary surveys, salary bands, and raise pools. Netflix
employees in creative positions would be paid at the top of their personal market, a fixed amount
with no bonuses. As a consequence, pay was also decoupled from the performance review
processes (employees who did not perform exceptionally were simply terminated). Netflix also did
away with signing bonuses or other one-time payments because the company’s executives believed
that those eventually changed the employees’ payment expectations and, if these one-time
payments were not repeated in future years, it was perceived as a wage reduction.47
Furthermore, before the start of the year, employees could elect to receive part of their pay in
stock options, in a percentage of their choosing, with a ceiling of 60% in stock. These options
could be exercised at any point after they were granted because Netflix believed that using
vesting restrictions encouraged unmotivated employees to “hang on.” The stock was awarded
monthly, using the valuation of the first day of that month as a reference.48
When to Take a Vacation
Netflix had a traditional vacation policy, where days off were tracked and allocated to each
employee according to formalized rules. However, one day in 2003, Hastings received a suggestion
from an employee:
We are all working online some weekends, responding to emails at odd hours, taking off an
afternoon for personal time. We don’t track hours worked per day or per week. Why are we
tracking days of vacation per year?49
Hastings and McCord were both tempted to just get rid of the vacation policy altogether and
give employees ownership of their own time. They called it a “No Vacation Policy” policy.
Hastings believed the following:
Today, in the information age, what matters is what you achieve, not how many hours you
clock, especially for the employees of creative companies like Netflix. I have never paid
attention to how many hours people are working. When it comes to how we judge
performance at Netflix, hard work is irrelevant.50
Of course, both McCord and Hastings soon realized there could be issues. What if all the
marketing executives decided to take vacation during a critical launch? Or, on the opposite side,
what if employees never took a vacation unless it was expressly allocated, fearful of being seen
as “not pulling their weight”?
Nonetheless, after meeting with the rest of the executive team, the decision was made to test
this new “No vacation policy” policy. At the time, it was stressed that managers should lead by
example, by taking vacations and talking about them, so the rest of the staff noticed that—
despite the lack of allotted vacation time—it was expected that they would take days off.
Problems soon arose. Some departments faced issues when employees began taking vacations
during times of intense activity. Others found themselves understaffed when many employees
took their vacations at the same time. Managers did not feel they could act in these situations
because the staff was just exercising their new rights.
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Netflix: Leading With a Unique Corporate Culture
Thus, to make this new policy work, Hastings realized that managers had to do more than lead
by example. They had to talk to their staff and set what Leslie Kilgore, chief marketing officer
from 2000 to 2012, called the “context” so their employees could then make better decisions
with their new freedom: which months were off limits due to expected activity, how to
coordinate vacations so the department was not understaffed, what was the expected advance
warning when taking a vacation, and more. The managers also had to be careful not to
discourage employees from taking vacations in order to achieve a healthy work–life balance.
When the policy was finally settled, however, Hastings considered it a success. He reasoned the
following:
Giving employees more freedom led them to take more ownership and behave more
responsibly. That’s when Patty and me coined the term “Freedom & Responsibility.” It’s not
just that you need to have them both, it’s that one leads to the other. Freedom is not the
opposite of accountability, as I’d previously considered. Instead, is a path toward it.51
Do Expenses Need Approval?
In the early startup days, Netflix did not have a formalized expense approval policy. Employees
were free to purchase what they needed; the company was so small that any purchase was easily
noticed, and any excesses could be corrected. However, by 2004, the company had been publicly
traded for 2 years, and many felt it was time to finally formalize spending policies. Hastings soon
had a detailed proposal on his table:
It had all sorts of details: which level of managers could fly business class, how much each
employee could spend on office supplies without approval, the signatures needed if you
wanted to buy something expensive like a new computer.52
However, Netflix had just removed the vacation policy, and Hastings felt that setting many rules
would go against the new drive to offer more freedom. Instead, he convened the executive team
to discuss adopting no formal policy and just giving a clear, short, guideline. But what would be
the best way to articulate it?
The team first went over the edge cases, trying to find out when it was or was not okay to
expense Netflix (should an employee working from home expense their printer paper? What if
he or she then used part of it for personal projects? Should Netflix pay for the gifts given by
employees while attending work-related parties?) and then find a way to summarize this in a
guideline. Ultimately, the first guideline adopted was the following:
Spend company money as if it were your own.
However, even this simple guideline eventually proved inadequate. After all, many people at Netflix
spent their own money very differently than others did. Some enjoyed spending, whereas others were
thrifty—and both extremes might be bad for Netflix. Thus, the guideline was eventually reformulated:
Act in Netflix’s best interest.
All in all, Netflix employees did not need to fill out a purchase order and wait for approval. They
could just go and make a purchase, taking a picture of the receipt. However, this did not mean
that expenses were not tracked. Managers could easily check their employees’ expenses from
their computer, and an audit committee went over 10% of all the company’s expenses every year.
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As with the vacation policy, however, managers were responsible for giving their employees the
requisite context to make informed decisions. For example, Leslie Kilgore recalled the framework
she gave to her team:
My marketing team was on the road non-stop. They selected their own flights and their own
hotels. I went through a number of scenarios with them to help them make specific spending
choices. If you’re flying overnight and have to be operational the next morning, flying
business makes sense. If you can fly overnight in economy to save money and arrive a day
earlier, that’s better and Netflix will pay for the extra hotel night. It’s almost never in Netflix’s
best interest to fly business for short flights.53
Always Say What’s on Your Mind
Early in Netflix’s history, Leslie Kilgore told Hastings about how one of the company’s top
executives—otherwise brilliant and a good colleague—had unpredictable changes of mood, and
this moodiness sometimes influenced his actions. Hastings, who valued Kilgore’s communication
skills, suggested that she bring up the issue directly to the executive.54
The result was that the executive was receptive to the feedback, and in the coming weeks and
months, many on his team reported a change in his leadership style. He also asked the team to call
him out when his mood swings were affecting his decision-making.55 Patty McCord reflected on this:
Holding people to this standard of transparency has many benefits. One is that it puts the
clamp on politicking and backstabbing. I’ve often said I hate company politics, not just
because it’s nasty but also because it’s more inefficient. […] More important, though, is that
honesty helps people grow, and it flushed out the differences of opinion and alternative ideas
that people so often keep to themselves.56
Indeed, Hastings and the rest of the team believed that a culture of giving feedback eventually
increased the company’s “talent density,” as their talented employees helped each other grow.
Soon, Netflix was encouraging, even demanding, that employees give continual feedback to
their colleagues, regardless of hierarchy or even functional boundaries. This feedback could be
interpersonal or formalized through reports.
Eventually, Netflix introduced processes to give and receive feedback from all parts of the company,
such as an annual “feedback day” when employees were asked to give “Start/Stop/Continue”
advice to anybody inside the company. Another example is 360 written reviews to which anybody
in the company could contribute. The feedback had to be constructive, concrete, and actionable,
rather than generic criticism, and it had to have a positive intent. Those receiving it were asked to
listen carefully and fight the natural urge to defend themselves to protect their reputation.57
This candor was often a culture shock for new hires at the company. McCord recalled how a
newly hired manager was shocked when a member of his team corrected him during an allhands meeting:
As I walked out of the meeting with the new manager, he turned around and said “who does
that guy think he is? How does he dare talk to me in that way!” I told him that the engineer
was one of our best […]. Netflix turned out to be too much of a culture change for him, and
he moved on before long. 58
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Nonetheless, the company found that the majority of hires eventually came to appreciate the
feedback culture. Eventually, it was felt that failing to speak up when in disagreement with a
colleague, or not providing feedback one thought was relevant, was—in a way—choosing not to
help the company.59
Searching for Disagreement
In 2011, the company was forced to pull back its plans of creating separate companies (Qwikster
and Netflix) to manage both its DVD-by-mail and streaming business models separately, with a
different subscription for each. Consumer reaction to the change was intensely negative, and
subscription numbers dropped, alongside Netflix’s stock, which lost much of its value. Hastings,
who had championed the idea, even went the length of apologizing to Netflix subscribers in a
YouTube video. He recalled what happened 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 […] But everyone else
seemed to go along with the idea, so we did too.”60
Why, despite Netflix’s continual feedback policy, had other managers kept quiet about their
disagreements regarding the Qwikster move? One reason might be that Hastings’ position as
CEO and the company’s successful track record had discouraged people from disagreeing, and
the ensuing climate of conformity further encouraged groupthink. Nonetheless, this made
Hastings realize,
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.61
Thus, Netflix eventually developed systems to actively seek out and find dissenting opinions.
For example, they distributed a spreadsheet asking employees to rate an idea from -10 to +10 and
requested an explanation for the rating. Another process was “socializing” the idea by floating it
openly to one’s peers and other leaders inside the company, gathering their opinions. Managers
were also encouraged to socialize an idea they might not agree on because the feedback could
change their minds. This is what happened when Netflix considered investing in quality children’s
programming, something Hastings believed would not bring new customers to the platform. The
socialization process changed his opinion, as Netflix employees shared with him their experiences
watching TV with children. The company then hired a VP of Kids and Family Programming.62
This practice should not be confused with “decisions by committee,” which were actively
discouraged. Significant decisions were made by what Netflix called “Informed Captains”—experts
in the area pertaining to the decision—who were then responsible for hearing and seeking other
people’s views before making their own judgment call.63
Another important learning was the practice of “sunshining” failure. That is, taking ownership of
a failed decision and communicating it to the entire organization while explaining the reasons
that provoked the failure. Conversely, managers were discouraged from reprimanding
employees for failed bets, instead helping them through the process of finding the reasons for
the failure. This provided lessons for the entire organization and fueled a sense of transparency
because employees now knew that Netflix was not the kind of company that only communicated
its successes while hiding its failures.64
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The culture of transparency extended to all parts of the company because, for example,
employees had access to the company’s financials weeks before they were released, and top
executives openly shared strategic and operational debates during quarterly business reviews
that involved hundreds of Netflix employees. In that regard, McCord believed the following:
People need to see the view from the C-suite in order to feel truly connected to the
problem solving that must be done at all levels and on all teams, so that the company is
spotting issues and opportunities in every corner of the business and effectively acting on
them. The irony is that companies have invested so much time and effort to incentivize and
measure performance, but they’ve failed to actually explain to all their employees how
their business runs.65
Who Should Make the Biggest Decisions?
In January 2017, the documentary Icarus premiered at the Sundance Film Festival. In the film,
its director and protagonist Bryan Fogel poses as a cyclist wanting to dope himself to win a race,
revealing an intricate international doping network. The movie caused quite a stir at the festival,
and soon Amazon, Hulu, Netflix, and HBO were vying to acquire distribution rights. Adam del
Deo, Netflix’s director of Original Documentary Programming, bid $2.5 million for the film, which
would have been a record amount for a documentary film. However, he learned that the bid
was too low. Should he bid more? How much? $3 million? $4 million?
Del Deo then consulted with Ted Sarandos, Netflix’s content officer. This was his answer:
Listen. It doesn’t matter what I think. You’re the doc guy, not me. We pay YOU to make these
decisions. But ask yourself if it’s THE ONE. Is this going to be a massive hit? Is it going to be
an Oscar nominee like Super Size Me or An Inconvenient Truth? If it’s not, that’s too much to
pay. But if it’s THE ONE you should pay whatever it’s going to take: $4.5 million, $5 million.
If it’s THE ONE, get the movie.66
Del Deo then raised the bid, ultimately paying a then-record $4.6 million for the film. Icarus first
struggled on the platform, getting poor viewership figures, but its fortunes turned around when
it won an Academy Award for best documentary feature. This was the first time Netflix won an
Oscar. Del Deo later recalled,
Ted wasn’t about to make that decision for me, but he set the broad context to help align my
thinking with the company’s strategy. That context he set laid the foundation for my decision.67
Why did Sarandos feel comfortable letting Del Deo spend a record amount on an unreleased
documentary? Netflix had ended up becoming a decentralized organization, where managers
did not manage all decisions; rather, they set the strategic goal and let people closer to the
business, the “informed captains,” make the decisions. Debate happened at the strategic level,
but the “tactical” decisions were made without the need to get buy-in from managers.68 Hastings
believed this was the best possible arrangement for a company like Netflix:
In a loosely coupled organization, where talent density is high and innovation is the primary goal,
a traditional control-oriented approach is not the most effective choice. Instead of seeking to
minimize error through oversight or process, focus on setting clear context, building alignment
[…] between boss and team, and giving the informed captain the freedom to decide.69
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Netflix: Leading With a Unique Corporate Culture
The Building Blocks of Netflix’s Culture
Eventually, the several incremental developments Netflix had gone through crystallized in a unique
culture. This culture was then formally articulated by Netflix’s executives; the company released
the first public iteration of this culture in 2009. Later, Hastings even developed a process
suggesting how Netflix’s culture could be implemented in other organizations (see Exhibit
E
t 1) and
made the company culture and the concepts underpinning it explicit on the Netflix website for
recruitment (see Exhibit
E
t 2).
This culture had several building blocks:
Thee Dream
m Team
Netflix developed the analogy of the company as a sports team, rather than a family. A family is
built on the concept of unconditional love, whereas a sports team is about performance. Netflix
managers were tasked with assembling and developing the best possible members of that team,
who were excellent at playing their position and playing with others.70 To assemble this dream
team, it was necessary to outbid Netflix’s competition to get the best performers.
Excellent performers (Hastings also often called them “rock stars”71) were able to make informed
choices, take risks, and be innovative. Although Netflix valued loyalty and tolerated temporary dips
in performance, sustained “merely adequate” levels of production were usually reason for
termination. Netflix gave generous severance packages to all terminated employees.72
Freedom
m and
d Responsibilityy
Netflix’s executives believed that organizations, as they grew, tended to become more processdominated and less able to change and innovate. Hence, Netflix strived to “let people manage
themselves,” removing as many internal processes and rules as possible (such as the vacation or
expense approval policies) and stressing the concept of freedom rather than procedure.
This freedom, in turn, generated a sense of responsibility, accountability, and self-discipline among
employees. Without this responsibility, freedom could indeed become chaos. Nonetheless, Netflix
stressed the need of being an organization that was quick to recover from mistakes rather than
avoiding them (which potentially stifled innovation).73
Context,, Nott Control
At Netflix, executives did not get involved in many of the company’s important decisions because
the company dispersed decision-making across the company and identified informed captains
(the employee with the best knowledge for a given matter) to make them. In that regard, Netflix
had a relatively flat organization, with each leader having many direct reports.74
Nonetheless, this did not mean that executives did not play an important role. They were tasked
with guiding and inspiring their people rather than managing them. They coached, set context,
gave suggestions and feedback, and were informed about their team’s work. The “context” was
the set of strategic and operational considerations that each employee had to consider when
making their decisions.
Highlyy Aligned,, Looselyy Coupled
d
Overall, Netflix’s culture developed an organization that was “highly aligned, loosely coupled.” This
was in opposition to “tightly coupled” organizations, which—according to Hastings—were vertical
and formalized, and although they could deliver operations effectively, they struggled to innovate.75
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Under the “highly aligned, loosely coupled” model, Netflix debated and revised strategy
vigorously and communicated it to the organization, but the operational decisions on how to
implement it were made without approval. Instead, the company relied on the excellent
performers of its “dream team,” using the context provided by the executives and leveraging
the feedback system to refine these decisions.
Going Forward
More than a decade after Netflix’s peculiar culture was first shared with the public, the debate
around it continued. Some questioned it for provoking fear and anxiety among employees with
their unnegotiable demand for transparency, excellence, and constant feedback that was open
for all the company to see.76
However, employee turnover was at 11%, which was lower than the national average for tech
companies (13%). The voluntary departure rate was hovering around 3–4%, which was under
the US national average of 6%,77 and, according to workplace review site Glassdoor, 87% of
Netflix employees would recommend the company to a friend.78 Thus, overall, employees
seemed to like working at Netflix. Additionally, the company’s breakneck growth and ability to
react to changing market conditions had been proven throughout its history.
Nonetheless, Netflix’s culture was constantly being revised and refined. The last revision, in May
2022, added sections stressing artistic freedom, diversity, and representation and remarked that
employees should “spend the members’ money wisely.”79 Would Netflix’s culture continue to
push the company forward in an increasingly competitive environment? If so, what made it
so effective? If not, what should be changed?
In the end, Hastings considered Netflix’s culture its main competitive advantage and the only
one the company could truly control.80
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Netflix: Leading With a Unique Corporate Culture
Exhibit 1
Netflix Culture Funnel
Source: Hastings, Reed, and Erin Meyer. No Rules Rules: Netflix and the Culture of Reinvention. London: Penguin, 2020.
1
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Exhibit 2
Netflix Culture Described on Corporate Recruitment Website
Source: Netflix. “Netflix Culture — Seeking Excellence.” Netflix Jobs. Accessed September 7, 2022.
https://jobs.netflix.com/culture.
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Endnotes
1 Reed Hastings and Erin Meyer, No Rules Rules: Netflix and the Culture of Reinvention (Virgin Books, 2020).
2 “Netflix’s Groundbreaking Culture Deck,” Insider, last modified January 16, 2018, https://www.businessinsider.com/bi-
prime-netflix-culture-deck.
3 “Working at Netflix Sounds Absolutely Terrifying,” Vanity Fair, October 26, 2018,
https://www.vanityfair.com/news/2018/10/working-at-netflix-sounds-absolutely-terrifying.
4 “Inside Netflix Company Culture: Amazing and Unusual,” Grove HR Solution | Blog, accessed August 10, 2022,
https://blog.grovehr.com/netflix-company-culture.
5 Vivian Giang, “She Created Netflix’s Culture And It Ultimately Got Her Fired,” Fast Company, last modified June 14, 2016,
https://www.fastcompany.com/3056662/she-created-netflixs-culture-and-it-ultimately-got-her-fired.
6 Jennifer Maas, “Netflix Loses 200,000 Subscribers in Q1, Predicts Loss of 2 Million More in Q2,” Variety, last modified
April 22, 2022, https://variety.com/2022/tv/news/netflix-loses-subscribers-q1-earnings-1235234858/.
7 Abigail Freeman, “The World’s Largest Media Companies 2022: Netflix Falls In The Ranks After Subscriber Loss, Disney
Climbs To No. 2,” Forbes, last modified May 31, 2022, https://www.forbes.com/sites/abigailfreeman/2022/05/12/theworlds-largest-media-companies-2022-netflix-falls-in-the-ranks-after-subscriber-loss-disney-climbs-to-no-2/.
8 “Oscars 2022: Netflix Leads Nominations in Another Streaming-heavy Year,” Los Angeles Times, last modified February 8,
2022, https://www.latimes.com/entertainment-arts/business/story/2022-02-08/oscars-2022-netflix-leads-nominationsin-another-streaming-heavy-year.
9 “About Netflix – Homepage,” About Netflix, Netflix, accessed August 11, 2022, https://about.netflix.com/en.
10 Mike Spector, “Blockbuster to remake itself under creditors,” The Wall Street Journal, September 24, 2010,
https://www.wsj.com/articles/SB10001424052748703384204575509331302481448.
11 Mathew Honan, “Apple Releases iTunes 6,” Macworld, last modified October 11, 2005,
https://www.macworld.com/article/177369/itunes6.html.
12 “YouTube Is the Fastest Growing Website,” Ad Age, last modified July 21, 2006,
https://adage.com/article/digital/youtube-fastest-growing-website/110632.
13 Miguel Helft, “Netflix to Deliver Movies to the PC,” The New York Times, January 16, 2007,
https://www.nytimes.com/2007/01/16/technology/16netflix.html.
14 Brian Stelter, “Netflix to pay 1 billion to add films to on-demand service,” The New York Times, August 10, 2010,
https://www.nytimes.com/2010/08/11/business/media/11netflix.html?scp=1&sq=%22netflix%20to%20pay%20nearly%2
0%241%20billion%22&st=cse.
15 Tim Arango and David Carr, “Netflix’s Move Onto the Web Stirs Rivalries,” The New York Times, November 24, 2010,
https://www.nytimes.com/2010/11/25/business/25netflix.html?pagewanted=all.
16 Ibid.
17 Juliane Pepitone, “Netflix inks Disney deal, but no new films ‘til 2016,” CNN, December 4, 2012,
https://money.cnn.com/2012/12/04/technology/netflix-disney/index.html.
18 "Netflix Scuttles Its 'Qwikster' DVD Rental Plan." NPR. Last modified October 10, 2011.
https://www.npr.org/sections/thetwo-way/2011/10/10/141209082/netflix-kills-qwikster-price-hike-lives-on.
19 From the press: “They have jammed the firm’s switchboard and posted 82,000 largely hostile comments on its
Facebook page. Netflix told investors to expect a rare loss of subscribers.” See “Netflix Messes Up,” The Economist,
September 24, 2011.
20 Julianne Pepitone, “Netflix stock sinks as subscribers flee,” CNN, October 25, 2011,
https://money.cnn.com/2011/10/25/technology/netflix_stock/.
21 Rebecca Greenfield, “The economics of Netflix’s $100 million show,” The Atlantic, February 1, 2013,
https://www.theatlantic.com/technology/archive/2013/02/economics-netflixs-100-million-new-show/318706/.
22 “Taking on TV: how Netflix is becoming an original programming powerhouse,” The Verge, June 2, 2013,
https://www.theverge.com/2013/5/2/4294336/taking-on-tv-netflix-original-programming.
23 “More Than Half of Netflix’s New Library Titles in 2018 Were Original Content,” Slashfilm, March 21, 2019,
https://www.slashfilm.com/netflix-original-programming-percentage/.
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Endnotes (Continued)
24 Tony Maglio, “Who Is Winning the Streaming Wars? Subscribers by the Numbers,” IndieWire, last modified March 15,
2022, https://www.indiewire.com/2022/03/how-many-subscribers-netflix-disney-plus-peacock-amazon-prime-video1234705515/.
25 Netflix. "Netflix - Financials - Annual Reports & Proxies." Netflix - Overview - Profile. Last modified 2021.
https://ir.netflix.net/financials/annual-reports-and-proxies/default.aspx.
26 “Netflix Case Study,” Amazon Web Services, Inc., accessed September 5, 2022,
https://aws.amazon.com/solutions/case-studies/netflix-case-study/.
27 Netflix. "SEC Filings." Netflix - Overview - Profile. Last modified 2022. https://ir.netflix.net/financials/sec-
filings/default.aspx.
28 Merve Aslan, “4 Things to Learn from Netflix’s Localization Strategy,” Weglot Blog, last modified July 7, 2021,
https://weglot.com/blog/netflixs-localization-strategy/.
29 Tim Wu, “Netflix’s special algorithm is a human,” New Yorker, January 27, 2015,
https://www.newyorker.com/business/currency/hollywoods-big-data-big-deal.
30 Lara O’Reilly, “Netflix lifted the lid on how the algorithm that recommends you titles to watch actually works,”
February 26, 2016, https://www.businessinsider.com/how-the-netflix-recommendation-algorithm-works-2016-2.
31 Lucas Shaw, “Betting Big on Brooklyn, Netflix Opens First New York Studio,” Bloomberg, last modified July 16, 2021,
https://www.bloomberg.com/news/articles/2021-07-16/netflix-opens-massive-new-york-studio-in-brooklyn#xj4y7vzkg.
32 Griffin Rushton, “Netflix Plans to Expand Studios in Albuquerque,” KOB, last modified March 2, 2022,
https://www.kob.com/archive/netflix-plans-to-expand-studios-in-albuquerque/.
33 Patty McCord, Powerful: Building a Culture of Freedom and Responsibility (Silicon Guild, 2020).
34 Ibid.
35 Minda Zetlin, “Blockbuster Could Have Bought Netflix for $50 Million, but the CEO Thought It Was a Joke,” Inc, last
modified September 20, 2019, https://www.inc.com/minda-zetlin/netflix-blockbuster-meeting-marc-randolph-reedhastings-john-antioco.html.
36 Giang, “She Created Netflix’s Culture.”
37 Hastings and Meyer, No Rules.
38 Giang, “She Created Netflix’s Culture.”
39 Hastings and Meyer, No Rules.
40 Ibid.
41 McCord, Powerful.
42 Hastings and Meyer, No Rules.
43 McCord, Powerful.
44 “Netflix Culture — Seeking Excellence,” Netflix Jobs, Netflix, accessed September 7, 2022,
https://jobs.netflix.com/culture.
45 Hastings and Meyer, No Rules.
46 Ibid.
47 McCord, Powerful.
48 Larker, David F., Alan McCall, and Brian Tayan, “Equity on Demand: The Netflix Approach to Compensation,” PhD diss.,
Stanford Graduate School of Business, 2010.
49 Hastings and Meyer, No Rules.
50 Ibid.
51 Ibid.
52 Ibid.
53 Ibid.
54 Ibid.
55 Ibid.
56 McCord, Powerful.
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Endnotes (Continued)
57 Ibid.
58 Ibid.
59 Hastings and Meyer, No Rules.
60 Ibid.
61 Ibid.
62 Ibid.
63 “Netflix Culture.”
64 Hastings and Meyer, No Rules.
65 McCord, Powerful.
66 Hastings and Meyer, No Rules.
67 Ibid.
68 “Netflix Culture.”
69 Hastings and Meyer, No Rules.
70 “Netflix Culture.”
71 Hastings and Meyer, No Rules.
72 “Netflix Culture.”
73 Ibid.
74 Ibid.
75 Ibid.
76 Shalini Ramachandran and Joe Flint, “At Netflix, Radical Transparency and Blunt Firings Unsettle the Ranks,” WSJ, last
modified October 25, 2018, https://www.wsj.com/articles/at-netflix-radical-transparency-and-blunt-firings-unsettle-theranks-1540497174.
77 Denning, Stephanie. "The Netflix Pressure-Cooker: A Culture That Drives Performance." Forbes. Last modified
October 26, 2018. https://www.forbes.com/sites/stephaniedenning/2018/10/26/the-netflix-pressure-cooker-a-culturethat-drives-performance/?sh=22a7a1dd151a.
78 “Netflix Reviews,” Glassdoor, accessed August 10, 2022, https://www.glassdoor.co.uk/Reviews/Netflix-ReviewsE11891.htm.
79 Todd Spangler, “Netflix Updates Corporate Culture Memo, Adding Anti-Censorship Section and a Vow to ‘Spend Our
Members’ Money Wisely’ (EXCLUSIVE),” Variety, last modified May 13, 2022,
https://variety.com/2022/digital/news/netflix-culture-memo-update-censorship-spending-1235264904/.
80 Hastings and Meyer, No Rules.
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