9 Fascinating Things About Reed Hastings and Netflix

Netflix (Nasdaq: NFLX  ) CEO Reed Hastings has an emotional IQ of zero, according to Gina Keating, author of Netflixed: The Epic Battle for America's Eyeballs. She also believes, however, that he's one of the smartest CEOs she has ever met.

So the picture of Hastings that emerges from "Netflixed" is complex, to say the least. Personally, I came away thinking of him as an incredibly talented leader who was able to create one of the finest companies of the last decade. Lots of great CEOs -- Steve Jobs of Apple is just one obvious example -- aren't particularly great in the emotional intelligence department. Fortunately, Hastings excels in almost every other area. After reading this book, I'm very optimistic about Netflix's future prospects.

I highly recommend this one for lovers of Netflix and students of business in general. To whet your appetite, here are nine fascinating things I learned from the book:

1. The traditional story about the founding of Netflix isn't entirely true. Many of us are familiar with the story of how Reed Hastings came up with the idea for Netflix after he paid $40 in late fees for an overdue copy of Apollo 13 at his local video store. According to Keating, this version isn't entirely accurate.

Netflix co-founder Marc Randolph calls the above story "a lot of crap." He told Keating that the Apollo 13 story was just a convenient way to explain Netflix's unique model. It didn't literally happen that way, however, according to Randolph. 

2. Reed Hastings' great-grandfather founded a physics laboratory that helped develop radar, the atomic bomb, and global positioning systems. Alfred Lee Loomis, Hastings' maternal great-grandfather, made a fortune in investing, and then set up an experimental physics lab in Tuxedo Park, New York. The most brilliant scientists in the world congregated there to develop technology for military applications.

3. Hastings tried to sell Netflix to Amazon. In 1998, Randolph and Hastings met with Amazon.com (Nasdaq: AMZN  ) founder Jeff Bezos to discuss partnership possibilities. For the right price, Hastings would even have considered selling Netflix to Amazon, according to Keating. Ultimately, Hastings was unimpressed by Amazon's $12 million offer, and the two companies agreed to a cross-promotion arrangement instead.

4. Netflix exited from soft-core pornography when Hastings was about to be appointed to the California Board of Education. Apparently, Hastings felt that distributing adult films would hurt his political aspirations. He felt he couldn't sit on the board unless they stopped distributing the porn.

5. Hastings was the driving force behind the decision to abandon a la carte rental. At some point in late 1999 or early 2000, according to Keating, Hastings argued passionately in favor of focusing solely on the subscription service, while abandoning the a la carte sales. Keating reports that Hastings believed that Netflix "needed to focus its resources on the model that worked, even if that meant betting the company on incomplete data and a gut feeling."

6. In the dark days of 2000, Hastings tried to sell Netflix to Blockbuster for $50 million. With losses mounting, Netflix executives met up with the leadership of Blockbuster. According to Keating, Hastings suggested that Netflix become an online arm of the video giant. Blockbuster dismissed Hastings' offer.

7. Blockbuster executives shipped a kitchen sink to Hastings' office. In a conference call, Hastings once remarked that Blockbuster had thrown everything at Netflix "but the kitchen sink." The sink was soon sent as well -- a gesture that Hastings appreciated.

8. Hastings admitted that Blockbuster Online had it "in checkmate." Soon after Shane Evangelist stepped down as head of Blockbuster Online, Hastings admitted to him at a dinner that the rival service had had Netflix "in checkmate." Apparently, Blockbuster Online's Total Access plan was a value proposition that Netflix couldn't match. Luckily for Netflix, new management at Blockbuster began diverting resources from the online offering back to the main business.

9. It was Hastings' idea to announce the Qwikster initiative via a homegrown video on YouTube. Against the advice of his PR team, Hastings decided to personally announce the decision to split off the traditional DVD service as a new business called "Qwikster." Keating reports that Hastings arrived at headquarters to make the homemade video wearing a beach shirt, and refused to rehearse the message. The resulting video was universally perceived as a PR disaster for Netflix.

Netflix has come a very long way since its murky origins back in 1997. According to Keating, its subscribers now use 35% of U.S. Internet bandwith by streaming movies in the evening, and the company claims 44% of the total online movie business, making it the world's largest Internet movie subscription service. The future, of course, remains uncertain. Amazon presents a very real threat, and it's still not clear that the streaming service will ever become as profitable as the traditional disc service once was.

I'm very confident that investors will enjoy Keating's compelling account of Netflix's remarkable rise. For additional, must-read business books, be sure to visit Amazon's Money & Markets page.


Read/Post Comments (8) | Recommend This Article (27)

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  • Report this Comment On November 13, 2012, at 12:15 PM, douggulick wrote:

    I agree, great book. The part of the book I found the most intriguing was the war with Blockbuster, and in particular the role that Carl Icahn, the activist investor played. Carl bought a 10% stake in Blockbuster and got himself elected to the board, and eventually forced out current CEO Antioco (who recognized the Netflix threat) and put in Keyes (whose lack of understanding of technology was epic!). Keyes never grasped the technological innovation that would allow movie renters to not physically enter a store. But more so, he was famously immutable to the cries of others who were aware. At one point he enthused that customers would one day load their movie rentals onto thumb drives!! A Keyes quote taken from the book: "imagine in the future the ability to have the entire library captured on a kiosk!". He virtually killed Antioco's Blockbusters Online initiative (which by Netflix's own assessment was "checkmate" with its return/pickup-at-stores feature), and diverted the money instead into additional merchandising for the stores under the belief that he could loss-leader the movie rental and make up the profits with high margin items like big gulps and pizzas! (An interesting side note was that when Antioco and his team were forced out, they all sold their Blockbuster shares and bought Netflix stock, so certain were they that Keyes would fail.) Carl's myopic pursuit of short term profits drove customers into the arms of Netflix and the rest is history.

    I was disappointed that the story ended with the price hike/Quikster fiasco of last summer. I wished for more insight into the streaming business than she provided, and she also only touches briefly on the international launches into Canada and Latin America/Caribbean (and now Europe). Maybe she'll write a sequel, especially now that Carl Icahn has purchased a 10% stake in Netflix with plans to push them toward being acquired! This story will need a second edition!

  • Report this Comment On November 13, 2012, at 5:47 PM, HighestVantage wrote:

    It is interesting that the streaming business may never become as profitable as the DVD business. I think that is potentially very true. There is going to have to be a major reorganization of the industry to increase the profitability of streaming.

  • Report this Comment On November 13, 2012, at 8:02 PM, Darwood11 wrote:

    Nice article, I'll be reading the book.

    It's unfortunate for shareholders that Hasting's decision to split the streaming/DVD business didn't use the margins for streaming as the basis for pricing for DVD subscriptions. As an observer and stockholder, I assume Hastings decided to juice the DVD business to sell it, and possibly push subscribers to streaming. It was a huge mistake with disastrous consequences for shareholders.

    My modus operandi with these tech companies is simple. They cannot be trusted. Yes, they are brilliant people who do what they want to do. But they seldom think of the shareholders. I'm of the opinion that we're an afterthought.

    Yet, there is money to be made for a shareholder, but it takes a lot more than listening to the company guru and the various services out there. One mis-step by management or game-changer of a competitor, and it's all over.

    Disclaimer: I sold most of my Netflix shares before the stock meltdown. What I now own is pure profit. I sold because I was concerned by management, concerned by glowing recommendations, and concerned by the stratospheric rise in the price of shares. "If it can go wrong, it will" and "If it seems too good to be true, it is" are my mantras. Was I smart? No, I just stuck to my investment principles and was lucky.

  • Report this Comment On November 14, 2012, at 8:48 AM, TMFBane wrote:

    Thanks for the great comments!

    @douggulick, I agree that the discussion of Blockbuster in the book is fascinating. Antioch and Evangelist did seem to understand what was necessary for the future. When Jim Keyes replaced Antioch, however, it appeared to go down hill very quickly.

    Here's an interview with Keating that you might appreciate:

    http://news.cnet.com/8301-1023_3-57524386-93/netflixed-autho...

    @Darwood11, congratulations on your good fortune with this one! It sounds like you played it perfectly.

  • Report this Comment On November 15, 2012, at 2:41 PM, TMFLomax wrote:

    I'm finding all the talk about Antioco/Icahn/Keyes interesting here lately. Did it REALLY happen that way? Is this recalled correctly or sort of revisionist? I'm thinking "revisionist." It has been quite a few years after the fact...

    As I recall, Blockbuster made fatal errors WAY before Icahn and Keyes came on the scene. Plus Antioco had things going for him like a gigantic golden parachute that effectively worked to block a seriously financially struggling company to fire him. (I just looked it up -- he was scheduled to get $54 million (!) in severance.) Some of Icahn's complaints were about excessive bonuses for executives at Blockbuster in the first place, even as the company wasn't performing well (obviously).

    Actually here's an article by Rick Munarriz from that time that's interesting in light of this idea:

    http://www.fool.com/investing/high-growth/2005/05/12/icahns-...

    As for Keyes, maybe his hiring was a mistake, but he really did have an excellent reputation at 7-11. My assumption is truly that Blockbuster was WAY broken and completely disrupted. End of story.

    Sorry, but I've seen this idea elsewhere about Icahn being the big problem at Blockbuster, not Antioco, and like I said, I seriously remember it all very differently. Icahn doesn't have a great track record I suppose, but then again he takes on companies that are already pretty screwed up to begin with. I'm sensing a little "shareholder activism is bad" attitude floating around, I guess, and that and the "revisionist" attitude bugs me.

    That said, the book sounds interesting and I should give it a read, so thanks for the review John!

    Best,

    Alyce

  • Report this Comment On November 15, 2012, at 4:08 PM, TMFBane wrote:

    Great points, Alyce! It does feel like a bit of revisionist thinking. I've probably overstated the case for Antioco's leadership. He certainly was slow to recognize the threat, and his compensation was ridiculous.

    I actually wrote a tongue-in-cheek piece about that way back in 2005:

    http://www.fool.com/investing/general/2005/09/23/quotbrownie...

    Anyway, thanks for the additional perspective on that!

  • Report this Comment On November 15, 2012, at 6:49 PM, TMFLomax wrote:

    Thanks John -- when I was researching a piece on Netflix's poison pill recently I was shocked that the meme seems to be floating around out there that Antioco was a victim and Icahn is the villain. I think of him mostly as possibly fairly ineffectual I guess. I suppose from my standpoint, I get sensitive since I am a proponent shareholder activism and management shakeups in general when things are going wrong at companies, so it hit a nerve remembering things like Antioco's pay/golden parachute, etc.!

    I have been bearish on Netflix lately, but I do have a lot of respect for what Hastings has done over the long course of the company's history so I do want to read the book!

    And awesome piece talking about Antioco's pay from 2005! There is nothing better than the Foolish wayback machine! :) Thanks for the discussion!

    Alyce

  • Report this Comment On December 01, 2012, at 5:11 PM, thidmark wrote:

    97 percent of the comments on MF articles are pure crap.

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