Netflix CEO Reed Hastings: The Sauron of Silicon Valley?

Say what you will about Netflix (NASDAQ: NFLX  ) , but you have to admire the company's turn-on-a-dime flexibility.

Netflix built a unique and market-leading DVD-by-mail service, protected by enforceable business method patents and a large customer base. The company turned right around to focus on digital video streams as soon as that business model started gaining momentum. Oh, but the separation of streaming church and DVD-based state was way too quick -- so CEO Reed Hastings immediately backed off his just-hatched Qwikster idea, apologized, and kept the services integrated.

These are just a few high-profile examples from a long history of lightning-quick adjustments to Netflix's business model.

Okay, but so what?
The company is fittingly proud of this spectacular flexibility. It's a selling point when Netflix goes looking for top-shelf engineering talent. The company is quick to overcome spectacular mistakes, as evidenced by the Qwikster drama. And a certain amount of elasticity might even help Netflix establish cross-industry partnerships.

At the recent Streaming Media East confab, Netflix sent encoding tools manager David Ronca to explain how the streaming service's technical details have evolved over the years. It's fascinating stuff for us tech geeks, but probably cringe-inducing for many others. But Ronca also dropped in some wheeling-and-dealing anecdotes that make all the dry tech talk totally worth a listen.

Drop in at the 35-minute mark in this video to see how Netflix became a launch partner for Apple 's (NASDAQ: AAPL  ) new tablet, what we now know as the first-generation iPad. As it turns out, it was all about quick reaction to Apple's impossible demands.

Apple sent a crosstown invite to Netflix on Feb. 6, 2010, asking if the company would like to be part of the iPad launch event. The catch: Then-CEO Steve Jobs would unveil the tablet less than two months later, on April 3.

Not only that, but the lessons Netflix learned from rolling out streaming services on PC systems and video game consoles would be nearly useless. Apple is very particular about what video formats its devices will support, and Ronca said that the iPad's copy protection features were nearly nonexistent. So, in less than 60 days, Netflix had to:

  • Come up with its own digital rights management tools for the iPad.

  • Figure out how to fetch and display video files with all of Apple's format quirks.

  • Re-encode the entire streaming library at various quality levels (for fast and slow network connections), according to the details worked out in the first two steps, and in time for Steve's on-stage presentation. This step alone absorbed about two weeks of the already-tight schedule.

  • Design an iPad-compatible user interface that makes the iPad itself look good. That's your job as a high-profile launch partner, right?

Hastings immediately accepted the challenge, and pretty much put his entire company to work on the iPad implementation. "Less than 60 days, all of Netflix turned like a laser," Ronca said. "It was kind of like the Great Eye in The Lord of the Rings when you've got Sauron's interest, his eye just focused in on you. ... When our CEO gets that interest, when we see an opportunity, the company will turn and shift and put everything into it."

Netflix's corporate headquarters in Los Gatos, California. Not quite as imposing as Sauron's tower in Mordor, but Netflix is planning a new corporate campus. Can you see Reed Hastings' all-seeing eye turning to focus on Cupertino across the Valley?

So, that's exactly what happened. At the core of this solution, you'll find Netflix's overall corporate philosophy. Hire the best people, and give them plenty of freedom to do what they do best; then just get out of the way and watch the magic happen. Or in Ronca's words, "You don't have to spend six months planning, you simply put the best people in the room and have them work it out."

How does this tale help Netflix investors?
This episode also shows you why Apple isn't likely to buy Netflix outright anytime soon. The two corporate cultures are almost exact opposites, and Apple would likely need to rebuild Netflix from scratch, as the top talent balks at Cupertino's ultra-tight reins. Just look at the question of digital content formats. Apple requires that you meet its specifications exactly, because Apple won't sully its perfect system designs with support for additional formats. Keep it tight, keep it clean. By contrast, Ronca puts Netflix at "the other extreme: give us whatever and we'll put it through. And that's been our model."

That model isn't scaling fast enough these days, so Netflix has started to place some quality demands on incoming digital source materials. But you'll never see Netflix drawing a line in the sand, demanding that content producers fit a certain template or else, like Apple does. Apple relishes in telling its users and developers what to do. Netflix simply wants to play with everybody, on any platform, and will bend over backwards to make it happen.

That's why the company stood ready to jump at Apple's invitation, with the full backing of its local Sauron. You can bet that Hastings will be ready to jump on the next unexpected business opportunity with impunity, regardless of how short the development lead time might be.

This is the kind of opportunistic management that makes me happy to be a Netflix shareholder for the long term. Hastings will leave no stone unturned in search of the next big thing.

The television landscape is changing quickly, with new entrants like Netflix and Amazon.com disrupting traditional networks. The Motley Fool's new free report -- "Who Will Own the Future of Television?" --details the risks and opportunities in TV. Click here to read the full report!


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