How Netflix changed entertainment -- and where it's headed

Netflix changed the world of entertainment -- first with DVD-by-mail, then with streaming media and then again with sensational original shows like "Orange Is the New Black" and "Stranger Things" -- but not without taking its fair share of risks. In conversation with TED curator Chris Anderson, Netflix co-founder and CEO Reed Hastings discusses the company's bold internal culture, the powerful algorithm that fuels their recommendations, the $8 billion worth of content they're investing in this year and his philanthropic pursuits supporting innovative education, among much more.

Chris Anderson: I have been long
so fascinated and amazed

by so many aspects of Netflix.

You're full of surprises, if I may say so.

One of those surprises happened,
I think about six years ago.

So, the company back then
was doing really well,

but you were basically a streaming service

for other people's films and TV content.

You'd persuaded Wall Street
that you were right

to make the kind of radical shift
away from just sending people DVDs,

so you were doing it by streaming.

And you were growing like a weed --

you had more than six million subscribers
and healthy growth rates,

and yet, you chose that moment

to kind of make a giant --
really, a bet-the-company decision.

What was that decision,
and what motivated it?

Reed Hastings: Well,
cable networks from all time

have started on other people's content

and then grown into doing
their own originals.

So we knew of the general idea
for quite a while.

And we had actually tried to get into
original content back in 2005,

when we were on DVD only
and buying films at Sundance --

Maggie Gyllenhaal, "Sherrybaby,"
we published on DVD --

we were a mini studio.

And it didn't work out,
because we were subscale.

And then, as you said, in 2011,

Ted Sarandos, my partner at Netflix
who runs content,

got very excited about "House of Cards."

And at that time,
it was 100 million dollars,

it was a fantastic investment,

and it was in competition with HBO.

And that was really the breakthrough,
that he picked right upfront.

CA: But that was a significant percentage
of the revenue of the company

at that time.

But how could you get confident
that that was actually worth doing?

If you got that wrong,

it might have been really
devastating for the company.

RH: Yeah, we weren't confident.
I mean, that's the whole tension of it.

We were like, "Holy ...!" --
I can't say that.

Yeah, it was scary.

(Laughter)

CA: And with that, it wasn't just
producing new content.

You also, pretty much with that,
if I understand right,

introduced this idea of binge-viewing.

It wasn't, "We're going to do
these episodes and build excitement" --

boom! -- all at one time.

And that consumer mode
hadn't really been tested.

Why did you risk that?

RH: Well, you know,
we had grown up shipping DVDs.

And then there were series,
box sets, on DVD.

And all of us had that experience
watching some of the great HBO content

you know, with the DVD --
next episode, next episode.

And so that was the trigger
to make us think,

wow, you know, with episodic content,
especially serialized,

it's so powerful to have
all the episodes at once.

And it's something
that linear TV can't do.

And so both of those
made it really positive.

CA: And so, did it work out on the math
pretty much straight away,

that an hour spent watching
"House of Cards," say,

was more profitable to you

than an hour spent watching
someone else's licensed content?

RH: You know, because we're subscription,
we don't have to track it at that level.

And so it's really about
making the brand stronger,

so that more people want to join.

And "House of Cards" absolutely did that,

because then many people
would talk about it

and associate that brand with us,

whereas "Mad Men" we carried --
great show, AMC show --

but they didn't associate it with Netflix,

even if they watched it on Netflix.

CA: And so you added
all these other remarkable series,

"Narcos," "Jessica Jones,"
"Orange is the New Black," "The Crown,"

"Black Mirror" -- personal favorite --

"Stranger Things" and so on.

And so, this coming year,

the level of investment you're planning
to make in new content

is not 100 million.

It's what?

RH: It's about eight billion dollars
around the world.

And it's not enough.

There are so many great shows
on other networks.

And so we have a long way to go.

CA: But eight billion --

that's pretty much higher than any other
content commissioner at this point?

RH: No, Disney is in that realm,

and if they're able to acquire Fox,
they're even bigger.

And then, really, that's spread globally,

so it's not as much as it sounds.

(Laughter)

CA: But clearly, from the Barry Dillers
and others in the media business,

it feels like from nowhere,

this company has come and has
really revolutionized the business.

It's like, as if Blockbuster one day said,

"We're going to make Blockbuster videos,"

and then, six years later,
was as big as Disney.

I mean, that story would never
have happened, and yet it did.

RH: That's the bitch about the internet --
it moves fast, you know?

Everything around us moves really quick.

CA: I mean, there must be something
unusual about Netflix's culture

that allowed you to take such
bold -- I won't say "reckless" --

bold, well thought-through decisions.

RH: Yeah, absolutely.

We did have one advantage,
which is we were born on DVD,

and we knew that that
was going to be temporary.

No one thought we'd be
mailing discs for 100 years.

So then you have a lot of paranoia
about what's coming next,

and that's part of the founding ethos,

is really worrying
about what's coming next.

So that's an advantage.

And then in terms of the culture,

it's very big on freedom
and responsibility.

I pride myself on making as few decisions
as possible in a quarter.

And we're getting better
and better at that.

There are some times
I can go a whole quarter

without making any decisions.

(Laughter)

(Applause)

CA: But there are some really
surprising things about your people.

For example, I looked at one survey.

It looks like Netflix employees,
compared to your peers',

are basically the highest paid
for equivalent jobs.

And the least likely to want to leave.

And if you Google
the Netflix culture deck,

you see this list of quite surprising
admonitions to your employees.

Talk about a few of them.

RH: Well, you know, my first company --
we were very process obsessed.

This was in the 1990s.

And every time someone made a mistake,

we tried to put a process in place

to make sure that mistake
didn't happen again --

so, very semiconductor-yield orientation.

And the problem is, we were trying
to dummy-proof the system.

And then, eventually,
only dummies wanted to work there.

Then, of course, the market shifted --
in that case, it was C++ to Java.

But you know, there's always some shift.

And the company was unable to adapt,

and it got acquired
by our largest competitor.

And so with Netflix, I was super focused
on how to run with no process

but not have chaos.

And so then we've developed
all these mechanisms,

super high-talented people, alignment,

talking openly, sharing information --

internally, people are stunned
at how much information --

all the core strategies, etc.

We're like the "anti-Apple" --
you know how they compartmentalize?

We do the opposite, which is:
everybody gets all the information.

So what we're trying to do is build
a sense of responsibility in people

and the ability to do things.

I find out about big decisions now
that are made all the time,

I've never even heard about it,
which is great.

And mostly, they go well.

CA: So you just wake up
and read them on the internet.

RH: Sometimes.

CA: "Oh, we just entered China!"

RH: Yeah, well that would be a big one.

CA: But you allow employees to set
their own vacation time, and ...

There's just --

RH: Sure, that's a big
symbolic one, vacation,

because most people, in practice,
do that, anyway.

But yeah, there's a whole lot
of that freedom.

CA: And courage, you ask for
as a fundamental value.

RH: Yeah, we want people
to speak the truth.

And we say, "To disagree
silently is disloyal."

It's not OK to let some decision
go through without saying your piece,

and typically, writing it down.

And so we're very focused
on trying to get to good decisions

through the debate that always happens.

And we try not to make it intense,
like yelling at each other --

nothing like that.

You know, it's really curiosity
drawing people out.

CA: You've got this other
secret weapon at Netflix, it seems,

which is this vast trove of data,

a word we've heard
a certain amount about this week.

You've often taken
really surprising stances

towards building smart
algorithms at Netflix.

Back in the day, you opened up
your algorithm to the world

and said, "Hey, can anyone do better
than this recommendation we've got?

If so, we'll pay you a million dollars."

You paid someone a million dollars,

because it was like 10 percent
better than yours.

RH: That's right.

CA: Was that a good decision?
Would you do that again?

RH: Yeah, it was super exciting
at the time; this was about 2007.

But you know, we haven't done it again.

So clearly, it's a very specialized tool.

And so think of that as
a lucky break of good timing,

rather than a general framework.

So what we've done is invest a lot
on the algorithms,

so that we feature the right content
to the right people

and try to make it fun
and easy to explore.

CA: And you made this, what seems
like a really interesting shift,

a few years ago.

You used to ask people,
"Here are 10 movies. What do you think?

Which ones of these
are your best movies?"

And then tried to match those movies
with recommendations for what was coming.

And then you changed away from that.

Talk about that.

RH: Sure.

Everyone would rate
"Schindler's List" five stars,

and then they'd rate Adam Sandler,
"The Do-Over" three stars.

But, in fact, when you looked
at what they watched,

it was almost always Adam Sandler.

And so what happens is, when we rate
and we're metacognitive about quality,

that's sort of our aspirational self.

And it works out much better
to please people

to look at the actual choices
that they make,

their revealed preferences
by how much they enjoy simple pleasures.

CA: OK, I want to talk
for a couple of minutes about this,

because this strikes me as a huge deal,
not just for Netflix,

for the internet as a whole.

The difference between aspirational values

and revealed values.

You, brilliantly, didn't pay too much
attention to what people said,

you watched what they did,
and then found the stuff that,

"Oh my God, I never knew I would like
a show about making horrible recipes,

called 'Nailed It!'"

RH: Called "Nailed It!" Right.

CA: It's hilarious. I would never
have even thought of that.

But aren't there risks with this,

if this go-only-with-revealed-values
approach is taken too far?

RH: Well, we get a lot of joy
from making people happy,

Sometimes you just want to relax
and watch a show like "Nailed It!"

And it's fun, and it's not stressful.

Other times, people want
to watch very intensive film.

"Mudbound" was Oscar-nominated,

it's a great, very intensive film.

And you know, we've had over
20 million hours of viewing on "Mudbound,"

which is dramatically bigger
than it would have been in the theaters

or any other distribution.

And so, we have some candy, too,
but we have lots of broccoli.

And you know, if you have the good mix,
you get to a healthy diet.

CA: But -- yes, indeed.

But isn't it the case that algorithms
tend to point you away from the broccoli

and towards the candy,

if you're not careful?

We just had a talk about how,
on YouTube, somehow algorithms

tend to, just by actually being smarter,

tend to drive people towards
more radical or specific content.

It'd be easy to imagine
that Netflix algorithms,

just going on revealed values,
would gradually --

RH: Right, get too base --

CA: We'd all be watching
violent pornography or something.

Or some people would, you know.

But, how --

(Laughter)

Not me!

I'm the child of a missionary,
I don't even think about these things.

But --

(Laughter)

But I mean, it's possible, right?

RH: In practice, you're right
that you can't just rely on algorithms.

It's a mix of judgment and what we carry,

and we're a curated service

versus a platform
like Facebook and YouTube,

so we have an easier set of issues,

which is: What are these great
films and series that we acquire?

But then within that,
the algorithm is a tool.

CA: But how -- John Doerr just talked
about measuring what matters.

As a business, what matters, I presume,

is fundamentally just growing subscribers.

I mean, that's your unique advantage.

Are subscribers grown only by
the more time they spend watching Netflix,

that is what will make them re-subscribe?

Or is it even more about having shows

that might not have been so much time

as watching the whole season
of "Nailed It!" or whatever?

But just get into them more;
they just think,

"That was nourishing,
that was extraordinary,

I'm so glad I watched
that with my family."

Isn't there a version
of the business model

that would be less content
but more awesome content,

possibly even more uplifting content?

RH: And people choose
that uplifting content.

I think you're right, which is,
when people talk about Netflix,

they talk about the shows that move them:

"13 Reasons Why" or "The Crown."

And that is way disproportionate
and positive impact,

even for the subscriber growth
that you talked about

is those couple big, memorable shows.

But what we want to do is offer a variety.

You don't want to watch the same thing
every night, as much as you like it;

you want to try different things.

And what we haven't seen is this, say,

race to the bottom of your
violent pornography kind of examples.

Instead, we've seen great viewing
across a whole range --

"Black Mirror" --
we're filming season five now.

And that was a struggling show
when it was only in the BBC.

And with the distribution of on-demand,

you can make these much bigger shows.

CA: You're telling me
humans can get addicted

by their angels as well as their demons.

RH: Yeah, and again, we try
not to think about it in addiction terms,

we think about it as, you know:

What are you going to do
with your time and when you want to relax?

You can watch linear TV, you can do
video games, you can do YouTube,

or you can watch Netflix.

And if we're as great as we can be,
and we have a variety of moods,

then more often, people will choose us.

CA: But you have people
in the organization

who are looking regularly
at the actual impacts

of these brilliant algorithms
that you've created.

Just for reality check, just,

"Are we sure that this
is the direction we want to go?"

RH: You know, I think we learn.

And you have to be humble and sort of say,
"Look, there's no perfect tool."

The algorithm’s one part,
the way we commission the content,

our relationships with societies.

So there's a lot of ways
that we have to look at it.

So if you get too stuck in
"Let's just increase viewing"

or "Just increase subscribers,"

you're unlikely to be able to grow
and be the great company you want to be.

So think of it as this
multiple measures of success.

CA: So, speaking of algorithms
that have raised questions:

You were on the board of Facebook,

and I think Mark Zuckerberg --
you've done some mentoring for him.

What should we know about Mark Zuckerberg
that people don't know?

RH: Well, many of you know him
or have seen him.

I mean, he's a fantastic human being.

Really first-class.

And social -- these platforms,
whether that's YouTube or Facebook,

are clearly trying to grow up quickly.

And we see that with all new technologies.

I mean, yesterday we were talking
about printed DNA,

and it's like: could be fantastic
or could be horrific.

And you know, all new technologies --

when television was first popular
in the 1960s in the US,

it was called a "vast wasteland,"

and that television was going to rot
the minds of everybody.

It turns out everybody's minds were fine.

And there were some adjustments,

but think of it as --
or, I think of it as --

all new technologies have pros and cons.

And in social,
we're just figuring that out.

CA: How much of a priority
is it for the board of Facebook

to really address some of the issues?

Or is the belief that, actually,

the company has been completely
unfairly criticized?

RH: Oh, it's not completely unfairly.

And Mark's leading the charge
on fixing Facebook.

And he's very passionate about that.

CA: Reed, I want to look
at another passion of yours.

I mean, you've done incredibly well
with Netflix, you're a billionaire,

and you spend a lot of time
and indeed, money, on education.

RH: Yep.

CA: Why is this a passion,
and what are you doing about it?

RH: Sure. Right out of college,
I was a high school math teacher.

So when I later went into business
and became a philanthropist,

I think I gravitated towards education

and trying to make a difference there.

And the main thing I noticed is, you know,

educators want to work
with other great educators

and to create many
unique environments for kids.

And we need a lot more
variety in the system

than we have,

and a lot more
educator-centric organizations.

And so the tricky thing is,
right now in the US,

most schools are run
by a local school board.

And it has to meet all needs
in the community,

and, in fact, what we need
is a lot more variety.

So in the US there's a form
of public school

called charter public schools,
that are run by nonprofits.

And that's the big emphasis for me,

is if you can have schools
run by nonprofits,

they are more mission-focused,
they support the educators well.

I'm on the board of KIPP charter schools,

which is one of the larger networks.

And, you know, it's 30,000 kids a year
getting very stimulating education.

CA: Paint me a picture of what
a school should look like.

RH: It depends on the kid.

Think about it as: with multiple
kids, there's all different needs

that need to be met,

so there's not any one model.

And you want to be able to choose,

depending on your kid
and what you think they need.

But they should be very educator-centric
and curious and stimulating

and all of those things.

And this whole idea
of 30 kids in fifth grade,

all learning the same thing
at the same time,

you know, is clearly
an industrial throwback.

But changing that, given
the current government structure,

is super hard.

But what these innovative, nonprofit
schools are doing is pushing the bounds,

letting kids try new things.

And so think of it as
the governance reform,

that is, the nonprofit,

to allow the educational changes.

CA: And sometimes the criticism is put
that charter schools,

intentionally or unintentionally,

suck resources away
from the public school system.

Should we be concerned about that?

RH: Well, they are public schools.

I mean, there's these multiple types
of public schools.

And if you look at charters as a whole,

they serve low-income kids.

Because if high-income kids
get in trouble,

the parents will send them
to a private school

or they move neighborhoods.

And low-income families generally
don't have those choices.

Like KIPP -- it's 80 percent
low-income kids, free and reduced lunch.

And the college admissions
for KIPP is fantastic.

CA: Reed, you signed
the Giving Pledge a few years ago,

you're committed to giving away
more than half of your fortune

during your lifetime.

Can I cheekily ask how much
you've invested in education

in the last few years?

RH: It's a couple hundred million,
I don't know exactly how many hundreds,

but we're continuing to invest and --

(Applause)

thank you all --

(Applause)

You know, honestly, for a little while
I tried to do politics full-time,

working for John Doerr.

And while I loved working for John,
I just didn't thrive on politics.

I love business, I love competing.

I love going up against Disney and HBO.

(Laughter)

That's what gets me going.

And now I do that to really
increase Netflix's value,

which allows me to write
more checks to schools.

And so for now, it's the perfect life.

CA: Reed, you're a remarkable person,
you've changed all of our lives

and the lives of many kids.

Thank you so much for coming to TED.

(Applause)