Leadership

Netflix CEO shows us the fastest way to end a successful career

Many great companies have been brought down by the power of an arrogant leader. In this article executive leadership coach John M. McKee discusses Netflix and its leader.
Hubris: extreme pride or arrogance. Hubris often indicates a loss of contact with reality and an overestimation of one's own competence or capabilities, especially when the person exhibiting it is in a position of power.

Can you say Reed Hastings?

Hastings is the CEO of Netflix. I believe that he provides us with an excellent model for how a leader should not behave.

Since being launched in 1997, Netflix was frequently used as an example to inspire entrepreneurialism and build a business through customer service and customer care. Conceived by a few people with a good idea, Netflix took on the giants in the video rental industry. It was given a lot of credit for the ultimate demise of Blockbuster and other similar national chains.

Netflix created an entirely new way for families to rent movies for use at home. Much like the shoe retailer Zappos, which was also built by a dedicated CEO, Netflix combined technology and new approaches to the delight of customers. Ultimately, customer numbers rose to about 25 million this year.

Hastings and his team were on to something. In the business world, Hastings was viewed as:

  • A shrewd management guru
  • A leader who could anticipate customers' needs and do great deals with bigger organizations
  • Someone who provided more benefits for his customers and in return made them very, very loyal

It was commonly accepted that Netflix subscribers were so well-served that they were unlikely to leave the service, consequently they would continue providing about $12 a month, day in day out.

Netflix was rewarded with a massive valuation on Wall Street. Share prices rose to nearly $300 at the end of last June.

Noticeable at the same time as this was going on, CEO Hastings started appearing more and more frequently in magazines, on panels, and at financial forums where he'd been invited to share his wisdom for the benefit of others.

He started well, often showing an attitude of "I'm just a regular guy who understands that if you treat your customers and employees with respect, then the marketplace will reward you." However, over time, his messages stopped being about the marketplace, the customer, and the employee. They became all about using technology to take over the world. It became clear that he was starting to believe that both he and his company could do no wrong.

His success "model" shifted from people power augmented with great algorithms and technology, toward just the tech and math. From a leadership observer's perspective (mine), this shift was reflective of his sense of entitlement and hubris.

In July he showed his true colors by announcing a dramatic change in the customer value proposition. Based on internal forecasts that most customers would swallow this change and accept one of two new options, he showed that he was OK with the loss of hundreds of thousands of loyal customers -- stating that the math showed Netflix would make more money without those people.

The market reacted quickly: Netflix has lost $11.6 billion since that time. At this point, nearly 800,000 subscribers have left Netflix. Stock prices, which had been trading at close to $300 each, fell to about $75 this week.

Hastings has lost his credibility as a management guru. Worse -- and more telling -- he has been reluctant to say he made a mistake. He has instead focused on the prospects for a "financial rebound," which he says will come as a result of entering new marketplaces outside the United States. He doesn't talk much about creating "delightful customer experiences" any more.

My forecast? This catastrophe will end up being one of those situations where a founder and leader ultimately gets forced out because he lost his direction and forgot his original values.

I am reminded of a lesson I learned from the late cosmetic and fragrance magnate Estee Lauder, who once told me why her organization would continue to succeed long after she left the planet: "Mr McKee, the trick to long-term success boils down to how you treat others. Do them right and they'll reward you. Treat them poorly and they'll abandon you. It's not magic."

That's still a great message for anyone in a leadership position.

John

About

John M. McKee is the founder and CEO of BusinessSuccessCoach.net, an international consulting and coaching practice with subscribers in 43 countries. One of the founding senior executives of DIRECTV, his hands-on experience includes leading billion d...

31 comments
Barmace
Barmace

Redbox gives convience and price that matches what Netflix used to be. By slapping the consumers in the face by saying they could survive without DVD rentals was not only wrong it was a lie because Netflix steaming does not offer cutting edge movies that Redbox offers for only $1.00 a day and I can almost guarentee that I can get the movie I want when and where I want it. Not receive my number 10 choice. Had Netflix worked out the numbers so that when they cut the DVD from their equasion and set up instant watch on the day a movie was released I would had applauded them. there are too many movies we as consumers want to watch that Netflix does not offer instant to make is feasible to stay with them. If you look at the numbers Redbox has experienced a boom in profits since the Netflix debaucle.

Netteligent
Netteligent

Every university and college should teach their students about crisis at Netflix. It is all about common sense.

Michael Jay
Michael Jay

truer words about how to run a business cannot be found. "Mr McKee, the trick to long-term success boils down to how you treat others. Do them right and they'll reward you. Treat them poorly and they'll abandon you. Its not magic." And it can be applied to all relationships as well.

den99md
den99md

When it's time for election of Directors the stockholders should replace the current board of directors as they come up for re-election. They all failed in their duties. If a rate increase is necessary to maintain a fair & reasonable profit, along with quality and availability of product, Keep the increase at or very near the rate of inflation, give advanced notice and a detailed and accurate explanation. If the customer sees the value and quality they will be loyal.

namvet_mike
namvet_mike

You've nailed it Mr. McKee it boils down to that "Golden Rule", too bad the high and mighty tend to forget it. I'm still a Netflix customer however, I'm not too impressed with the latest idea to "double down" .

Techrat, Inc.
Techrat, Inc.

My wife and I were loyal subscribers to Netflix for $8/mth on auto-pay. We expected and could have handled an increase from $10-$12. What caused us (and probably many others) to jump ship was that Netflix split the Disc-by-Mail and Download services into two separate services and debited our account for each without notice. We thought we had been double billed when we got our statement. The next day before we called, we got a letter in the mail explaining what what going on. With all the technology in the world, they couldn't send us an e-mail with a few weeks advance notice giving us a warning or an option. Hope that extra $8 did them some good because its the last they will ever get from us!!!

benskid
benskid

I met R.H. once in the late 90's when Netflix was first testing their mailings at the San Jose main post office. His arrogance and small regard for those he perceived as not his intellectual equal were not attractive then and have come back to bite him now. Power corrupts. Absolute power corrupts absolutely.

sboverie
sboverie

The debacle at Netflix sounds more like group think than a CEO's gaffe. The article points out that the CEO started paying more attention to the "tech and math" than the customers and even accepted a large loss of subscribers as part of the decision. Group think is where a team gets over confident with their plans. Group think is characterised by not listening to opposing views and also aggressively silencing opposing views. A great example of this is what happened with Ford and the Pinto, the 5 passenger vehicle with a flaw that caused a rear collision to pucture the gas tank. Ford had information about the flaw and determined that the number of possible accidents ending in explosion and fire were too small to do a recall; Ford also had information that showed that there were more risks but decided to ignore anyone bringing up those risks. Ford did recover from the Pinto blunder, but not cheaply. Netflix can recover from their recent mistakes but it won't be easy. I am a Netflix customer and I recently changed my subscription to 3 DVDs and no streaming, the cost is reasonable.

desktopanalyst
desktopanalyst

I closed my account as soon as I received "the email". I cannot remember what I was paying exactly but 800,000 people paying $8.00 a month times 12 months... Yeah, deadwood, and won't be missed. I won't go back because of the way it was rolled out and like kenjwsu said above, the technology just isn't there to make it worth it.

e_caroline
e_caroline

I don't agree with your assessment. Netflix will probably make more money by getting rid of deadwood subscribers. Even at the new price... it is a dirt cheap service.. and it seems it would have been impossible to keep serving low-paying customers who bailed and whose greedy attitude in the comment columns suggests they were also the ones who maxed out usage of the service. The dropping of the stock price means little since the $300 price was a ridiculous over-valuation driven by nitwits with more money than brains who drove it upwards with no real-world justification... based upon notice in the mass media. And the supposedly low price now... is just an opportunity for the savvy since it is under-valued now. What we see is what happens in the trading habits of lemmings who don't really know how to understand the value of stocks... combined with easy to access online trading services.... that probably are why so many foggy-minded lemmings (operating off of goober rules-of-thumb?) can so easily effect market prices. Your article alone will drive the price down a few cents and no few tiny-brains who also invest will fail to look at the dollars.. and will only mindlessly think the number of subscribers directly maps onto profit levels... which is not true. Better half the subscribers paying twice the price... since all of the fixed costs remain the same... but the variable ones drop with a reduction in subscribers. The savings in postage and handling alone... in handling half as many transactions... is probably worth the change in price to drive away the deadwood customers. They are sorta like the idlers who hang out in front of a convenience store all day every day and who buy a couple cups of coffee in their hours of idling and who seem like the source of a regular daily cash flow. But who, upon close examination, can be seen to use more than the profit made on the coffee in free toilet paper, paper towels and soap on trips to the restroom.

Mycah Mason
Mycah Mason

I completely agree with your assessment ...and great quote at the end.

danap
danap

John, you are the first writer about the Netflix debacle to get to the root of the problem. All the news articles, and also most commenters, seem to focus on the price increase. It wasn't the price increase, it was the arrogant way it was rolled out, then "apologized" for while simultaneously cramming a dramatic business change down customer's throats. As a long-time Netflix customer AND fan who constantly talked up the service to my friends, I felt used and abused and could see nothing but more of the same in the future. There was simply no evidence of a renewed feeling of customer care on the horizon. So I am one of the 800,000 who bailed (despite having most of a non-refundable month left on my account!). If it were just the price increase alone that caused so many to lose faith in the company and its stock, then why did the valuation continue to freefall even though they increased revenue for the quarter? No, you got it right - it was the behavior of the CEO and how he treated his customers that caused the downfall. Loved the quote from Estee Lauder at the end. Great article!

kenjwsu
kenjwsu

I was a subscriber to Netflix for a few years and absolutely loved the service, even forking out the extra few bucks in order to rent Blu-Ray. After the first several months, they announced an increase in price.. which I didn't mind as it was still cheaper than renting the movies from any other rental place and gave me the flexibility I desired. Then they increased again, still I stayed on ship. But when they started putting more investment into instant watch opposed to rentals, including the pricing, I had to bid a farewell. It is a common belief that digital copies and online streaming is THE future for entertainment, and I have to admit, I somewhat agree. The only problem is that it's the FUTURE, the technology just doesn't have the capacity to sustain it yet. When I want to watch a movie, I want the ability to turn it on and go. I live in Kansas, and I know that the highest possible internet out here isn't the same as on the east or west coast, but with that being said, I have the highest option available to me. Still, when I would queue a movie on instant watch, I'd still have to let the movie buffer for more than a few minutes just to get a consistent quality, and still it wasn't near as crisp of a picture as an up-converted DVD, let alone Blu-Ray quality. I want to enjoy every aspect of a movie, not just watching it. Until bandwidth levels allow for a consistent 1080p or even 720p online stream, DVD/Blu-Ray rentals are going to be priority number one. I may be part of the minority, but I'm sure that there are many who left for a similar reason. Hastings needs to do right by the dedicated consumer and admit his mistake. I'm sure Redbox and Blockbuster Express aren't complaining though :)

shandleman
shandleman

Great article, John. If I were to pick one idea that sums up my overall philosophy in life, that quote from Estee Lauder would capture it. It's not rocket science (or magic as she put it). In many ways, its a retelling of the Golden Rule: Treat others well, as you would want to be treated, and you will be rewarded through how they treat you in return. In a business context, that reward comes through happy, productive employees as well as customer loyalty and the resulting revenues. Of course many other things impact revenues but if you don't have happy, loyal customers it's hard to make any of the other business strategies work.

aeiyor
aeiyor

Good Day All. John McKee, Fantastic and great article. Very dead on. It all comes down to how well you treat others and how respectful you are of them. And a knowledge that your customers are NOT just the people to whom you provide services and products to but the people whom you work with. Failure to acknowledge, recognize and provide terrific support - leads to downfall and disarray. Eventually the business suffers and truly loses its direction/focus and becomes no different than other businesses. I believe this is something that has happened too often, many CEO, CTO, CIO, etc.. etc.. are brought in to help company's but these people don't get what it is that makes the company's what they are... they have background in business -- but its not all about business, its about the people.... and they try using technology, information, perhaps how they did things at other places (hmmm if it was so good why did they leave or aren't with the company they use to be with?).... Another company I see that suffered this was HP. And I see the signs too present in other company's. If you don't treat people right, it WILL get back at you. Sooner or later, you'll reap what you've sown. Sincerely, Satori.

alan.kirchoff
alan.kirchoff

I am a netflix subscriber, mainly just for my kids to watch shows every now and then. When I got the email about them splitting the web site into two domains I thought, "why would you do that." Then I didn't pay much attention until I got the email saying they decided not to do it. Great article on how some leaders loose touch with their customer base. Has anyone heard on if there's been a mass exit of employees? I understand that me be difficult to do in this economy but if this happened back in the late 90's you might see employees jumping ship.

1976Hoosiers
1976Hoosiers

1 thing before i go into the awesomeness of this article...it is algorithms not algorhythms :) Loved the article John it is incredible how fragile the b2c relationship is. It is a true phenomenon to me that it is so hard to get people to give you money and so easy to ruin that relationship. 11.6 B should be a great teacher. I think Netflix was leaps and bounds ahead of the competitors, but now with people frothing at the bit to jump ship (including me) I think they really gave Amazon a lot of momentum in battle for cord cutters. I do not have cable and never will again and I think the industry as a whole is shifting towards a pay for what you want to watch "iTunes" sort of model. The days of paying hundreds of dollars for channels you never watch and subsidizing bad programming are numbered. Great article!

adornoe
adornoe

corporations lecture. Too many universities are not into the practical business 101 lesson of the past.

jcitron
jcitron

he company will have a lot of work to do to bring back lost customers and build new relationships because once the bad word gets out, they're essentially toast. They say that it's very difficult to build a business-to-customer relationship, and even more difficult to rebuild the same once the relationship is damaged.

Kent Lion
Kent Lion

The saying "Power corrupts. Absolute power corrupts absolutely." is well known, but completely wrong. Power brings out the corruption that was already there; that's what you were seeing in the late 90's..

g01d4
g01d4

The $8/month is less than what it costs Netflix to service them.

rmclau
rmclau

GEE! It must be nice to have money enough to burn and still have some to throw into the toilet. Short sighted rich people make me SICK!

techrepublic
techrepublic

Netflix has been leaping into streaming video (the FUTURE) so intensely that they had to screw up the DVD by mail program that made them successful. For two years at least, Netflix has been putting way less $$$ into purchasing new DVDs and replacing the lost and broken DVDs. It's so bad now that my DVD queue now has about 100 main-stream movies with "availability unknown", even though these movies are available on DVD at my local video rental store. Netflix made the decision to throw away the DVD market before they had the streaming business in place with deals to provide the content the DVD business offered. This, in itself, should have shown the markets that Netflix was into megelomania two years ago; rewarding that with $300 stock was indeed a gamble unworthy of even amateurs. As for me being a deadwood, I was one of the early Netflix DVD customers, and I stayed with them as they fought to provide even mediocre streaming services that made my home theater an embarrasment at times. I've been a 3-DVD and streaming customer who watched perhaps 5 movies a week, but Netflix has lost me as a loyal customer. If I can get the DVDs that Netflix won't replace from another service, I'll drop my account. I bet there are at least a million or two subscribers who feel this way, and are just waiting for an alternative. Then the stock might really tank...

g01d4
g01d4

Which was how Hastings managed things recently. Netflix's claim to fame and incumbency was in mail delivery. Hastings *method* of communicating and implementing his decision that he was setting up to punt all this and focus on streaming content was, per the article, poorly implemented. The merit of Hastings decision is another issue - though I've made my bias clear.

nwallette
nwallette

I was all prepared to dislike this article because hating Netflix is in fashion this season, and it seemed like so many spoiled brats whining about how unfair it is that they have to pay more for something. Prices go up everywhere. Nothing is immune. I considered their previous low price for both physical and streaming content as a long-term "introductory" price anyway. There's no way they could continue at that cost. The media industry would never let it happen. So, not at all shocked to see it go up. I still consider their prices reasonable. The streaming library may not be great, but that kind of thing takes time. Not because of technical complications; because the deals that must be made with the content producers move glacially. I have no beef with the release day delays either. It's still new to me two weeks later. The whole thing about splitting the website seemed pointless and annoying. Glad they recanted on that. Now, I haven't studied the CEO. The email saying "OK, we heard you, we won't do that" sounded like they're actually listening to the end users. This is all I know of him as a leader, and if were asked, I would've had positive things to say. The perspective of this article focused on something that actually matters, and is news to me. Most people's complaints are from being charged a little bit more for a luxury service. Other people reading these comments feel they're also entitled to complain, and it goes on from there. But there isn't really a cheaper option, so there had to be more going on. This article addresses that. Well done.

kenjwsu
kenjwsu

Well put. In my comment, I may have brought up price increase but, like many others, I was fine with it until they completely changed their business strategy.

AnsuGisalas
AnsuGisalas

but power also makes arrogant asses think they can get away with letting their inner selves "shine" through. Two different processes.

AnsuGisalas
AnsuGisalas

And that's true even when the relationship in question is where the money is flowing *away* from you. They could have achieved whatever change they were seeking without throwing away anything.