Reed Hastings: “Blockbuster is a thousand times our size,” I whispered to Marc Randolph as we stepped into a cavernous meeting room on the twenty-seventh floor of the Renaissance Tower in Dallas, Texas, early in 2000. These were the headquarters of Blockbuster, then a $6 billion giant that dominated the home entertainment business with almost nine thousand rental stores around the world.

The CEO of Blockbuster, John Antioco, who was reputed to be a skilled strategist aware that a ubiquitous, super-fast internet would upend the industry, welcomed us graciously. Sporting a salt-and-pepper goatee and an expensive suit, he seemed completely relaxed.

By contrast, I was a nervous wreck. Marc and I had cofounded and now ran a tiny two-year-old start-up, which let people order DVDs on a website and receive them through the US Postal Service. We had one hundred employees and a mere three hundred thousand subscribers and were off to a rocky start. That year alone, our losses would total $57 million. Eager to make a deal, we’d worked for months just to get Antioco to respond to our calls.

We all sat down around a massive glass table, and after a few minutes of small talk, Marc and I made our pitch. We suggested that Blockbuster purchase Netflix, and then we would develop and run Blockbuster.com as their online video rental arm. Antioco listened carefully, nodded his head frequently, and then asked, “How much would Blockbuster need to pay for Netflix?” When he heard our response—$50 million—he flatly declined. Marc and I left, crestfallen.

That night, when I got into bed and closed my eyes, I had this image of all sixty thousand Blockbuster employees erupting in laughter at the ridiculousness of our proposal. Of course, Antioco wasn’t interested. Why would a powerhouse like Blockbuster, with millions of customers, massive revenues, a talented CEO, and a brand synonymous with home movies, be interested in a flailing wannabe like Netflix? What did we possibly have to offer that they couldn’t do more effectively themselves?

But, little by little, the world changed and our business stayed on its feet and grew. In 2002, two years after that meeting, we took Netflix public. Despite our growth, Blockbuster was still a hundred times larger than we were ($5 billion versus $50 million). Moreover, Blockbuster was owned by Viacom, which at that time was the most valuable media company in the world. Yet, by 2010, Blockbuster had declared bankruptcy. By 2019, only a single Blockbuster video store remained, in Bend, Oregon. Blockbuster had been unable to adapt from DVD rental to streaming.

The year 2019 was also noteworthy for Netflix. Our film Roma was nominated for best picture and won three Oscars, a great achievement for the director Alfonso Cuarón, which underscored the transformation of Netflix into a full-fledged entertainment company. Long ago, we had pivoted from our DVD-by-mail business to become not just an internet streaming service, with over 167 million subscribers in 190 countries, but a major producer of our own TV shows and movies around the world. We had the privilege of working with some of the world’s most talented creators, including Shonda Rhimes, Joel and Ethan Coen, and Martin Scorsese. We had introduced a new way for people to watch and enjoy great stories, which, in its best moments, broke down barriers and enriched lives.

I am often asked, “How did this happen? Why could Netflix repeatedly adapt but Blockbuster could not?” That day we went to Dallas, Blockbuster held all the aces. They had the brand, the power, the resources, and the vision. Blockbuster had us beat hands down.

It was not obvious at the time, even to me, but we had one thing that Blockbuster did not: a culture that valued people over process, emphasized innovation over efficiency, and had very few controls. Our culture, which focused on achieving top performance with talent density and leading employees with context not control, has allowed us to continually grow and change as the world, and our members’ needs, have likewise morphed around us.

Netflix is different. We have a culture where No Rules Rules.

NETFLIX CULTURE IS WEIRD

Erin Meyer: Corporate culture can be a mushy marshland of vague language and incomplete, ambiguous definitions. What’s worse, company values—as articulated—rarely match the way people behave in reality. The slick slogans on posters or in annual reports often turn out to be empty words.

For many years, one of America’s biggest corporations proudly exhibited the following list of values in the lobby of its headquarters: “Integrity. Communication. Respect. Excellence.” The company? Enron. It boasted about having lofty values right up to the moment it came crashing down in one of history’s biggest cases of corporate fraud and corruption.

Netflix culture, on the other hand, is famous—or infamous, depending on your point of view—for telling it like it is. Millions of businesspeople have studied the Netflix Culture Deck, a set of 127 slides originally intended for internal use but that Reed shared widely on the internet in 2009. Sheryl Sandberg, COO of Facebook, reportedly said that the Culture Deck “may well be the most important document ever to come out of Silicon Valley.” I loved the Netflix Culture Deck for its honesty. And I loathed it for its content.

Quite apart from the question of whether it is ethical to fire hardworking employees who don’t manage to do extraordinary work, these slides struck me as pure bad management. They violate the principle that Harvard Business School professor Amy Edmondson calls “psychological safety.” In her 2018 book, The Fearless Organization, she explains that if you want to encourage innovation, you should develop an environment where people feel safe to dream, speak up, and take risks. The safer the atmosphere, the more innovation you will have.

Apparently, no one at Netflix read that book. Seek to hire the very best and then inject fear into your talented employees by telling them they’ll be thrown back out onto the “generous severance” scrap heap if they don’t excel? This sounded like a surefire way to kill any hope of innovation.

Not allotting employees vacation days seemed downright irresponsible. It is a great way to create sweatshop conditions, where no one dares to take a day off work. And to wrap it up like a perk.

Employees who take holidays are happier, enjoy their jobs more, and are more productive. Yet many workers are hesitant to take the vacation allotted them. According to a survey conducted by Glassdoor in 2017, American workers took only about 54 percent of their entitled vacation days.

Employees are likely to take even less time off if you remove the vacation allotment altogether because of a well-documented human behavior, which psychologists refer to as “loss aversion.” We humans hate to lose what we already have, even more than we like getting something new. Faced with losing something, we will do everything we can to avoid losing it. We take that vacation.

If you’re not allotted vacation, you don’t fear losing it, and are less likely to take any at all. The “use it or lose it” rule built into many traditional policies sounds like a limitation, but it actually encourages people to take a break.

And here’s a last slide: