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In the 1990s, I liked to rent VHS videos from the Blockbuster down the street from our house. I’d take two or three at a time and return them quickly to avoid late fees. Then one day I moved a pile of papers on the dining room table and saw a cassette that I’d watched weeks ago and forgotten to return. When I took the movie back to the store, the woman told me the fee: $40! I felt so stupid.
Later, that got me thinking. Blockbuster made most of its margin from late fees. If your business model depends on inducing feelings of stupidity in your customer base, you can hardly expect to build much loyalty. Was there another model to provide the pleasure of watching movies in your own living room without inflicting the pain of paying a lot when you forgot to return them?
In early 1997, when Pure Software was acquired, Marc Randolph and I started thinking about opening a movies-by-mail business. Amazon was having good luck with books. Why not films? Customers would rent VHS cassettes from our website and be able to return them via the mail. Then we learned it would cost $4 to mail the VHS cassette each way. There wasn’t going to be a big market. It was too expensive.
But a friend told me about a new invention called DVDs, which would be coming that fall. “They’re like CDs but hold a movie,” he explained. I raced to the post office and mailed myself several CDs (I couldn’t find an actual DVD for my test). Each cost thirty-two cents to mail. Then I went back to my place in Santa Cruz and waited anxiously for them to arrive. Two days later they dropped through the mail slot, unharmed.
In May 1998, we launched Netflix, the world’s first online DVD rental store. We had thirty employees and 925 movie titles, which was almost the entire catalog of DVDs available at the time. Marc was the CEO until 1999, when I took over and he became one of our executives.
By early 2001, we’d grown to 400,000 subscribers and 120 employees. I tried to avoid the leadership fumbles of my Pure Software days, and although we avoided implementing excessive rules and controls this time, I also couldn’t characterize Netflix as a particularly great place to work. But we were growing, business was good, and work for our employees was OK.
Then, in the spring of 2001, crisis struck. The first internet bubble burst, and scores of dot-coms failed and vanished. All venture capital funding stopped, and we were suddenly unable to raise the additional funds we needed to run the business, which was far from profitable. Morale in the office was low, and it was about to get lower. We had to lay off a third of our workforce.
I sat down with Marc and Patty McCord—Patty had come with me from Pure Software and was head of Human Resources—and we studied the contribution of each employee. We didn’t have any obviously poor performers. So we divided the staff into two piles: the eighty highest performers who we would keep and forty less amazing ones we would let go. Those who were exceptionally creative, did great work, and collaborated well with others went immediately into the “keepers” pile. The difficulty was that there were many borderline cases. Some were great colleagues and friends but did adequate rather than great work. Others worked like crazy but showed uneven judgment and needed a lot of hand-holding. A few were exceptionally gifted and high performing but also complainers or pessimists. Most of them would have to go. It wasn’t going to be easy.
In the days before the layoffs, my wife remarked how on edge I was, and she was right. I worried that motivation in the office would plummet. I was convinced that, after I’d let go of their friends and colleagues, those who stayed would think that the company wasn’t loyal to employees. It was bound to make everyone angry. Even worse, the “keepers” would have to shoulder the work of those let go, which seemed certain to lead to bitterness. We were already short on cash. Could we bear a further collapse in morale?
The day of the layoffs arrived, and it was awful, as expected. Those who we laid off cried, slammed doors, and shouted in frustration. By noon it was finished, and I waited for the second half of the storm: the backlash from the remaining employees. . . . But, despite some tears and visible sorrow, all was calm. Then, within a few weeks, for a reason I couldn’t initially understand, the atmosphere improved dramatically. We were in cost-cutting mode, and we’d just let go of a third of the workforce, yet the office was suddenly buzzing with passion, energy, and ideas.
A few months later the holidays arrived. DVD players were popular that Christmas, and by early 2002, our DVD-by-mail subscription business was growing rapidly again. Suddenly, we were doing far more work—with 30 percent fewer employees. To my amazement, those same eighty people were getting everything done with a passion that seemed higher than ever. They were working longer hours, but spirits were sky-high. It wasn’t just our employees who were happier. I’d wake up in the morning and couldn’t wait to get to the office. In those days, I drove Patty McCord to work every day and when I swung up to her house in Santa Cruz, she would practically leap into the car with this big grin: “Reed, what’s going on here? Is this like being in love? Are these just some wacky chemicals and this thrill is going to wear off?”
Patty had put her finger on it. The entire office felt like it was filled with people who were madly in love with their work.
I’m not advocating for layoffs, and fortunately we haven’t had to do anything like that at Netflix since. But in the days and months following those 2001 layoffs, I discovered something that completely changed the way that I understand both employee motivation and leadership responsibility. This was my road to Damascus experience, a turning point in my understanding of the role of talent density in organizations. The lessons we learned became the foundation of much that has led to Netflix’s success.
But before we go on to describe those lessons, I should give Patty a proper introduction because she played a critical role in the development of Netflix for over a decade, and her protégé, Jessica Neal, runs HR for Netflix today. I first met Patty McCord while at Pure Software. In 1994 she called the office out of the blue and asked to speak to the CEO. My younger sister was answering the phones in those days, and she put Patty right through. Patty was raised in Texas, which I could hear faintly in the way she spoke. She said she was currently working for Sun Microsystems in the HR department, but she’d like to come to Pure Software and run HR for us. I invited her in for a cup of coffee.
During the first half of the meeting, I couldn’t understand anything Patty was saying. I asked her to tell me her HR philosophy, and she said: “I believe that every individual should be able to draw a line between their contribution to the corporation and their individual aspirations. As the head of human capital management, I would work with you, the CEO, to increase the emotional intelligence quotient of our leadership and improve employee engagement.” My head started to spin. I was young and unpolished and after she stopped, I said: “Is that how all HR people speak? I couldn’t understand a word. If we are going to work together you are going to have to stop talking like that.”
Patty was insulted, and she told me so straight to my face. When she got home that evening and her husband asked her how the interview had gone, she told him, “Bad. I got in a fight with the CEO.” But I loved the way she told me exactly what she thought of me. So I gave her the job, and since then we have had a frank, long-lasting friendship, which has persisted even after her departure from Netflix. It may be partly because we’re so different: I’m a math wonk and a software engineer, she’s an expert in human behavior and a storyteller. When I look at a team, I see numbers and algorithms that connect the people and discussions. When Patty looks at a team, she sees emotions and subtle interpersonal responses that are invisible to me. Patty worked for me at Pure Software until we sold it in 1997, and she joined us early at Netflix.
Patty and I spent dozens of car rides following the 2001 layoffs trying to figure out why the work environment had taken a sharp turn for the better and how we could maintain this positive energy. We came to understand that what Patty referred to as our dramatic increase in “talent density” was behind the improvements.
Every employee has some talent. When we’d been 120 people, we had some employees who were extremely talented and others who were mildly talented. Overall we had a fair amount of talent dispersed across the workforce. After the layoffs, with only the most talented eighty people, we had a smaller amount of talent overall, but the amount of talent per employee was greater. Our talent “density” had increased.
We learned that a company with really dense talent is a company everyone wants to work for. High performers especially thrive in environments where the overall talent density is high.
Our employees were learning more from one another and teams were accomplishing more—faster. This was increasing individual motivation and satisfaction and leading the entire company to get more done. We found that being surrounded by the best catapulted already good work to a whole new level.
Most important, working with really talented colleagues was exciting, inspiring, and a lot of fun—something that remains as true today with the company at seven thousand employees as it was back then at eighty.
In hindsight, I understood that a team with one or two merely adequate performers brings down the performance of everyone on the team. If you have a team of five stunning employees and two adequate ones, the adequate ones will
sap managers’ energy, so they have less time for the top performers,
reduce the quality of group discussions, lowering the team’s overall IQ,
force others to develop ways to work around them, reducing efficiency,
drive staff who seek excellence to quit, and
show the team you accept mediocrity, thus multiplying the problem.
For top performers, a great workplace isn’t about a lavish office, a beautiful gym, or a free sushi lunch. It’s about the joy of being surrounded by people who are both talented and collaborative. People who can help you be better. When every member is excellent, performance spirals upward as employees learn from and motivate one another.
From the 2001 layoffs, Reed learned that performance—both good and bad—is infectious. If you have adequate performers, it leads many who could be excellent to also perform adequately. And if you have a team consisting entirely of high performers, each pushes the others to achieve more.
Professor Will Felps, of the University of New South Wales in Australia, conducted a fascinating study demonstrating contagious behavior in the work environment. He created several teams of four college students and asked each team to complete a management task in forty-five minutes. The teams who did the best work would receive a financial reward of one hundred dollars.
Unbeknownst to the students, some teams included an actor, who played one of several roles: a “Slacker” who would disengage, put his feet up on the table, and send text messages; a “Jerk” who would speak sarcastically and say things like, “Are you kidding me?” and “Clearly, you’ve never taken a business class before”; or a “Depressive Pessimist” who would look like his cat had just died, complain the task was impossible, express doubt that the team could succeed, and sometimes put his head on the desk. The actor did so without tipping off the rest of the team that he was anything other than a regular student.
Felps first found that, even when other team members were exceptionally talented and intelligent, one individual’s bad behavior brought down the effectiveness of the entire team. In dozens of trials, conducted over month-long periods, groups with one underperformer did worse than other teams by a whopping 30 to 40 percent.
These findings flew in the face of research going back decades, which suggested that individual team members conform to group values and norms. The behavior of the one individual quickly spread to the other group members, even though the groups were together for only forty-five minutes. As Felps explains, “Eerily surprising was how the others on the team would start to take on his characteristics.” When the impostor was a slacker, the rest of the group lost interest in the project. Eventually someone else would announce that the task just wasn’t important. If the actor was a jerk, others in the group also started being jerks: insulting one another, speaking abrasively. When the actor was a depressed pessimist, the results were the starkest. Says Felps: “I remember watching this video of one of the groups. You start out all the members are sitting up straight, energized, and excited to take on this potentially challenging task. By the end they have their heads actually on the desk, sprawled out.”
···
Felps demonstrated what Patty and I had already learned in 2001. If you have a group with a few merely adequate performers, that performance is likely to spread, bringing down the performance of the entire organization.
Most of us can remember moments in our own lives when we have seen this principle of infectious behavior play out firsthand, as I did when I was twelve years old.
I was born in 1960 in Massachusetts. I was a pretty average kid with no particular talent or standout ability. When I was in third grade, we moved to Washington, DC. Things would have been OK there, and I had a big group of friends, but on the sixth and seventh grade playground, there was one boy, Calvin, who began to organize fistfights. It wasn’t that he picked on or bullied any of us. But this one kid, otherwise unremarkable, created a pattern of behavior that impacted the way the rest of us behaved and responded to one another. I didn’t want to join in, but the shame of not fighting would have been worse than taking part. And it really mattered for the whole day who won or lost their fight. Without Calvin, our way of responding to one another and playing together would have been dramatically improved. When my father told us we were moving back to Massachusetts, I couldn’t wait to leave.
After the 2001 layoffs, we realized that at Netflix we also had a handful of people who had created an undesirable work climate. Many weren’t great at their jobs in myriad little ways, which suggested to others that mediocre performance was acceptable, and brought down the performance of everyone in the office.
In 2002, with a new understanding of what makes a great place to work, Patty and I made a commitment. Our number one goal, moving forward, would be to do everything we could to retain the post-layoff talent density and all the great things that came with it. We would hire the very best employees and pay at the top of the market. We would coach our managers to have the courage and discipline to get rid of any employees who were displaying undesirable behaviors or weren’t performing at exemplary levels. I became laser-focused on making sure Netflix was staffed, from the receptionist to the top executive team, with the highest-performing, most collaborative employees on the market.
This is the most critical dot for the foundation of the whole Netflix story.
A fast and innovative workplace is made up of what we call “stunning colleagues”—highly talented people, of diverse backgrounds and perspectives, who are exceptionally creative, accomplish significant amounts of important work, and collaborate effectively. What’s more, none of the other principles can work unless you have ensured this first dot is in place.
▶ TAKEAWAYS FROM CHAPTER 1
Your number one goal as a leader is to develop a work environment consisting exclusively of stunning colleagues.
Stunning colleagues accomplish significant amounts of important work and are exceptionally creative and passionate.
Jerks, slackers, sweet people with nonstellar performance, or pessimists left on the team will bring down the performance of everyone.
THEN INCREASE CANDOR . . .