Netflix’s Reed Hastings: the ‘system builder’ who brought revolution

Reed Hastings, who stepped down as Netflix chief executive on Thursday, co-founded a company that has became the byword for a tech revolution in the entertainment business. But, by his own admission, the 62-year-old is no inventor.

As a computer science student at Stanford University in the 1980s he dabbled in reimagining hardware, with ambitious plans for a “foot mouse” that would avoid hands straying from the keyboard. He generously summed up that project as “a disaster”.

Netflix’s early experimentation was not much better. The 25-year-old company first tested movie downloads in 2000 when it explored alternatives to mailing out rental DVDs in red envelopes. But broadband was so slow that it took more than half a day for the film to download — and incurred internet fees higher than the movie cost to rent.

While admiring “one in a billion” inventors such as Elon Musk, Hastings saw himself playing a different role. He told the Financial Times in 2020: “For the rest of us it is really about trying to build a system.”

He did so with a disruptive force that not only sealed the fate of his rental rival Blockbuster, but ultimately reset the Hollywood model for making and selling video entertainment.

John Malone, the billionaire who mastered the shift to cable, joked that Netflix shareholders should build a statue to the founder; Hastings floated Netflix as a one dollar stock in 2002 and built it into a $150bn business trading at about $336 a share. Hastings himself owns a stake worth more than $1.6bn today.

“He really broke the mould with his success,” Malone said in November. “He was there early . . . A lot of people are regarding [Netflix] now as a foundational programming service. I just attribute it to his excellent execution.”

Under the plan announced this week, Hastings will continue as an executive chair but hand day-to-day operations to two co-CEOs — Ted Sarandos and Greg Peters — who have worked alongside him for about 25 years and 15 years respectively. They take the reins of a company that has swapped the role of disrupter for that of dominant incumbent: Netflix is now the only profitable big streaming service in the world, with a subscriber base of 231mn and annual content budget of roughly $17bn.

The challenge for Sarandos and Peters is whether the Netflix system can keep pace with breakneck change still ripping through the entertainment business — and actually deliver returns that come anywhere close to those of the traditional television model in its heyday.

One rival media executive compared Hastings’ influence on the industry to “the pied piper” — luring legacy media companies towards their demise with an expensive bet on subscription streaming that has left them nursing billions in losses. “None of us know whether this business will pay off,” he said.

Hastings’ chosen successors, Peters, a polyglot with a background in tech, and Sarandos, who has built the entertainment side, are confident that cable-style margins of 40 per cent plus are ultimately possible as streaming matures. Sarandos on Thursday described Netflix’s business as still in its “infancy”; it accounts for just 8 per cent of television viewing in America.

But investor faith in Netflix is not what it was. Shares in the streaming group were hammered last year after subscription growth stalled and the stock remains 55 per cent off its 2021 peak.

The succession plan effectively keeps in place the top trio running the business, with reallocated roles. Both Sarandos and Peters not only saw Hastings borrow ideas to shape the Netflix business, but often saw the projects through themselves.

Peters was managing the digital division when Netflix eventually did break into streaming in 2010, a full five years after the emergence of YouTube Driven by Sarandos, who joined Netflix in 2000 and has been co-CEO since 2020, the company then deliberately mimicked HBO in moving from distribution into making its own shows. Sarandos’s big bet was placed without explicit approval from Hastings: spending $100mn on House of Cards, one of Netflix’s first breakout hits.

But it remains to be seen what role Hastings, whose singular style has shaped the Netflix corporate culture, will continue to play at the company. He prides himself on clarity and radical honesty, which at times has unnerved his partners.

The Netflix co-founder Marc Randolph recounts in his memoirs how Hastings edged him out as chief executive in 1999 by calling a meeting, straddling a chair, then presenting a deck of slides on his shortcomings. “He pursed his lips, looking down at the screen like it was a set of cue cards . . . ‘I’m worried about us’,” Randolph described Hastings as saying. “‘Actually, I’m worried about you. About your judgment’.”

Hastings’ proposed solution was making Randolph co-CEO. It is exactly the same kind of unorthodox leadership arrangement Hastings shared with Sarandos, and that Sarandos will now share with Peters.

Given their long history working together, some analysts have put little significance on the leadership transition; Tim Nollen of Macquarie argued it was not a “meaningful” change given Hastings was “still on top” as executive chair.

But within Netflix the change in titles is marking a shift in responsibilities that has been evident for some time. Hastings, who spreads mild terror among staff with his habit of turning office meetings into urban strolls, is already less hands-on than in the past, delegating most Hollywood decisions to Sarandos, according to people familiar with the matter.

This may allow his successors to take more risks in diversifying the business. Hastings used to tell colleagues “strategy is pain” as he explained why it was important for Netflix to show discipline and resist straying from its core model of subscription video.

He was one of the last to hold out against creating an ad-supported tier of membership, which Netflix rolled out last year. Some insiders envisage his successors potentially now having more liberty to experiment with gaming, or other distribution models for the company’s shows, whether in cinemas or by licensing its content outside its platform. “There won’t be a radical shift but they might test the boundaries more,” said one Netflix veteran.

Hastings walks towards the stage exit at a pivotal point for the media industry wrestling with how to make streaming profitable. “Rather than being the new sliced bread, investors and executives have accepted that streaming is, in fact, not a good business — at least compared to what came before,” wrote analysts at SVB MoffettNathanson.

Netflix, though, has begun to deliver modest positive returns, with $3bn in free cash flow expected this year. Hastings, who has long had an aversion to companies hoarding cash, has pledged to return anything above minimum levels — roughly two months of revenue — to shareholders.

Meanwhile friends say Hastings’ personal focus will now also be on giving away his own fortune through philanthropy. “That’s the mission,” said one colleague. “He wants to die poor.”