Inside Netflix’s No Rules Rules Culture

“Blockbuster is a thousand times our size,” I whispered to Marc Randolph as we stepped into their headquarters. They were then a $6bn giant that dominated the home entertainment business with almost 9,000 rental stores around the world.

Marc and I had confounded 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 were off to a rocky start. That year alone, our losses would total $57m and we were eager to make a deal.

We suggested that Blockbuster purchase Netflix, and we would develop and run  Blockbuster.com as their online video rental arm. Blockbuster’s CEO, John Antioco asked, “How much would Blockbuster need to pay for Netflix?” When he heard our response – $50m – he flatly declined.

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. By 2010, Blockbuster had declared bankruptcy. By 2019, only a single blockbuster video store remained. Blockbuster had been unable to adapt from DVD rental to streaming.

2019 was also noteworthy for Netflix: our film Roma was nominated for best picture and won three Oscars. Long ago, we had pivoted from our DVD-by-mail business to not just an internet streaming service but a major producer of our own TV shows and movies.

It wasn’t obvious then, but we had one thing that Blockbuster did not: a culture that valued people over process, emphasised innovation over efficiency, and had very few controls. Our culture has allowed us to continually grow and change as the world, and our members’ needs, have likewise morphed around us.

Blockbuster’s story is not an anomaly. Kodak failed to adapt from paper photos to digital. Nokia failed to adapt from flip-phones to smartphones. AOL failed to adapt from dial-up internet to broadband. With Netflix, I hoped to promote flexibility, employee freedom, and innovation, instead of error prevention and rule adherence. I also understood that as a company grows, if you don’t manage it with policies or control processes, the organisation could descend into chaos.

Through a gradual evolution we found an approach for making this work. If you give employees more freedom instead of developing processes to prevent them from exercising their own judgement, they will make better decisions and it’s easier to hold them accountable. This also makes for a happier, more motivated workforce as well as a more nimble company. But to develop a foundation that enables this level of freedom you need to first increase two other elements: build up talent density and increase candour.

Once you start developing this type of culture, a virtuous cycle kicks in. Removing controls creates a culture of “Freedom and Responsibility” (a term Netflix employees use so much that they now just say “F&R”) which attracts top talent and makes even fewer controls possible. All this takes you to a level of speed and innovation that most companies can’t match.

Have you ever wondered what Microsoft’s management challenges are? Find out how they changed their leadership culture.