Reed Hastings’ Six Lessons for the Newspaper Industry

Reed Hastings has been on a rollercoaster ride in the 13 years since he founded Netflix. From punchline to genius to toast to genius and back, several times over, it seems. In a talk Tuesday night in his hometown of Santa Cruz with TechCrunch’s Sara Lacy, so-sponsored by UC Santa Cruz, he talked about the ride and his learnings. He’s a thoughtful guy, with experiences well beyond the movie rental business. Most significantly, he’s a leader in education reform, and plainly well-informed about the news business crisis.

Though he mentioned the newspaper industry only in a single passage — “There’s a special case around newspapers that’s been different…a ton of highly profitable regional monopolies that employed way more journalists than you needed if you had national reach” — his building of a company with almost 10 million subscribers is noteworthy. That’s five times the number of subscribers of the country’s leading newspaper. The number, though, isn’t important; it’s the Netflix, and Hastings’, philosophy that’s worth applying.

Six quick lessons:

1. Spend your time on tomorrow, not today: “The percentage of our time we spend on DVD by mail [still Netflix's biggest revenue source by far] is tiny. We’re entirely focused on streaming.” Most newspaper companies’ organization and usage of staff time is focused on print. That means it is facing today, if not yesterday. Expend as few resources on the current operating model as possible, says Hastings, and run to the future. Put your best minds there — and most of your company. “We knew that the DVD business was temporary when we founded the company. That’s why we named it Netflix and not DVD by mail. We wanted to become Netflix.” Whatever the brand name, aspire to what and who you want to become.
2. Savor the economics of digital distribution: “It costs us about a dollar, round-trip, to send DVDs by mail. It costs us less than a nickel to deliver by streaming.” Netflix now spends $600 million a year on the postal service [note to Jim Cramer: short USPS now!] and lots of hourly labor checking DVD quality. In the new world the costs evaporate — and quality and timeliness improve. For news publishers, the switch to digital media offers huge savings, at least 60% and probably more. Further, the switch removes concerns extraneous to the two things digital news companies will need to do: please readers and please advertisers.
3. Don’t sweat the timeline: “In 1997, we said that 50% of the business would be from streaming by 2002. It was zero. In 2002, we said that 50% of the business would be from streaming by 2007. It was zero….Now streaming has exploded….We were waiting for all these years. Then, we were in the right place at the right time.”  Hastings’ point is that business strategy is about preparation, having a good sense of where consumer habits lie and then being ready to take advantage of them. Companies can’t predict timelines, dependent on technology and much else, but can be ready, when the market is ready.
4. Play chess, not monopoly: If regional monopoly killed the old newspaper industry, then Hastings believes chess playing is basic to company comebacks. “The key here is to be a good chess player. The key to business strategy is to separate real threats from others. Blockbuster was concerned about VOD [video on demand]. They saw DVD by mail and didn’t think it was a threat. If they had launched [a Netflix-like service] a few years earlier [than 2004], they might well have won.” What indeed are the threats to the news industry? Is it that readers simply have to be “re-trained” to pay? Is it Apple’s new middleman role? Or is it the great ongoing advertising revolution, which is changing the whole nature of buying and selling, and may determine publishing fortunes far more greatly going forward? Hastings’ point: pick your spots.
5. The presentation revolution is still to come: “The IP revolution gives you tremendous flexibility on interface.” An amateur historian of tech revolutions, Hastings ran through the decades of mobile phone change, reminding us the distance between Gordon Gekko’s big, blocky mobile phone on the beach in the original (1987) Wall Street, the intermediate steps of car phones, StarTacs, Palms and, finally, the iPhone. TV is in for the same revolution, he says, as the cable guides of today succumb to the Google TVs and Apple interfaces of tomorrrow. Lesson here for newspaper companies; think what kinds of presentations soak in the social, video and on-the-go tools of the day, the effects that clearly delight consumers. And don’t simply beat a retreat to the newsprint presentations that preceded Web 1.0.
6. Culture counts. Hastings talked at some length about the culture he’s built at Netflix, a winner in “great places to work” contests. He talked about working in a place with people you want to work with and people who value excellence, chords that should send a shiver down the spines of too many news publishers. “If there is a God we worship, it is the god of excellence.”

Why didn’t Walmart kill Netflix, Lacy asked at one point, given its tremendous size and scale. Hastings turned the question, in part, back on the news business, “You could just have a bunch of news….”  His point, a big one for the news industry at this pivotal juncture: it’s not the stuff, it’s what you do with the stuff to please customers. Netflix isn’t about simply getting you a movie. It’s the recommendation engine and lists, the customer-pleasing, no-late-fees (remember when this was a huge issue), its easy-to-use interface and its social/sharing emphasis, among other features that let it distinguish itself in consumers’ minds.

In an age where, there are bunches and bunches of news, this point is a huge one. As the tablet age, in particular, dawns, it’s not about re-purporsing bunches of news; it’s about delivering that news in ways that delight and satisfy audiences. We’ve seen remarkably little innovation along those lines in 2010; will 2011 be much different?

1. 

   Karl Pearson-Cater says:

   October 6, 2010 at 2:17 pm

   Very good post. There are some good nuggets to think about. However, the comparison is a little off? Netflix does not produce any of the movies it distributes. Newspapers create a lot of the content it distributes. Would Netflix be as successful if it had to budget to create it’s own movies to rent? Still a good post — not trying to destroy it. Perhaps suggesting “lessons for the newspaper industry” was a little too strong of a conclusion.
2. 

   Ken Doctor says:

   October 6, 2010 at 3:22 pm

   Karl: Thanks. You are right; certainly not a one-to-one comparison in a number of ways. Yet, I think the news industry has to look outside itself whenever possible, borrowing ideas and models, and fitting them as makes sense. Lots to learn here and from the Blockbuster experience as well. Ken
3. 

   Joshua Karp says:

   October 7, 2010 at 5:38 am

   It’s an interesting article. The only thing that Reed doesn’t consider is that sometimes, it’s just nice to read something in paper. I (for obvious reasons), don’t care about the additional “non-digital” delivery cost. There are some things that simply aren’t better online. When you want to consume information, really focus on it and enjoy it, there will never be as good a method than on paper.
4. 

   Matthew Quint says:

   October 7, 2010 at 7:01 am

   Thanks for sharing this summary of Hasting’s talk. It was fascinating to find out that he felt video on the internet was the future of the business when it was founded. Launching Watch Instantly in 2007 certainly did lead to an explosion of interest in the company, and is pushing the entire industry.

   I also agree with Karl’s sentiments that the challenges of being a content producer and distributor are even more challenging. But Hasting’s is right that the news industry needs to be looking ahead to determine how the public will most want to ingest their news, and how they can deliver a robust interactive experience to them and to advertisers.
5. 

   Jayasimhan says:

   October 7, 2010 at 11:18 am

   Redbox and all other competitors will lose to Netflix on the late fees play, unless they get innovative about it. Being late and forgetfulness is ingrained in people. Punishing them with late fees will always drive them away from the service. Netflix gets it.
6. 

   Michelle Teheux says:

   October 7, 2010 at 11:23 am

   Tell me, when will we be treated to business advice from someone who has gotten rich selling fishing bait? It would have about as much in common with the news business as Netflix does. For starters, we produce news. Netflix doesn’t produce its own content. Secondly, his revenue is all from subscriptions. Most of ours comes from advertising. Yes, we could make plenty of money if we only had to pass on content via the web. That’s easy. Lots of people are doing it. What nobody has figured out how to do so far is how to make enough money with online advertising to pay for the cost of supporting a newsroom. I’m pretty sure I have a lot better idea of how much it costs to run a newsroom than Hastings, but he doesn’t even bring it up … because he knows nothing about the news biz. He can talk all he wants about different ways to deliver the news, and that’s fine. But it still doesn’t solve our primary problem of trying to figure out how to make enough money to support a newsroom. Maybe we should start delivering a free movie with every news subscription?
7. 

   Britt Miles says:

   October 8, 2010 at 7:11 am

   Michelle:

   CNN weekend edition and ABC-News Now has proven can stay profitable and employ reporters by become “edutainment”, giving you information that the ordinary citizen could use to live a safer and more productive life. Reid Hastings is one of the most successful entrepreneurs in the field of entertainment delivery.

   Reed Hastings is a master at not only surviving but also thriving in internet entertainment delivery. The stock in Netflix, Reed Hastings’ company, is one of the business world’s wonders. It’s had an 800% increase in value in two years. Single shares of Netflix (NFLX) went from $6.50 in 2002 to $22.50 in Dec 2008 to $180 last week. During the same period many newspapers have become defunct. Newspapers must evolve or die. To survive, they must provide more local, useful credible content than blogs and be able to deliver it, for a fee, to kindle or an Ipad. The Wall Street Journal has been wildly successful in adapting to the internet by allowing a short two paragraphs of all of its stories to be freely available on the web. They require payment before the rest of the story will be revealed.

   Although movies such as Broacast News sneered at “edutainment” as the reporter manipulating the content of the news. This kind of offense can be guarded against. The point is that the newspapers can no longer be solely about hard news stories. It’s about informing people in a timely way. This can be lifesaving and just as important as “hard news”.

   Let me give an example from my life. The Ocmulgee River flooded the roadways in Macon Georgia in 1993, 17 years ago. A large female reporter, Candy Crowley(?), spoke on the local television AM news about a how tempting it is to drive over a couple of inches of overflow on the bridges. She knelt down to a shallow stream of water overflowing a bridge, the one that I had to cross to get to work. She said, “I wouldn’t” and showed the video of a truck that had been swept through the guardrail into the river by two inches of overflow over the bridge.

   That woman saved my life! If I hadn’t watched her I would have crossed that same bridge and might have lost my life. Crowley educated me about the danger of overflow across a bridge. In response, I wrote a thank-you letter to the local station for that report.

   Sometimes we, the public, need to know more than simply “what happened.” We need to know why this is a danger and what we can do to stay safe.
8. 

   Britt Miles says:

   October 8, 2010 at 7:28 am

   Michelle:

   CNN weekend edition and ABC-News Now showed how to stay profitable and employ reporters by become “edutainment”, providing information that the ordinary citizen could use to live a safer, more productive life. Reid Hastings is one of the most successful entrepreneurs in the field of entertainment delivery. The stock in Netflix has increased 800% in two years.

   In the last five years, many major newspapers have become defunct. must To survive, newspapers must provide more local, useful credible content than blogs and be able to deliver it, for a fee, to kindle or an Ipad. The Wall Street Journal has been wildly successful in adapting to the internet by allowing a short two paragraphs of all of its stories to be freely available on the web. They require payment before the rest of the story will be revealed.

   Although movies such as Broacast News sneered at “edutainment” as the reporter manipulating the content of the news. This kind of offense can be guarded against. The point is that the newspapers can no longer be solely about hard news stories. It’s about informing people in a timely way. This can be lifesaving and just as important as “hard news”.

   Let me give an example from my life. The Ocmulgee River flooded the roadways in Macon Georgia in 1993, 17 years ago. A large female reporter, Candy Crowley(?), spoke on the local television AM news about a how tempting it is to drive over a couple of inches of overflow on the bridges. She knelt down to a shallow stream of water flowing across a bridge, the one that I had intended cross in 15 minutes to go to work. She asked, “Would you cross this? I wouldn’t.” Then she showed the video of a truck 40 below with river water flowing over it. It had been swept through the guardrail into the river by two inches of overflow.

   That woman saved my life! If I hadn’t watched her I would have crossed that same two inches of overflow on the bridge. Crowley educated me about the danger of overflow on a bridge. In response, I wrote a thank-you letter to the local station for that report.

   Sometimes we, the public, need to know more than simply “what happened.” We need to know why this is a danger and what we can do to stay safe.
9. 

   Jeff Sonderman says:

   October 8, 2010 at 12:00 pm

   Geez people, of course we know Netflix isn’t in the news business. That is not the point. The article is about the need for ANY business to be smarter about it’s strategic planning and positioning relative to the changes in its industry. And the points on that matter are very relevant to newspapers, which are terrible at doing this.

   A couple specific replies…

   Josh: Not everyone feels the same about reading on paper. I don’t prefer to read things on paper. Paper is less portable, sharable, storable, saveable. It bends, wrinkles and tears and is harder to hold in a readable position. And it’s bad for the environment, especially when you’re printing commodity daily news on it that will be thrown away in bulk.

   Michelle: Stop trying to “make enough money to support a newsroom” and start trying to make a newsroom that can work off the money available online. Start at zero and prioritize and grow into it.. you’ll never get there trying to protect your legacy costs and structure.
10. 

    Michelle Teheux says:

    October 8, 2010 at 10:14 pm

    Jeff, I am guessing you don’t work in a newsroom. How would you presume to obtain coverage of city hall, the courts, local sports, obituaries, school news, community activities, local business … in short, all the things going on in a community, without paying reporters and photographers? You call it “legacy costs and structure.” I call it “having a staff that does the work.” Like most small-town papers, we have a very small and very hard-working staff.

    And Britt, surely you realize the WSJ is not a community newspaper. It can charge for its online content in a way a newspaper providing community news simply cannot. It has a nationwide audience much like a magazine does, and it has specialized financial content a large number of people nationwide need to be successful.

    Online advertising simply is not as lucrative as print advertising. Print advertising has always brought in the bucks needed to pay the gal who covers city hall and the guy who covers high school football. Online advertising is not as profitable. A website that caters to a very large geographical area might be able to make this work. Or a website that publishes opinion pieces and passes on content produced by a real life reporter employed by someone else can make money this way.

    But if you have to support even a handful of entry-level journalists, you need a lot more revenue than you can make on online advertising, at least as things stand now.

    I really wish I were wrong about this. I would worry less about my future if I thought we could all switch easily to online. But anyone who thinks online advertising can support even a stripped down newsroom quite simply knows nothing about this business.
11. 

    Steve Woodward says:

    October 9, 2010 at 10:21 am

    I have to agree with Jeff Sonderman. These are universal lessons for any industry in decline, not just newspapers. I spent 30 years at major metro dailies and business weeklies as a reporter and editor. I left two years ago to start my own new-media venture, largely out of frustration that the industry was too caught up in self-pity and denial.

    To Hastings’ points:

    1. Spend your time on tomorrow, not today. Even as it became obvious that ad revenues would no longer support the legacy print model, most editors kept their resources focused on print. Few had the foresight to switch to a minimum viable print product and shift the bulk of resources to digital. In effect, they assigned a few people to the front lines and sent everyone else to fight a rear-guard action.

    2. Savor the economics of digital distribution. As print disappears, so does the need for $50 million Goss presses, paper, press operators, back shops and so on. Software templates reduce the need for page designers. The cost structure changes in a way that can support a smaller, but still productive staff on lower revenue.

    3. Don’t sweat the timeline. Netflix was extraordinary in foreseeing the future and preparing for it. Newspapers, on the other hand, are still trying to migrate the old paid-circulation model to the Web. The magazine industry, at least, is trying to anticipate the future with its many tablet editions, even if that future proves to be years ahead of now.

    4. Play chess, not monopoly. Hastings is spot-on in saying we must separate perceived threats from actual threats. An amazing revolution is under way in the advertising industry, as delivery systems, metrics and the ads themselves become smarter. The online publishers who understand and embrace these concepts will ultimately checkmate those who search for ways to maintain the status quo.

    5. The presentation revolution is still to come. Papers are filled with extraordinarily talented page designers and graphic artists. How many of them are assigned exclusively to design online pages, interactive graphics and new websites? Almost none, because they are too busy designing for print.

    6. Culture counts. Now that I’ve been a new-media entrepreneur for two years (and a tech reporter and editor through the dot-com craze and crash), I can tell you that the cultures are like night and day. Online startups assume that nothing is impossible. In fact, they spend every day creating things that never before existed. In contrast, newspaper staffs spend every day creating a product that would be instantly recognizable to Ben Franklin. They have been conditioned to think that innovation consists of switching typefaces or replacing 2-point rules with 1-point rules. Changing that culture is both monumentally difficult and monumentally important. Otherwise, reorienting an organization toward the future may be a lost cause.
12. 

    Cristian Arturo Ramirez Fernandez says:

    October 11, 2010 at 6:52 pm

    POR FAS
13. 

    Michelle Teheux says:

    October 15, 2010 at 8:57 pm

    So tell me then, Steve … exactly how many reporters/fotogs/etc. do you think it would take to even minimally cover a small town? How many sales people? You have to have at least one biz office person to do billing and payroll and such. Let’s say you decide that by cutting out all press and circulation people that you can struggle by with four reporters (including sports), one editor/manager/publisher type person, one sales person, one designer, one fotog. Now let’s say they all agree to work for an average of $25,000, including all benefits. You’re up to $200,000 without ever buying a computer or renting an office, not to mention any other cost of doing business. Do you REALLY think you can get anything approaching that much online advertising revenue in any but very large towns? If you’re talking larger towns, you’re talking more people needed, so it doesn’t work either way. The web sites that can make money by depending on online ads are NOT employing more than a handful of people to create original, local content. If you want to know what happened in court today or at the city council meeting last night, you have to pay someone to collect that info and turn it into content that can be printed or posted. You don’t have to pay them a lot but you do have to pay them something. If you can find an example of this being done, please let me know. Because I’d seriously love to be proven wrong!
14. 

    Raj N says:

    October 26, 2010 at 1:46 pm

    Nice post ..and discussion . All I can say is that time is right for Print publications to leverage next generation technologies and transition to be digital publications.

    Who ever thought Amazon would kill Barnes & Noble
    Who ever thought Blockbuster would loose to Netflix

    Did i mention , Amazon posted record sales of Kindle. While there are printed books , people are still buying digital books .. this clearly shows the shift in the market , users want less paper and stacks of books/papers in their book shelves ..

    Do not forget the newer generation – Teens and youngsters using ipads, iphones, tweeting, blogging etc.. after all this is your market …