Netflix and 10x Talent
PLUS: Tesla price cuts, Tinder slowdown.
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Today, we’re talking about the Netflix philosophy of paying top-dollar for 10x talent (PS. if you’re here for TikTok stuff, that’s coming next week).
Also in this email:
Tesla price cuts
Tinder slowdown
And some wild tweets (including firefighter stuff)
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After 25 years, Reed Hastings stepped down as Netflix CEO. Well, technically the co-CEO position he was sharing with Ted Sarandos. Hastings is now Executive Chair and Netflix elevated its COO Greg Peters to co-CEO.
It’s kind of a weird set-up and feels like having three CEOs…which may cause some confusion on important decisions (the one place where there will be zero confusion: every Adam Sandler project is an automatic “yes”).
The Hastings news is a good reason to revisit Netflix’s famous 120-slide “Culture Deck” presentation from 2009. At the time, Netflix was pivoting from DVD to streaming, which it rolled out in the second week of January 2007 (fun fact: Steve Jobs introduced the iPhone in the same week…meaning that seven-day period is responsible for 99.9% of our wasted time).
I remember reading the deck back in the day and a few slides always stood out to me. Specifically, Hastings laid out the rationale for why Netflix was willing to pay above-market rate (1.5x to 2.0x base salaries) for 10x talent.
It should be noted that Netflix’s compensation is heavily skewed towards cash with few bonuses or stock grants. Total compensation at other Big Tech firms — including bonuses and stock — was always in the ballpark of Netflix’s high base pay throughout the 2010s. While it’s easy to look back at FAAMG equity as a no-brainer over the past decade, it’s very understandable why many tech workers opted for Netflix’s guaranteed cash. Today, senior software engineers, data scientists and product managers can easily make $500k+ salaries at the streaming giant.
Not everyone agrees with Netflix’s “offer whatever for top talent” approach. But even with $NFLX’s recent drawdown from pandemic highs, the Hastings philosophy has produced remarkable results over the past 13 years:
headcount from 2k to ~11k employees
subscriber growth from 20m to 200m+
market cap going from $2B to $150B+
a successful transition from DVD-by-mail to streaming
creation of original intellectual property (House of Cards, Stranger Things, Orange is the New Black, The Crown, Bridgerton, Emily in Paris etc.)
Everything Adam Sandler
The following 7 slides explain Netflix’s high-salary approach (warning to all McKinsey consultants: the deck is very ugly).
Netflix competes in media and technology, both are knowledge industries that emphasize creative thinking. High-performing employees in these fields can be 10x better than the average employee. In a "procedural" field like manufacturing, the best employee may only be 2x better than the average. Why? Because industries that deal with atoms are naturally capped (due to physical constraints, a top-tier car maker can’t just 100x their output).
Bill Gates is even more bullish about top creative talent: “A great lathe operator commands several times the wages of an average lathe operator, but a great writer of software code is worth 10,000 times the price of an average software writer.”
(Back when I first read the deck in 2009 while living in Vietnam, I definitely thought to myself “wow, maybe I’m a 10x creative” even though I couldn’t get a job teaching English to Vietnamese kids).
In "procedural" industries (e.g., manufacturing), good processes can often compensate for a lack of "high-performing" creative talent. Processes work very-well for procedural fields because:
It’s about execution (as opposed cranking out new ideas)
You want efficiency and few mistakes (at the expense of flexibility)
The problem is that processes are optimized for existing conditions. However, during market shifts — such as from DVDs to streaming — process-driven companies are ill-prepared to change or adapt quickly.
Netflix competes in fast-moving industries (tech, media) that require creativity, innovation and quick adaptation.
Netflix's ongoing challenge is to scale its business and deal with complexity without introducing more processes (which could limit creative adaptation). To do this, Netflix needed to hire a lot of A+ creative talent.
It did this by offering high-performers:
Tons of freedom
Top-of-market compensation
There are exceptions, though: Hastings said that Netflix shouldn’t hire “brilliant jerks”. While they are 10x producers, the “cost to effective teamwork is too high”.
To reduce business complexity, Netflix focused on a few big projects vs. a lot of small ones. Furthermore, it avoids “efficiency optimization” at all costs.
The flipside of the coin is that if an employee doesn't fit, they'll quickly be dropped. Lastly — and perhaps most importantly — Netflix says its culture is not for everyone:
Hastings and Netflix are clearly strong believers in radical transparency and blunt assessments (Hastings encapsulated the entire philosophy in his 2020 biography No Rules Rules).
This approach is not for everyone (and that’s totally fine).
However, due to slowing subscriber growth and a tough macro market, Netflix has had to reconsider its top-dollar approach over the past year. Per The Information, Netflix has implemented salary bands tied to industry benchmarks. And while managers can still go above market with justification, the bands “bring some discipline to hiring” because without banding it’s “a bit of a free-for-all” (in a funny aside, Netflix maliciously complied with California’s requirement for pay transparency by showing a range of $90k to $900k for a software role).
An interesting stat that reflects the Netflix approach is how much revenue each employee generates: $3m, which is more than Apple ($2.5m), Alphabet ($2.0m), Meta ($1.7m) or Microsoft ($1.0m).
Two caveats: 1) none of the worker stats include contractors; and 2) Netflix looks less good on a free-cash-flow basis (it still brings in $142k FCF per employee, but that’s less than the FAAMG firms with Apple dominating at $680k per employee).
The efficacy of Netflix's approach is being tested again due to a series of new market shifts (higher interest rates, probable recession, subscriber fatigue, streaming and social media competition, and forays into ads and games).
It is too soon to tell if the new regime will be successful. My suggestion: more Adam Sandler.
Links and memes
Tesla Price cuts: Tesla cut prices across its entire line of vehicles from the Model 3 (-6% or $3k) to Model Y (-20% or $13k). The cuts come following pandemic-price increases. While 2022 buyers that paid the higher price are pissed, the cuts will likely secure Tesla’s EV leadership in the US. Here’s a good excerpt from Car Dealership Guy:
Tesla’s abrupt price reductions across the board will lead to its more market share gains in the long run. Kelly Blue Book just released EV sales numbers from Q4, and Tesla’s market share is still at 64.6%, almost 9X the nearest competitor, Ford.
There are speculations that Tesla prices drop is related to the government’s EV credits game as well as the upcoming new battery system that is cheaper to produce. There’re also reports on Twitter that Tesla is likely to increase its presence in rental fleets. In short, Tesla is now paying the same game as traditional manufacturers have been playing for years: sell more to fleets and lower prices.
Some may see this as a sign of trouble, but in reality this is Tesla flexing its manufacturing capacity and profit margins. Not many competitors can easily pull off a move like this without disastrous consequences on profits.
Tinder is slumping: Match Group owns 40+ dating apps including Hinge, OKCupid, Plenty of Fish and Tinder (the company’s big dog, accounting for more than 50% of its ~$3B revenue). Per Bloomberg, the app has seen a drop in downloads over the past year while Hinge and Bumble (founded by a former Tinder co-founder) are growing.
One interesting problem: Tinder had a big early advantage by growing via word-of-mouth and didn’t have to spend on marketing...is was great for margins. However, it became known as a hook-up app while users are increasingly looking for more substantive relationships (for example: Hinge's motto is "designed to be deleted"). So, Tinder — trying to attract more females and Gen-Z users — is revving up its ad spend to rewrite the narrative and highlight successful long-term relationships.
Another way Match is dealing with Tinder’s slowdown is by rolling out a higher-paying tier for “motivated daters”. Tinder is trialling a $500-a-month package. You’re supposed to get stuff like a boosted profile, faster response times but unless that $500-tier comes with a wedding planner…it’s insane.
Tinder is probably the most popular consumer app that I’ve never used. My wife and I got together before Tinder was founded in 2012. I’ve definitely asked my single friends to watch them swipe, though (which sounds quite weird typing out).
…and here are some good tweets.
I’ve made some bad investments in my life. But this might be the most reckless risk/return bet I’ve ever seen. Last week, someone bet $1,400,000 on an NFL playoff game with a winning payout of only $11,200. The person lost the $1,400,000.
I’ve been looking at this for 20 minutes and can’t think of the pun. It looks like someone asked AI to “make me a pun that involves Chorizo” and the AI was forced to give an output…and even though it made no sense, the person went with it:
Long-time SatPost readers know that I love discovering new meme formats. Here’s a recent gem: Prince Harry’s biography “Spare” is a complete takedown of the Royal Family. So, people are now using the cover of the book — which is just Prince Harry’s face — as a shorthand for giving “bad reviews” to various services. It’s gold:
Finally, here are two really funny failed Tinder convos:
Great post. Also Netflixed by Gina Keating is great for the founding story of Netflix and fall of Blockbuster