Hello, I'm Nakata Atsuhiko. Let's jump right into the lecture! Extreme modern society, episode on 'The Success of Netflix'! I'm back with 'Kurohune'. 'Kurohune' called Netflix, along with YouTube shook up the media industry. As all of you know, thinking 'Netflix? You have to pay money to watching something?' 'You can just watch TV.' 'I'm going to borrow a DVD from "Tsutaya" is outdated. All the episodes are on Netflix. All 'Demon Slayer' episodes 'Crash Landing on You' episodes 'Itaewon Class' episodes are there, you can watch movies too and the monthly subscription fee is cheap as well. We spend each day trying to decide whether to watch Netflix or YouTube. You can watch it on smartphones, tablets, and even on the big screen of televisions. This culture has become the norm now. And the demands from those staying at home. We can't go anywhere because in this era of COVID-19, everyone is advised to stay home and practice social distancing. We can't go to theaters and cinemas. We're always home. If you ask someone what he's doing, he'll say that he's been watching Netflix or YouTube all day long. The number of members increased accordingly. Actually, there are many interesting things on there. 'Can't you just borrow a DVD?' No, there is something called Netflix original. This is an interesting thing that you can only watch on Netflix. For example, 'The Naked Director'. 'The Naked Director' has become a hot issue, right? 'What is that? It sounds weird.' But top actors like Takayuki Yamada are in it and the production costs are unbelievable. It really became a hot issue. It's adding more Korean dramas as well. It's very fascinating. I mean this. But if you think about the company Netflix isn't it a service that you take for granted but at the same time you're thankful about? Even the original shows have subtitles and they create huge contents with the monthly subscription fee they collect directly from customers, it's amazing. But! This company wasn't like this from the beginning. It overcame a huge crisis once and innovated itself four times to become the company that it is today. This. Over 22 years of innovation, Netflix became the company that it is today. What is this company? Do you know how it started its business? Which business did the company start with? Actually, it began as a postal DVD rental service. What? 'What is that, is that like Tsutaya?' you are correct. Actually back in the day, when we think of video rental service, we think Tsutaya, right? In America, they have a super conglomerate called Blockbuster. They rented videos from Blockbusters. But the founder questioned its business. Isn't there something that can defeat the business style of Blockbuster? Now, this is today's reference. "No Rules Rules: Netflix and the Culture of Reinvention" which is written by the co-founder, president and CEO of the company Wilmot Reed Hastings, Jr. The most liberal company in the world, Netflix. How did Netflix take over the world? He completely changed the position of Netflix, which was a very small company compared to Blockbuster and Tsutaya in Japan back in the day, over the course of 22 years. That's right. Blockbuster went bankrupted in 2010, just at the mid-point during the recent 20 years. They were destroyed. The huge conglomerate Blockbuster went bankrupted and barely saved one shop in some state in the U.S. This is a complete change of situation. The, what happened? Netflix was originally like…. a suck fish of Blockbuster. It was a business that was squeezing itself between a small crack. Blockbuster is a business which rents out DVDs and VHS. I owed a lot to Tsutaya when I was in high school. I rented a VHS, a comedy video from Tsutay in Shibuya every week and studied comedy from it back in the day. Going to a theatre to watch something was expensive and buying a video was expensive too… I wanted to buy a comedy VHS once and it costed 8000 yen. Was it 6000 yen? It really costed that much. So I had to rent it because I was in university. But Mr. Reed, the founder of Netflix, thought A video rental business only makes money on late fees. Have you ever thought about this? Usually you rent a video for 3 nights and 4 days. Renting it for a week is too long and returning it on the day is just too much work so you think about renting it for 3 days. And you rent it for 3 nights and 4 days. But do you only rent one? You usually rent about four. It's a hassle to rent each one separately, so you rent three or four videos that you want to see. You watch two of them on the day, another one the next day, and the other one on the day of returning them. But you end up falling asleep after watching one. And you have three videos left. But the next day, your friend asks you if you want to hang out with him. He wants to go somewhere, so you go to Disney land. Then obviously, you would get tired and fall asleep. Now the next day, you have a pile of homework that you must get through. You only watched one and there are still three more videos to watch. You think about extending the rent but that idea drifts away soon. Then one day, you realize and find the videos under your desk. 'I rented this a week ago!' But you still only watched one of them. You hurry over to the shop to return them anyways. Late fees are super expensive. If I knew this would happen, I would have rented them for a week. All of you who are Digital Natives probably don't know this, right? Video rental service is a very unforgiving business model for customers, you would probably think 'what is that?', it's really hard to understand this. Right? 'If you forget, we're going to charge you more~' That's how it is. Then there's the worst case scenario, when you are thinking of moving 'I've already lived here for 2 years~' and you think about moving and find a video on a shelf, 'gasp!' 'Hey, so I rented this 2 years ago…' I'm sure you all have this experience. You've heard this many times in real life. You rented a video for 2 years and now you have to pay couple hundred thousand yens. Why would you pay couple hundred thousand yens to rent a video? What did you rent for 2 years? Tsutaya probably called you several times but you changed your number so you didn't get their call, then whose fault is this? There are lame university students who ask their parents to pay this fee. That fee that they obtained from forgetting about a video for 2 years. Mr. Reed questioned this business model and thought 'It would be better to adapt more flexible system than paying late fees.' 'If the customers didn't have to go back and forth to shops' 'and get videos delivered and return them through mail' 'wouldn't it make things more convenient for the customers?' 'They don't have to go to video shops and they can just drop the videos in a mailbox.' So Mr. Reed looked into the idea. But in the time of VHS, delivery fee was charged by the weight of the parcel. If one rents four VHS videos, the weight of them are quite heavy so that customer would have to pay expensive fee for the delivery. So Mr. Reed gave up on the idea, but then DVD came out. DVDs made the parcels extremely light. 'If the customers will just pop in disks and files' 'the delivery fee would be… Wow, this could work' so he started a postal DVD rental business. When we look back now, it's a very old business model. But this was the first business that came out in the time when DVD was an innovation. The fact that DVD is lighter than VHS and that customers were burdened by late fees. This brilliant business focuses on these two facts, this business is called Netflix. That was its business. It didn't even fathom things like internet, streaming, original contents and such but it came up with the best solution during that time period. There were only 30 employees. It began its business with only 925 DVDs. It's fascinating, isn't this making you feel braver? This was a small business that you couldn't even guess that it would become Netflix which took over hundreds of countries and hosts over 1 hundred million members. The company consisted of just a couple of guys, it was a size of one class in school. He would say 'we are going to deliver DVDs through mails!' And the employees would answer 'Yes!'… 'We don't even have a thousand DVDs' 'but we are going to send these when there's an order.' 'And they'll be returned through mails.' This was how the business started. But later things became more centered around the internet. So he then thought, wouldn't it be okay to stream videos rather than delivering them physically? Originally, it started out as a DVD rental business so it had to get the video contents from each organizations. It received the contents from TV broadcasting stations or movie companies, like very old TV programs and very old movies and it asked 'Wouldn't it be good to make a bit of money through streaming?' 'Wouldn't it be better to make some money through re-runs?' then it received the contents and streamed them. But around this time, most people still liked to watch new contents on TV. They liked to watch new movies in theaters. So it didn't grow into a huge enterprise. In order to make people think that the liked Netflix service, it needed contents that people can only watch on Netflix. That's how the idea for the third item came along. 'External production company but independent content' it's basically saying that Netflix will make its own contents. Then those contents will become the new shows. There are people who join the platform to enjoy the unlimited old contents but now people will join to watch new shows as well. Bringing new shows alone wasn't enough, so Netflix mixed two elements. But because the shows were produced by external production companies and they were purchased through license deals, the company depended heavily on the external production companies. But Netflix had a lot of data on its own. 'We have viewers who like these kinds of shows, then if we make similar shows, wouldn't they sell?' They had a vast amount of data. People like to stream these movies and these TV programs. So if the company makes similar movies or similar TV programs, they're going to become hits. Then it doesn't have to give the job to external production companies. So the company said, 'okay, let's do this!' And the in-house studio was built. Original programs were made inside the Netflix studio with the actors and staffs the company hired. The delivered contents that best fit the needs of its customer data and through that it maximized its profits. This is the current situation of Netflix. And the results are out. An original content called 'ROMA' which was made in 2019 was nominated for ten Academy awards and three Oscars. The company became an obvious super content creator. Isn't this unbelievable? It started out as a postal DVD rental service and now it won Oscars with its original contents. During these four innovations, Blockbuster went bankrupted. What changed? This book talks about exactly that. It asks the reader what they think was different. It's really interesting. Actually in 2010, no, going way back, 3 years after 1998 when it first started its business in 2001, a phenomenon called Dot-com bubble appears. Haven't you heard about this in another classes? For example, in the class about SoftBank. When SoftBank was flourishing, Dot-com bubble appeared and all the prices for IT companies became super high and everyone had high hopes for them but then people tell the difference between great companies and useless companies, the market crashed because people realized that other than really good companies there wasn't much to expect from the IT companies. So the market price of SoftBank crashed at once. That were such times. During this Dot-com bubble Netflix was in an unbelievable crisis. It hired more employees and the business became bigger accordingly. There were 100 employees and the members reached over 300,000 people. It was still a very small company compared to Blockbuster but it was slowly growing. But it was running under a deficit operation. It never made a surplus. It increased its sales but the costs were too high. The company was running towards the goal was making a surplus, this goes the same for Amazon as well, right? It's hard for new venture business to make a surplus because such business requires initial costs and running costs in the beginning. In 2001, the company couldn't fund itself. That was the time of Dot-com bubble. Netflix was hugely damaged and the business was no longer sustainable. It was running under a deficit operation while somehow getting funded but now it was impossible to get funded. The company had to be sold and the first door it knocked on to sell the company was Blockbuster. Netflix was going on sale. Mr. Reed wen to the huge office of Blockbuster. At the time, Blockbuster had everything. Land, reputation, market share, brilliant human resources, abundant business resources, and money. The CEO of Blockbuster was also an outstanding man. He knew how to read the future visions in business and the world. Obviously, he knew that the era of streaming was approaching. That's it. So Netflix knocked on the door of Blockbuster. Every was on another level. The co-CEO of Netflix, a small business that was being managed under a deficit operation went to the very successful CEO of Blockbuster and negotiated to sell his compnay. However, he offered it for 50 million dollars. In yen, that's 5 billion yen. He made a ridiculously high offer. 'I don't think it's going to be worth that much…' So he was denied. Blockbuster refused Netflix's sales offer. Then how? How did Blockbuster, the brilliant company with abundant business resources and human resources, the business that had all the land, fame, and market share, go bankrupt 9 years from then, and how did Netflix take over the world after 9 years from then? The author recommends you read this book if you are curious to find out what happened. He says that it was the 'culture'. The two had different company culture. 'By creating new company culture' 'Netflix was creating an organization with mobility.' 'The problem was that' 'the company failed because it a huge conglomerate which made it impossible to operate flexibly and use its human resources wisely.' 'If you want to build the best next generation organization and team' 'you'll have something to learn from Netflix.' That's the book. But what is this culture? To summarize, it's the title of this book, 'NO RULES'. 'Huh, what does that mean?' There is no rule, no limitations, whatever is fine, it's laissez-faire. But the authors warns not to mistake this with something else. Anything is fine, laissez-faire. The direction of where this is going is great but if you don't pay attention, things could get chaotic. 'We valued this freedom with all our heart and designed it.' 'And doing so, we created a brilliant company culture.' 'We made a brilliant team.' It's not just the freedom. What is a designed freedom? Let's go through the points, there are three points. Density of competency, feedback, abolishment of regulations. There is an order in this. If you follow this order then you'll be well off. What's it like in your organization? Many of you must work in conglomerates with a long history. I'm still a part of a company that has a long history. It's hard to be in a big company with a long history. 'What is this rule for?', 'What is this procedure for?' 'Why is it like this?', 'There's no flexibility here, why is everything under regulations?' Even when there is an opinion saying 'this is just the necessary approach for this time.' 'I hear you but I can't do anything, I don't even know what to do.' 'That will make it impossible to control and people are going to rebel and quit the company.' Many conglomerates are like this. Especially in Japan, many companies are like this. Then what are these things. Density of competency. This was actually discovered during a crisis. As mentioned before, in 2001, when he was going through a breakdown after the sale rejection. First, he thought, the company needed to restructure its 100 employees. This wasn't a big company, there were only 100 employees. Within these 100 employees who were just a tad bit better than the company's starting members, he had to fire 1/3 of them. This would leave about 60 people. Firing 40 people out of 100 people is hard, right? But then, looking through them with a strict standard, he realized something. It's easy to pick out the indispensable employees of a company. And it's easy to pick out those you aren't. But those who are hard to pick out are the people in the middle. Most of the employees are just a average employee. There are some who are exceptional and there are some who aren't. These people are easy to differentiate but most people are just average people. He had to thoroughly look into this. And after looking through it thoroughly, he fired the average employees that was lacking, and those that had a certain issue. But this was a painful procedure, why? Because he was worried that it ruin the atmosphere for those who did get to stay. Right? If you fire 30 to 40 people when you only have 100 employees, won't the energy drop because the employees will start to think that they might get fired in the next crisis? But that didn't happen, this was a great realization. the atmosphere of the company improved exponentially because the level of energy spiked among the employees who got to stay behind. How did this happen? That was the beginning of Netflix. As the result of evaluating the competency of the few employees it had under a criteria and reconstructing, Netflix started to recover. During this time, he says that he was trying to find out who the problematic employees were. A personnel evaluation. Even when you exclude the super talented, creative, an d cooperative members, there are many different people what's important is how you observe the average employees. They're average because they possess both strengths and weaknesses. But those who show an evident strength or weakness within this group of average employees were the troublemakers. 'Competent troublemaker'. Aren't you familiar with these people? They can be divided into three patterns. In a normal company, these troublemakers that fall under the three patterns don't get fired because they do get the job done. But Netflix decided to fire these people focusing on their another weakness. First pattern is the 'lazy ones'. They can get the job done but they just wont' do it. If you smack that butts, they will give you performances but they won't do it proactively. The type that never finds work himself. These people who are lazy are problematic. And another pattern is 'unlikeable'. The people who are competent but you who have foul mouths. 'Why can't you do this?', 'Shouldn't you know how to do this?' 'You can watch and learn from me!' They'll say these things, the people who are unlikeable. That's right. They can be a problem too. And the other pattern is 'gloomy pessimist'. 'You know, this won't work.' 'Well… This project is full problems.' 'This work that, that guy this, would this really work?' 'It'll probably fail'. But when they do get to the work, they do good job of it. But they always focus on the problems. Why would you say… when everyone's trying to do their best 'Would it really work?', wow… ''Would it really work?', it could work and it could not but we're always trying our best.' 'Why do you always say things like that?' 'I just wanted to make the problem clear…' The people who fall under these three categories are hard to fire, aren't they? It's hard, because they get the work done. Even when someone's lazy, if you say 'do it properly, just get it done before I tell you to!' then they'll get it done. Those with foul mouthes, they also get the work done well. You acknowledge their competency. Because their proposals are good. Even when they keep saying pessimistic things, they work fine. When they get to it, they're good. Aren't they hard to fire? But when crisis hits, he decided to fire these guys. He only kept those who are capable and willing to cooperate. He decided to nurture them only. He made a decision to focus on them. So, if people aren't competent enough, he'll say "thank you for your hard work" and let them go. Even when they're cooperative, if their performance isn't up to the standard, he'll say "thank you for your work.' Then there are people who are sweet but who aren't so good at working. They are terrible at work, they make a bunch of mistakes. But something about them is very sweet. They don't complain but they don't have anything to offer in meetings. That's why they're there, they don't start a turmoil. Do you know people like this? They're in every organization and in every company. But he spent these people home first. He started to fire the average employees first. Then, those who are competent but have a problematic characteristic. Through these two steps, he significantly improved the compnay. He believed that the level of team performance drops when those people are in the team because they ruin the atmosphere. People tend to adapt to the worse condition. Even when you have very creative and competent people, if you have one lazy person, others will start to wonder why they have to work so hard. If there is a pessimistic person, then others won't actively share their ideas. When there is a gloomy pessimist, everyone's spirit would drop. But when only those who are competent cooperative are left, meaning, when only the A+ members are left, they realized the pleasant atmosphere is overwhelming. The people who are really competent and cooperative, you know those people, when they're the only ones, the company excelled. It hurts my lips saying this again. But you can't easily fire the average employees. You can't get rid of the average ones that easily, they're not mosters. But I think this is a rare story to be told. You can only hear from Netflix. But if you want to create an innovation that can take over the world, it might be good to take note of this action. [Next episode – The Secret to Success is Honesty and Abolishment of Regulations]
'You don't need multiple rules, just one will do it.' 'One must always work for the best interest of Netflix.' Then you will have gain more and more super employees who bring awesome ideas when they return. '1 superstar is better than 100 average employees.' This is the cold truth! Web community, PROGRESS. [Nakata Atsuhiki online salon PROGRESS, 3700 members, monthly payment of 980 yen]
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