7 Secrets to Netflix’s Success

Riding high off the recent news that Netflix (s nflx) had more paid subscribers than Comcast, CEO Reed Hastings would seem to have much to gloat about. But Hastings was more circumspect as he capped off the Wired Business Conference in New York. Hastings talked broadly about the business and where it’s going, what its strengths are and the limits he sees for the company. Over the course of this talk, a picture emerged of how Netflix has achieved its success and how it hopes to keep it going.

Here are seven lessons I gathered from his talk:

Know what kind of company you are: Hastings said the company has thought about launching live video streaming but sees no point in streaming events like the President’s address when CNN can do the same thing. He said it goes back to the core principal of Netflix’s identity, which is as a personalization and user choice company, not as a streaming company. That has helped the company focus on what the user wants, not just pushing out features because it’s possible.

Time your opportunity: He said when the company got started in 2000, they knew there was no way they could steam movies over a 56k connection. So they went with DVD distribution first while planning for a future of 14 megabits per second in home connections by 2012, which is roughy where we’re at. Hastings said the turning point happened in 2005 with the rise of YouTube and Netflix hasn’t looked back since. It was this good grasp of the timing of technology improvements that helped the company get started with one model while preparing for the future.

Choose the right niche: A lot of the company’s success has been in choosing the right area to compete in. By providing movies and last season’s TV shows, it puts Netflix in the market for pay TV and syndication, a big enough market to grow in but not so ambitious as to incite World War III against incumbents. Even now, Hastings said he doesn’t believe he’s affected the profits and losses of any company though I suspect Blockbuster thinks otherwise.

Have good relationships with content providers: Netflix has been fortunate to scale on the back of its DVD business and be in a position to write big checks to content providers for streaming movies and shows. Though Hastings said those same providers could turn their back on Netflix, he sees that as unlikely because the company has worked hard on its supplier relationships, which he said is a killer skill for a company like Netflix.

Test a lot: While companies like Apple pursue a singular vision of one man, Hastings said Netflix does a lot of A/B testing, trying out new concepts on 10,000 users at a time. If something sticks, it eventually gets rolled out to Netflix’s 24 million subscribers. Janko also wrote about Netflix’s interest in testing everything.

Price the product well: At $8 a month, Hastings said the streaming service is priced so that people who use it once or twice a month will still find value and come back. And those who use it once or twice a week will rave about it to friends. Netflix could have met a different reception if it was a lot more expensive. But Netflix focused on the user experience including making sure the service was an easy buy for consumers.

Promote creativity from within: Netflix promotes creativity with its own culture, summed up in the company’s culture guide, a sort of “constitution” for employees. The guide provides workers with no tracking of vacations and increasing freedom for good work. Hastings said the culture allows Netflix to create a platform for innovation, rather than a stifling one that ultimately engenders bitterness. That can mean the difference between a company that comes up with one innovative breakthrough and one that can repeat its success over time, Hastings said.