I write a lot about product strategy, and use Netflix as an example so that others can learn from the company’s success and failure. I often highlight that half of Netflix’s high-level product strategies fail in order to help product leaders to understand how hard it is to launch and grow startups. I also think it’s important to communicate how challenging it is to blend art and science, to effectively capture “lightning in a bottle,” which is how I describe the challenge of building products using consumer science techniques.
This post focuses on one of Netflix’s mistakes and tries to answer the question: Why did Netflix fail so often? The simple answer:
- Our humanity clouds our judgment, and
- Inventing the future is hard.
I wrote this post so you will be more conscious of the things that cloud your judgment. With a little luck and increased discipline, these ideas should make inventing the future a bit easier for you.
A Brief History of Netflix’s Friends
Netflix launched Friends in 2004, the year that Facebook grew from one million to six million members. Because of Facebook’s meteoric rise, the persistent question from Silicon Valley venture capitalists became “What’s your social strategy?”.
With Friends, we believed we could delight customers in hard-to-copy, margin-enhancing ways. Netflix members would delight in movie ideas from friends, we would build a hard-to-copy network effect, and movie suggestions would be cheaper as friends suggested “long-tail” movies to one another.
While we hoped to improve retention, our easier-to-move proxy metric was the percentage of members who connected to at least one friend. At launch, we engaged 2% of members, and after four years, we had reached 8%. But in 2010 – I was at Chegg by that time – Netflix killed Friends because they recognized they needed at least 20% of members to engage. Below this threshold, it’s hard to improve retention in a meaningful way. And after nearly six years of effort, Netflix was far below that threshold.
Why did Netflix Persist for so Long?
Yes, Friends failed to get big enough to improve retention, but looking back, I think the real question is, “Why did we persist so long?”. Here’s my answer:
- CEO support for the project. Reed Hastings’ confidence in the idea contributed to our persistence. It’s hard to quit when the CEO is passionate about an idea.
- As a strategy, social makes sense. Friends promised to fulfill the revered troika – to delight customers in hard-to-copy, margin-enhancing ways.
- Small wins cloud judgment. Our proxy metric kept going up and to the right, but we failed to recognize early enough that it would never be big enough to matter.
- Product leadership requires optimism. You need hope to overcome the inevitable challenges of product leadership. Product leaders tend to see the positive in projects and to ignore the negative. It’s a natural, almost necessary bias for successful product leaders.
- We assumed the failure was in our execution, not the idea. We initiated Friends before Facebook opened its social graph and we had many industry-specific challenges, so the project was hard to execute. For instance, the US Video Privacy Protection Act required explicit, opt-in permission to share movie history with others, creating friction as members tried to connect. Our focus on addressing challenges like this distracted us from a more careful evaluation of the social strategy itself.
- Paradoxically, small success makes it hard to kill features. Our job was to delight members, and we worried that killing Friends would do the opposite. In 2009, we faced a revolt when we removed Profiles, a feature that allowed members to manage multiple queues, even though only 2% of members used this feature. As it turned out, Profiles users were highly passionate as they believed that merging their accounts would lead to divorce (really!). Netflix eventually reinstated Profiles. (Did I mention that most of our board members used Profiles?)
What Can You Learn from Friends?
Here’s what I hope you will take away from Netflix’s ill-advised persistence in the face of long-term failure:
- Behold the idea and not the source. Friends got extra time and investment because our CEO stood behind the idea. It’s common to give ideas extra weight when the CEO believes in them. But Reed was wrong. That happens. In this case, we needed to do a better job of evaluating the idea on its own merit.
- Beware conventional wisdom. Thought leaders in Silicon Valley reinforced the value of a social strategy. And “social” worked well for music, which didn’t seem too different from movies. But, as we slowly learned, no one wants to reveal all the movies they watch. (“Did you really watch Adam Sandler’s ‘The Ridiculous Six’!?”) But even more critical, movie tastes are amazingly unique. Given this inherent diversity, reality eventually came into focus: your friends have terrible taste in movies.
- Temper your pride in ownership. As builders, we love to build stuff. And we don’t like to kill projects. Passion and hope cloud our judgment.
- Clear objectives can help. We had a proxy metric, but no timeline for when we hoped to achieve a specific goal, something like “10% member engagement within two years.” Setting a goal helps guard against “just one more quarter” youthful enthusiasm. I liken it to the “Noontime Turnaround Rule” for summit day climbers on Everest. A climber is required to turn around at noon, even if they are 100 yards from the summit at that time. The rule exists because a climber’s judgment becomes clouded by lack of oxygen.
- Take your blinders off. As product leaders, we so strongly focus on the goal that we become blind to new data that should cause us to change course. Successful projects develop momentum quickly. Customers enthusiastically embrace good ideas despite early shortcomings. Tunnel vision prevented us from accepting failure earlier.
- Ignore sunk cost. “We’ve invested so much, how can we give up now?” was a frequent refrain. Don’t let past investment in an effort inform future investment. Ask yourself, “Given what we know today, how much should we invest going forward?”
- Be open to better ideas. In the end, we diverted the Friends team to another project. It took the judgment of an “unclouded” executive to encourage us to move on. No one likes to be the “heavy.” For those of us in executive roles, our job is to provide unbiased judgment, free of pride in ownership. But no one wants to be the person who kills a five-year effort. But for many of you reading this post, that’s your job: embrace it.
- Learn to kill projects. Killing projects is a critical, rarely-practised discipline. Netflix eventually “euthanized” Friends. Netflix let members know far in advance that it was stopping the effort, explained the “why”, gave customers recourse, and over-communicated this context, again and again. There was no member revolt.
- Scrape the barnacle. One mistake Netflix did not make: when they killed Friends, they “scraped it” from the site. Like boats with barnacle-infested bottoms, companies that fail to “scrape” failed projects move slower and slower as they confront edge cases caused by needless, enduring complexity. This concept of a barnacle extends to “middling” success, as well. Creating a simple overall experience requires thoughtful sunsetting of these efforts, too.
Netflix made other mistakes: a long-term investment in the hypothesis that a more entertaining experience would improve retention, that unique movie-finding tools would create both customer and shareholder value, and that building our own “Netflix-Ready” TV-connected hardware device would do the same. You can trace these failures back to many of the themes above, too.
Conclusion: Your Friends?
Skillful product leadership depends on rare judgment about product, people, and business. Consumer science – the process of forming and evaluating hypotheses through existing data, qualitative research, surveys, and A/B tests – requires finely-tuned intuition. And in the end, building successful consumer tech products is very hard.
You are likely to be engaged in a project today where your humanity obscures a disciplined evaluation of the project’s merit. Take a moment to reevaluate, discounting both executive-level support and conventional wisdom. Remove your “blinders” by setting an objective goal, taking stock in your pride of ownership, and ask, “What should we invest in today, irrespective of past investment decisions?”. Last, if it’s clear you are working on a failed experiment, dare to communicate this and then “scrape the barnacle”. With your intuition fine-tuned by recent failure, you will dramatically improve your odds for future success.