I write a lot about product strategy, using Netflix as an example so others can learn from the company’s successes and failures. I often highlight the fact that half of Netflix’s high-level product strategies fail. I do this to help product leaders understand how hard it is to launch and grow startups. It’s also important to stress how challenging it is to blend art and science, to effectively capture lightning in a bottle, and to build products using consumer science techniques.
Why does Netflix fail so frequently? Two reasons: 1.) There are many biases that cloud human judgment, and 2.) it’s hard to invent the future. It is critical to remove losers swiftly and double down on winners, which means good judgment is paramount.
A Brief History of Friends
Netflix launched Friends in 2004. That year, Facebook’s membership grew from 1 million to 6 million. This meteoric rise led Silicon Valley venture capitalists to pose the same persistent question: “What’s your social strategy?”
With Friends, Netflix believed it could entice customers in hard-to-copy, margin-enhancing ways. Netflix members would delight in getting movie ideas from friends, they would build a hard-to-copy network effect, and movie suggestions would be cheaper as friends recommended long-tail movies to one another.
While Netflix hoped to improve retention, the easier-to-move proxy metric was the percentage of members who connected to at least one friend. At launch, Netflix engaged 2 percent of members and, after four years, got to 8 percent. But in 2010—I was at Chegg by that time—Netflix killed Friends because they recognized they needed at least 20 percent of members to engage. Below this threshold, it’s hard to improve retention. After nearly six years of effort, Netflix was still far from achieving it.
Why Did Netflix Persist for So Long?
Yes, Friends failed to get big enough to improve retention, but the real question is, why did Netflix persist so long? Here are some reasons:
- CEO support for the project. Reed Hastings’ confidence in the idea contributed to the 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 holy troika: to delight customers in hard-to-copy, margin-enhancing ways.
- Small wins cloud judgment. The proxy metric kept going up and to the right, but Netflix 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. Product leaders tend to see the positive in projects and ignore the negative. It’s a natural, almost necessary, bias for successful product leaders.
- Netflix assumed the failure was in the execution, not in the idea. It initiated Friends before Facebook opened its social graph, and Netflix had many industry-specific challenges, so the project was hard to execute. For example, the U.S. Video Privacy Protection Act required explicit opt-in permission to share DVD rental history with others, which created friction as members tried to connect. The focus on addressing challenges like this distracted Netflix from a more careful evaluation of the social strategy itself.
- Paradoxically, small success makes it hard to kill features. Netflix’s job was to delight members, and it worried that killing Friends would do the opposite. In 2009, Netflix faced a revolt when it removed Profiles, a feature that enabled members to manage multiple queues, even though only 2 percent of members used the feature. As it turned out, Profiles users were highly passionate because they believed that merging their accounts would lead to divorce (really!). Netflix eventually reinstated Profiles. (Did I mention that most of the board members used Profiles?)
Lessons From the Failure
Here’s what you can take away from Netflix’s misplaced persistence in the face of long-term failure:
- Behold the idea and not the source. Friends got extra time and investment because the CEO stood behind the idea, but Hastings was wrong. That happens. In this case, Netflix 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 Netflix slowly learned, no one wants to reveal all the movies they have viewed. (“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 sucky movie taste.
- Temper your pride in ownership. As builders, companies love to build stuff. And nobody likes to kill projects. Passion and hope can cloud judgment.
- Establish clear objectives. Netflix had a proxy metric, but no timeline for when achieving a specific goal, such as 10 percent member engagement within two years. Setting a goal guards against we’ll-figure-it-out-next-quarter youthful enthusiasm. I liken it to the noontime turnaround rule for summit day climbers on Everest. Climbers are required to turn around at noon, even if they are 100 yards from the summit. The rule exists because the lack of oxygen clouds a climber’s judgment.
- Take off your blinders. Product leaders can focus so much on the goal that they lose sight of new data that should cause a change in course. Successful projects develop momentum quickly. Customers enthusiastically embrace good ideas despite early shortcomings. Tunnel vision prevented Netflix 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 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, Netflix diverted the Friends team to another project. It took the judgment of an unclouded executive to encourage them to move on.
- Embrace your role. For those in executive roles, their job is to provide unbiased judgment that’s free of pride in ownership. But no one wants to be the person who kills a five-year effort. But that’s part of the job. Embrace it.
- Kill projects properly. Killing projects is a critical, rarely practiced discipline. Netflix eventually euthanized Friends. Netflix let members know far in advance that it was stopping the effort, explained why, gave customers recourse, and communicated this context again and again. There was no member revolt.
- Scrape the barnacle. When Netflix killed Friends, they scraped it from the site. Companies that fail to scrape failed projects move more and more slowly 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.
Netflix made other mistakes, including 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 a Netflix-ready TV-connected hardware device would do the same. You can trace these failures back to many of the themes above.
Examine Your Own Projects
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. Building successful consumer tech products is wicked hard.
When engaged in a project, your humanity can cloud a disciplined evaluation of its merit. Take a moment to reevaluate, discounting both executive-level support and conventional wisdom. Remain objective by setting an objective goal, taking stock in your pride of ownership, and asking, “What should we invest in today, regardless of past investment decisions?” If it’s clear you are working on a failed experiment, dare to communicate this and then scrape the barnacle. With intuition fine-tuned by recent failure, you will dramatically improve your odds for future success.