Reed Hastings and the Myth of the Great Man

A warning sign for poor governance

When one thinks of the influential billionaires of the day, a few names spring to mind: Elon Musk, Jeff Bezos, Warren Buffett, Mark Zuckerberg are the top names. Some day there will be a Zuckerberg University and Medical School. The name Zuckerberg won’t likely be associated first with Facebook, just like the name Vanderbilt doesn’t summon images of Railroads and Steamships today.

Myth-making and legacy have long been the stated goal of the extremely wealthy and powerful. From the Gilded age boom to the onset of World War II was identified as an era of the extremely wealthy: think the Vanderbilts, Rockerfellers and Carnegies. In the post WW2 era, the richest men were not unknown by any stretch, but the luster seemed to have faded. Howard Hughes, Daniel Ludwig and Sam Walton are notable as the richest men of the day, but an average American today, in 2022, is more likely to recognize the name of Gilded era tycoons rather than their 1970s counterparts.

As the 1990s rolled into a new century, the era of the great rich man came back in style and it continues on today. Starting with Bill Gates and Larry Ellison, to the iconic Steve Jobs, and this decade’s “hot names.” Enough ink is spilled about the big three (Zuck, Bezos, Musk) to dominate a huge amount of mind- and media-space to the point at which it becomes tiresome. That’s, of course, forgetting our favorite recent Ex-president, who is much more powerful than he is rich. Heck, I’m guilty of focusing too much on them. The greatness of these men, promoted by the Myths they propagate about themselves, is furthered on by the reactionary and often important pushback against them as they consolidate power, riches and influence. The saying “There’s no such thing as bad news” comes to mind.

With that setup out of the way, I’m going to talk about another Billionaire, who doesn’t get enough negative attention; Mr. Reed Hastings, CEO and Founder of the Streaming Service Netflix. Netflix’s stock is cratering, down nearly 40% as I’m writing this, after releasing horrifyingly bad earnings. Year to date, the Company has lost over $200 billion in market capitalization, despite the service itself being more or less unchanged. Growth looks to have plateaued and what remains is a service with very poor unit economics. They pay too much for content and don’t have enough viewers at the current price point to make money on a steady state basis.

The Reed Hastings Origin Story

Now, Mr. Hastings doesn’t have the fabulous story that many of his peers share. He didn’t come from a broken family or spend late nights cranking out code and soldering PCB boards in a garage. He also isn’t nearly as wealthy (having peaked at ~$7 billion late last year) and he thankfully doesn’t start slapfights on Twitter. But the Reed Hastings’ myth is such an interesting story, and in keeping to the theme of this blog, it’s important because it really impacts corporate Governance of Netflix, Inc.

In 2010, middlingly average hedge fund manager Whitney Tilson announced he was short selling Netflix’s equity. At the time, NFLX was trading at $30 per share and their Streaming service, the replacement for DVDs by mail, was in the process of gaining some steam. Even after the recent rout, NFLX is up 900% from the time of the announcement by Tilson. It was, in retrospect, a bad trade.

But the myth of Reed Hastings comes about because shortly after Tilson’s call, he wrote a personal letter, posted publicly, to Mr Tilson. The letter says, to the effect, “I think you are a nice human being, but you got this trade wrong and you should close your short position.” Rebuttals to short sellers are often angry, defiant and spiteful so at the time this letter was newsworthy for its civility and candor. But the Myth of Reed Hastings doesn’t come about because he was polite to a short seller, it’s because he was right and the market proved it. Or did it?

Whitney Tilson went on to close his short position and often cites the letter as the reason he did so, long after he shuttered his fund. But, here’s the thing: Netflix’s stock indeed levitated in the months that followed up to $38. But in July 2011, the equity cratered by 75% to below 10 dollars per share. It languished there for a year and a half before going on a nearly decade long trajectory of “up and to the right.” Tilson, had he ignored the letter and kept the position on, would’ve likely pulled a lot of money out once the stock got gutted a few months later and booked a big trade.

But today, the story is akin to a fable: the generous, 21st century different breed of CEO brought his critics in and calmly dispatched them using logic and a forward thinking vision of the future. Netflix has since proved that streaming would become “the thing,” and the number of copycat services indeed bolsters this view.

Reed Secured his legacy, his own “How many Rockets have *you* landed?” A CEO of the future, a business savant, and a kind and thoughtful man at that.

The Reed Hastings Myth is Nonsense

I would write tomes on the topic of how silly the unit economics of the company are, but in the service of brevity, I think this tweet sums it up nicely:

BUCK.eth @eriz35

please don't forget that $nflx is eating like $20 million dollars on the COGS line this year for that will smith: orc cop movie

When Disney pays for a new Avengers movie, the $300 million or so in production cost is spent largely as CapEx. That cost, when calculating profits, is spread out over a few years.