Saturday, February 25, 2017

Netflixed: Co-Founder of Netflix Tells Bankers How It's Done

This past week I attended the American Bankers' Association National Conference for Community Bankers (NCCB). At such affairs, I like attending the general and education sessions for my own knowledge, and for the benefit of my clients and readers.

The NCCB was no different. If there was one session that struck me like a lightning bolt, it was the general session, with keynote speaker Marc Randolph. It was riveting, and challenging. And I'm not too sure bankers are up for the challenge. 

Riveting because he spoke about the founding of Netflix. The idea was not a lightning bolt, as Netflix co-founder Reed Hastings tells of his late fee epiphany when returning the movie Apollo 13. Rather, it evolved during long commutes between Hastings and Randolph. In other words, car pooling planted the seeds of Blockbuster's demise. This factoid is sure to get me social media shares from environmentalists.

The tale of the early years of Netflix is very instructive to an industry experiencing change. Think banking. The talk was challenging because Randolph's keys to being successful in such an environment may, and should scare bankers.

Marc Randolph's three keys to business success:

1.  Tolerance for Risk

Number one is already turning off readers. Low risk tolerance is suffocating. Why? It promotes a "no mistakes" culture. When you have low tolerance for risks and mistakes, you lose innovation. Who will stick their neck out in such a culture? Who will endure five failures to discover that one idea that turns your business model on its head and plants the seed for an enduring future? Bankers may hate the analogy, but Blockbuster was not willing to gut their main revenue source to build out and promote streaming. Does the term "disintermediation" in banking sound familiar?

2. An Idea

And it doesn't have to be a good idea. When Netflix decided to forego late fees their business took off. If Randolph was writing a letter to himself how he thought Netflix would evolve in five years it would not have read like it played out. But they tried anything and everything to get subscribers, and more revenue into their company. They had many failures. The idea wasn't an "in the shower" epiphany. But after trying several things, the one that stuck ended up being the hurdle that would eventually lead to what we have today. An idea. Not a good one. As Randolph mentioned, many of us have great ideas in the shower. Few of us get out of the shower and do something about them. In a culture with a low tolerance for risk, would one of your bankers step out of the shower and do something about their idea? Would such a person even work for your bank?

3. Confidence

It takes confidence to fail several times, and to get up and keep going. As Rocky once said, it's not how many times you get knocked down, but how many times you get knocked down, get up and keep moving forward. That's right, I made a Rocky reference. Say what you will about the Italian Stallion, when he was in the ring, he had confidence to go toe to toe with the best in the business. Think about little $5 million in revenue Netflix, going toe to toe against multi-billion dollar Blockbuster. 

I will close by paraphrasing Randolph. Business success is not about coming up with the best or even good ideas. It's about building a culture to try lots of bad ideas.

And with our own culture in banking, to try few ideas and even fewer that have not proven tried and true, do we have the culture to succeed in a changing industry.

Should we build such a culture? And if so, how?

~ Jeff


  1. Jeff – Excellent post. Thanks for sharing what you gleaned from the presenter. I have a suggestion to answer your question about building a culture that embraces risk, ideas and confidence through failure. Rather than avoiding risk, think more in terms of managing risk, or dipping your toe into risk. I have two simple, but specific examples.

    The first is a bank that avoided putting any 30-year, fixed rate mortgages on the books (100% risk averse). Even good loans where they knew the occupant(s) would not be there if five years (i.e., newlywed, starter home, no kids, professional career path). Despite a lot of liquidity on the balance sheet, they favored the approach of selling the mortgages, and then effectively buying them back as securities at a lower yield. My suggestion was to create their own security of a modest amount, just $10 million, and fill it with mortgages that fit certain criteria, instead of selling them. For a bank of that size, if the worst performing security in their portfolio was yielding 4.20% in 10 years, it was not going to be the end of the world. So, starting by thinking small, and setting a hard target with a little risk, is a good way to introduce yourself to risk.

    The second one is the binary reaction we take toward risk. Yes, no. Good, bad. Safe, dangerous. When we take a binary approach, we dismiss the possibilities that come with taking a risk because we dismiss risk altogether, and then we go back to work along the cow-path of risk avoidance. I worked with a bank that was great at lending, and had very few losses, but not as effective at attracting core funding. Their first reaction was to slow down the lending and underwriting engine, which was really their core competency, in order to eliminate liquidity risk. My suggestion was to leverage their core competency even further and find banks that were weak at lending in order to participate the loans out. They started down that path with a couple of loans and it has grown to be part of their operations. They now think in terms of “bank assets under management” instead of assets on the balance sheet.

    My two cents in reaction to your blog post. Thanks again for putting together such thoughtful posts.

  2. Mike,

    These are great suggestions. Another is a program done by a long since sold financial institution that took warrants along with making loans to earlier stage companies. Regulators gave them some grief. But might be time to test the waters again if banks box up their risk to early stage businesses in the form of principal credit scores, secondary sources of repayment, and percent of capital policies on such loans.

    Thank you for the comment!

    ~ Jeff