High-tech Achiever: Netflix

The last DVD Reed Hastings watched was Iron Jawed Angels, the HBO movie about the women's suffrage movement starring Hilary Swank and Anjelica Huston. Right now, Hastings, the founder and CEO of Netflix, the online DVD subscription service, has seven movies at home, ranging from Z Channel, a documentary about the first pay-cable channel, to the cult phenom Donnie Darko. He loved chick flick Fried Green Tomatoes but hated the Guy Ritchie heist film Lock, Stock and Two Smoking Barrels. Go figure.

I know all of this because Reed Hastings and I are friends. Well, sort of. In August, Hastings invited me to view his "queue," or the list of movies he wants Netflix to mail him. More specifically, he asked me to join "Friends," a growing network of Netflix users. This feature, which launched in January, lets users peek at what movies their friends are watching--I'll show you mine if you show me yours--what movies their friends loved or hated, and their friends' movie reviews. (Reed on Iron Jawed Angels?: "Moving. Intense. Inspiring.")

The Friends network gives Netflix a way to more deeply engage customers in its service. But someday, it may also help Netflix detect possible spikes in movie demand so that it can avoid DVD shortages. People with lots of friends, after all, have the ability to affect a lot of movie watching.

Friends is just one of many ways online DVD pioneer Netflix is building on its technology roots to continue enhancing the customer experience. Over the second half of this year, the company plans to spend $8 million to further automate its already high-tech distribution centers in order to keep costs low and further speed up shipping times. Last fall, the company introduced RSS feeds, automatically sending customers updates on new releases or account changes. And in January, doing its part to promote world household peace, Netflix programmed its software so that single accounts can have multiple "profiles." Family members can now create their own separate queues, giving Die Hard and Divine Secrets of the Ya-Ya Sisterhood equal-opportunity rotations in the living room.

A Companywide Focus

It's no surprise, then, that Netflix is the winner in our High-Tech Achiever category. But Netflix was our overall winner, too, with a recommendation score topping 90%. (Netflix also triumphed over Wal-Mart this year. In what may be a first, the giant retailer gave up on its DVD rental service in May, directing its customers to Netflix. In exchange, Netflix will point its users to Wal-Mart for DVD purchases.)

In fact, Netflix's companywide focus on the customer experience could make it a candidate in any of our five categories--and a source of ideas for any company looking for smart ways to cozy up to customers. The Friends network and profile capabilities, for example, are testaments to how well Netflix listens to customers: Each was added in response to consumer demand. Not a week goes by that the company doesn't play host to several focus groups to get feedback on site innovations.

Netflix could be called an employee innovator, too. Warehouse workers--those closest to the customer--get free Netflix subscriptions and DVD players in order to understand what customers go through when Finding Nemo doesn't arrive in time for their kid's birthday party. Corporate employees stay happy--and therefore eager to solve tough engineering problems to improve the user experience--with perks like no hard limits on vacation time and free trips to Sundance each January.

Profits are up--second-quarter earnings were almost double those from the same period last year--in part thanks to one of Netflix's lowest customer churn rates ever, just 4.7%. That low churn rate, the company says, is helped by investments in greater selection (Netflix's library increased 20% in the second quarter, to more than 50,000 titles) and four new distribution centers that shorten some shipping times.

Finally, while Hastings, 44, is hardly the humble "I'm Reed in customer service" sort--rather, he plays the role of the cocksure Silicon Valley entrepreneur quite well--he does lead from a customer-centered perspective. When Netflix delayed its IPO in the midst of 2000's dotcom bust, for example, Hastings reminded his troops of their mission. " 'Tomorrow when you come to work, if it doesn't make the customer happy, move the business forward, and save us money, don't [do it],' " recalls chief talent officer Patty McCord. "Anything we're doing has to meet all three criteria."