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Saving The State Of California: Reed Hastings

As a manager in Newport Beach, California, concerns over the state’s viability have never been so palpable in the face of an almost $16 billion budget deficit and rising taxes. The answer to a certain course of default is not just cost-cutting or raising taxes. The state needs creative entrepreneurs to rethink every process of providing services. If the focus was to promote and incubate business activity
along with promoting creative solutions to education and other state services, California could survive.
Reed Hastings, Frank Baxter and Eli Broad who offer innovative thinking and charitable service to offer a solution to provide better and lower cost education to the State of California that is a major budgetary item threatening California’s fiscal viability. California is made of up many of these benefactors who should be tapped to provide creative private industry solutions to the debacle created by politicians. A short profile of Reed Hastings is below.

Reed Hastings

Born Boston, MA 1960. After his Bachelor’s degree he became a math teacher due to his love of teaching. Then after briefly joining a US Marine training camp, joined the Peace Corps to teach 2 yrs in Swaziland.

Then Reed got a MS in Computer Science at Stanford and worked at Adaptive Corp and was introduced to Mark Box, a start-up investor and co-founder of Pure Software with Reed. Pure Software was a collaborative code developer program. Audrey MacLean was also a Pure VC investor. Reed’s style is buying a six-pack and using his personable rapport face-to-face.

After selling Pure Software (went public 2005) for $750mm he went back to Stanford and studied State Education and Politics for six months, then went to the state capital of California. This began innovation and new operators to enter education.

He advocated for a new kind of school in California called a Charter schools (promoting charters that free schools from 6000 pgs of state regulations, giving teachers and administrators the freedom to do what they think is best to educate students. (San Diego UNION TRIBUNE).
This was one of the first laws of charter schools in the country.

Netflix began in 1998 but less than 1% of households owned DVD players that were over $600. When he added computer generated suggestions and a Queue and changed to a “subscription” model that launched their success. Netflix catapulted to $5 million in 2000 that paled in comparison to Blockbuster’s $4.5 billion. Reed then made a bold mood to ask Blockbuster to become a strategic partner in an attempt to acquire customers at low cost. Blockbuster delayed consideration. Reed’s manner is low profile, refuses to talk about himself, unassuming, and a gentleman extremely bright and strategic-minded.

As Netflix was fighting Netflix’s monster competitor struggling with customer acquisition cost, he took an additional job on Calfornia’s State Board of Education. He was appointed by Governor Grey Davis in 2000. Reed believes that the biggest challenge facing any large organization is “getting it on course” and then “keeping it on course.” Netflix attempted to go public around 2000 – 2001 at the same time the “dotcom” bubble burst and the 2001 terrorism attack and repercussions. Reed canceled the IPO and laid off 1/3 of Netflix workers. Shortly thereafter, the cost of DVD players plunged and Netflix slipped a “trial subscription” flyer into every new DVD box. That solved Netflix’s “cost per customer acquisition” and led to Netflix’s IPO in 2002 raising $82.5 million (Merrill Lynch). That introduced competition from Blockbuster and Walmart and started a price war. Netflix stock fell 75% in the face of this competition. Reed sacrificed profits to drive back competition and regain growth and it became a game of attrition – who would survive longer.

Reed suffered a personal setback when he was not reappointed to the State school board 13Jan2005. For 4 years Reed championed reform in California education, but when he pushed for more English and bi
lingual programs he was pushed out by Democrat representatives, his own party. In mid 2005, Walmart dropped out and gave Netflix their customer list in exchange for promoting their sales. Blockbuster was gaining subscribers but was losing money. At the Sundance Film Festival in Utah 2007, Blockbuster met Reed who offered to buyout Blockbuster’s online business that was losing money. Blockbuster’s CEO, counter-offered a merger. Talks broke down due to concerns over anti-trust regulations and Blockbuster CEO John Antioco was later fired in 2008. Blockbuster soon gave up on the business.

By 2007 Netflix delivered their billionth DVD by mail and decided to enter into streaming content. Their challenge was obtaining expensive licenses for every stream that at the time could only stream to the PC. The content was limited in quality and volume so he added 11,000 titles in two years and offered the streaming service for free. He then made a deal with Starz to obtain higher quality new content that enabled them to get Sony and Disney library films for about $20 million, an incredible bargain. Content and access was aided by hardware development of game makers and Apple devices. By 2011 Netflix revenue hit $2 billion with 20 million subscribers. In July 2011 Netflix announced it was raising subscription prices 60%. 800,000 subscribers left. He apologized publicly two months later retracting the price increase and announcing the split of the streaming business from the newly branded mail business named Qwikster. Subscriptions and stock price continued to drop so by October 2011, splitting the company was reversed. By then, the damage was done causing Netflix stock to drop 60% in 3 mos. losing $2.3 billion in market value. Simultaneously, Starz dropped their deal with Netflix, but Reed re-established the push for content in signing up AMC, Dreamworks Animation, CW, and Relativity.

Charter schools innovation is still a main interest of Reed Hastings, along with biotech magnate philanthropist Eli Broad (KB, Sunlife) and former Jefferies CEO/Chairman, US Ambassador and now philanthropist, Frank Baxter. Reed’s greatest contribution may end up being saving the state of California that is presently suffering a near $16 billion budget deficit. Where many California residents have to accept the fact that one political party runs the show, Jerry Brown was considered to be a hopeful choice who had no political agenda remaining at the very end of his political career. Instead, those who got him into office are expecting payback in a state that can’t afford it.

Governor Brown’s problem is that only about 15% of California’s budget is discretionary that may be cut. The deficit represents about 17% of the total. Short of a 17% across the board discretionary budget cut, the Governor is proposing higher state income and sales taxes on residents who already pay the highest taxes in the country. The Governor is threatening that if his proposal of higher taxes is not accepted with a first round of spending cuts, he will add an additional $6 billion of cuts. A large part of the California budget is education and it is all but impossible to fight the powerful education unions so a Charter School solution to education to any degree may be a saving grace to the State of California…if democratic representatives don’t attempt to foil Reed Hastings, Eli Broad, Frank Baxter and other dedicated benefactors to the State of California.

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