That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea

by Marc Randolph

The good is in the left column: Sales are up 50 percent over May, our first full month in business. Monthly revenue has just passed $94,000 for the month of June. With twelve months in a row like that, we’ll hit one of those magic startup numbers: a million dollars of annual revenue. I make a note to myself to bring that up at our company meeting at the end of the week.

They answered to their superiors along vast and complex chains of command. They worked from nine to five every day and got paid overtime if they stayed late. Once a month, they came to work in khakis and polos for casual Friday. But only once a month.

From research and development to packaging to marketing to shipping, it took years to roll out a new TV, VCR, or CD player. There were quite literally hundreds of thousands of tiny decisions that had to be made, and they all had to be made in concert.

I was angling to meet three people: Mike Fidler from Sony, Steve Nickerson from Toshiba, and Rusty Osterstock from Panasonic. Between the three, they controlled roughly 90 percent of the DVD player market. I knew that if I wanted to cut any sort of deal, I’d have to get my foot in the door with one of them.

I was a gnat. They were elephants whose tails I wanted to ride.

one fell swoop,

demurrals

exuded

copious

scantily

“Pays to have friends in high places,”

In my estimation, he’s one of the single most important players in the Netflix story. Without his help, there is absolutely no way the company would have succeeded.

You see, a startup is a lonely place. You are working on something that no one believes in, that you’ve been told time and time again will never work. It’s you against the world. But the reality is that you can’t really do it on your own. You need to enlist help. Bring others around to your way of thinking. Let them share in your enthusiasm. Give them the magic glasses that will let them see your vision of the future.

More importantly, though, lunch is a chance to start imprinting culture: to explain the most important aspects of working at Netflix, what we expect of people, and what they can expect of us.

Doing smart things as a leader as changing the atmosphere in which you interact with your employees and coworkers

Pre-launch, I’d also counted on another recruiting advantage: Location. About 19,000 people per day commute from Santa Cruz “over the hill” to tech jobs in Silicon Valley. Probably 18,997 of them hate it. (And I can’t imagine what those other three are thinking.)

Sony hadn’t really given me the time of day when I first approached them about a coupon deal. But once they’d seen that we were working with Toshiba, they felt like they had to keep up with the Joneses. You see this all the time in business and in sports—a younger upstart tries something new, and when it works, the industry leader co-opts. Why? Because they can.

Don’t get me wrong—it’s great that we’re doing so much business, two months in. The $100,000 coming in every month from DVD sales not only pays a few of our bills, it demonstrates to our suppliers and partners that we’re real. It gives Eric and his team a chance to stress-test the site under the load of real customers, not projections. It gives our operations team the thrill of seeing real packages going out the door each day. It gives the entire company a sense of momentum. But it’s a sugar high.

Looking at the figures, I know that once everyone is selling the exact same thing, pretty much exactly the same way, it will only be a matter of time before our margins shrink to nothing. It might not happen next week, next month, or even next year, but it is inevitable. And when it happens, we’ll be toast.

We have to explain on our home page that users can either buy or rent most titles—and a general rule of web design is that if you have to explain something, you’ve already lost.

Although I’m upset, I’m not entirely surprised. The second your dream becomes a reality, things get complicated. You simply can’t know how things are going to behave until you’ve actually tried them. Go ahead and write up a plan, but don’t put too much faith in it. The only real way to find something out is to do it.

turducken,

I hadn’t even meant to work on the mailers when I returned to the office. But that’s how things are—there is always so much to do that making plans and to-do lists is a waste of time.

Joy Covey,

“make-or-buy analysis,”

But when Amazon calls, you pick up the phone. Even if it’s 1998, and Amazon is nowhere near the powerhouse it is today.

dynamo

When Bezos had recruited Covey to Amazon, she’d casually mentioned that after college she had managed to get the second-highest score in the country on the CPA exam—a test taken by nearly seventy thousand other aspiring accountants. When Bezos had teased her—“Really, Joy? The second-highest?”—Covey had shot back, “I didn’t study.”

I wasn’t surprised to hear any of this. Bezos was notoriously frugal—even cheap. He was famous for his “two-pizza meetings”—the idea being that if it took more than two pizzas to feed a group of people working on a problem, then you had hired too many people. People worked long hours for him, and they didn’t get paid a lot.

Although Amazon was still relatively small in 1998, they already had over 600 employees and were doing more than $150 million in revenue.

When someone uses the term “eight figures,” they are referring to digits. Eight figures translates to tens of millions of dollars. When someone uses “low eight figures,” that means barely eight figures. That means probably something between $14 million and $16 million.

And then, for some reason, I chose that moment to tell Reed that we should abandon the only profitable part of our business. I think it was the afternoon with Bezos—seeing Amazon in the flesh, dingy office and all, just reinforced for me that we could never compete in the DVD retail sales market. Better to focus on what made us different and unique.

“Kinda puts all our eggs in one basket,” he said. “That’s the only way to make sure you don’t break any,”

One of the key lessons I learned at Netflix was the necessity not only of creative ideation, or of having the right people around you, but of focus. At a startup, it’s hard enough to get a single thing right, much less a whole bunch of things. Especially if the things you are trying to do are not only dissimilar but actively impede each other.

Without deciding, we’d decided: we weren’t ready to sell.

When an opportunity comes knocking, you don’t necessarily have to open your door. But you owe it to yourself to at least look through the keyhole.

The key to these pitches is to read the room, sense what they want to hear, and then give that to them—without lying, obfuscating, or distorting the truth.

In a pitch, perfection isn’t always the goal: projection is.

More importantly, he had a track record of solving seemingly unsolvable problems. Investors and VCs knew this even then. They definitely know it now. That’s why the second he walks into a room, people whip out their checkbooks. They know that what he does isn’t teachable, isn’t reproducible—hell, it’s barely even explicable. He’s just got it.

That’s what great entrepreneurs do, in the end: the impossible. Jeff Bezos, Steve Jobs, Reed Hastings—they’re all geniuses who did something that no one thought was possible. And if you do that once, your odds of doing it again are exponentially higher.

halcyon days.

apogee

That’s the thing about halcyon days: you need them, but if you want your egg to hatch and the bird to fly away, you need a little wind.

Things might sound dire to you at this point. But that’s the thing about startups—you’re almost always on the razor’s edge between total success and total failure.

chasm,

Sounds terrifying to most people. But do it enough times, and that’s just the life you lead.

The life span of a startup is often so short that by the time people notice what you’re doing, you’re hanging on by a thread.

I wanted something of Santa Cruz’s laid-back ethos to seep into our office culture.

But one of the things I was learning, that first year, was that success creates problems. Growth is great—but with growth comes an entirely new set of complications.

Early Netflix was a small, tight-knit group. I knew everyone—I’d hired them. I knew what they were good at and what they didn’t know they were good at yet. I knew how they thought, how they worked. Most of all, I knew they were brilliant—that they could learn new things if needed. Jim had no experience in operations when I hired him. Boris wasn’t even a web designer. But I knew that both of them had the necessary drive and malleable creativity to make a go of it. And that’s how startups typically run, in the early days: You hire a bunch of brilliant people to be jacks-of-all-trades.

Where it didn’t matter who solved a problem—only that it got solved. Where dedication and creativity mattered a lot more than dress codes or meeting times.