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

by Marc Randolph

This book is a memoir, not a documentary. It’s based on my recollection of events that happened twenty years ago, so most of the conversations in this story have been reconstructed. What mattered to me, as I wrote, was rendering the personalities of Netflix’s founding team as vividly and as accurately as possible.

There’s a popular story about Netflix that says the idea came to Reed after he’d rung up a $40 late fee on Apollo 13 at Blockbuster. He thought, What if there were no late fees? And BOOM! The idea for Netflix was born. That story is beautiful. It’s useful. It is, as we say in marketing, emotionally true. But as you’ll see in this book, it’s not the whole story.

One of my goals in telling this story is to puncture some of the myths that attach themselves to narratives like ours. But it’s equally important to me to show how and why some of the things we did at the beginning—often unwittingly—worked. It’s been over twenty years since those first car rides with Reed, and in that time, I’ve come to realize that there are things we discovered that, applied broadly, can influence a project’s success. Not exactly laws, not even principles, but hard-won truths.

Truths like: Distrust epiphanies. The best ideas rarely come on a mountaintop in a flash of lightning. They don’t even come to you on the side of a mountain, when you’re stuck in traffic behind a sand truck. They make themselves apparent more slowly, gradually, over weeks and months.

“Sure, sure,” Reed replied absentmindedly. “But the point is that customizing a unique product for every customer is just too difficult. It never gets easier. The effort to make a dozen is exactly twelve times the effort it takes to make one. You’ll never get ahead.” “But we have to sell something.” “Sure. But you want something that will scale,” he said. “You want something where the effort it takes to sell a dozen is identical to the effort it takes to sell just one. And while you’re at it, try and find something that’s more than just a onetime sale, so that once you’ve found a customer, you’ll be able to sell to them over and over again.”

A few years ago, when my son graduated from college, he moved out to San Francisco with a buddy of his, intent on starting a new company. In less time than it took to drive from our place in Scotts Valley to San Francisco, he had built a website on Squarespace, set up a credit account on Stripe, bought some banner ads using AdSense, and set up some cloud-based analytics on Optimizely to measure the results. All within a single weekend. (One of the ideas they tested? Shampoo by mail. What can I say, the apple doesn’t fall far from the tree.) But back in 1997, you could raise $2 million with a PowerPoint. In fact, you had to. There are a lot of reasons for that, but the most fundamental had to do with time. In 1997 there was no Squarespace. No Stripe, no AdSense. No Optimizely. No cloud. If you wanted to build a website, you had to have engineers and programmers build it for you. You had to have servers to serve the pages. You had to figure out a way to accept credit cards. You had to do your own analytics. Forget a weekend. Try six months. And you needed money for that. Money to hire people, to rent space, to buy equipment…money to survive until you could prove your idea had merit, and until you could raise your first serious funding. It was kind of a catch-22: You couldn’t prove to your investors that your idea would work unless they gave you money to prove that your idea could work. You had to sell them on your idea.

As I mentioned earlier, Reed and I had assumed that the value of Netflix (which at that point was just two guys and an idea) was $3 million. So to keep the math easy, I decided that to start, there would be six million shares of Netflix stock, each worth fifty cents, and each representing a small fraction of ownership in the company. On day one, there were only two owners of the company—Reed and I—and we split it down the middle. Each of us received three million shares—or 50 percent of Netflix. Now, if nothing had happened since then, and I still owned 50 percent of Netflix, my world would be a little different. As I mentioned, Netflix is now worth about $150 billion. Owning half of that would be a nice piece of change. But then comes something called “dilution.”

The truth is that no business plan survives a collision with a real customer. So the trick is to take your idea and set it on a collision course with reality as soon as possible.

All of this might seem like it happened fast. And it did—in a matter of weeks, we’d gone from a list of nebulous ideas to a semicoherent plan for moving forward. But here’s the thing about Silicon Valley in the late nineties: everything was fast. It hadn’t been slow in the eighties—not exactly. But progress had occurred on a more incremental scale. It was an engineering driven culture, so it all moved at the speed with which things could be built.

The most impactful of these exercises? Blindfolding us, driving us to a random intersection in Hartford, confiscating our wallets and watches, and telling us that we’d be picked up in three days. No food, no water, no prearranged place to sleep. Just a phone number written on our arm, in case we decided to give up. It went without saying that all of us would rather freeze to death under an overpass than admit defeat and call it.

In a way, all of these decisions were a kind of microcosm of the problems facing us as innovators in the late nineties. When you’re building a business from the ground up, you start from scratch—from zilch, from nada. And you have to figure out how to make it work. The same was true for a tech startup in 1997, especially one that focused on using the emergent power of the internet to sell a brand-new piece of technology. DVDs were barely in the world, high-speed internet was in its infancy, and there were no premade templates for online sites. If you wanted to do something, you had to build it yourself—from scratch.

but he was planting seeds that would pay off…big-time.

Planting seeds is important, like digging the well before you're thirsty. It's worth remembering that some of those seeds pay off big time, and others don't pay off at all. And that's OK

I firmly believe that a healthy startup culture arises from the values and choices made by the startup’s founders. Culture is a reflection of who you are and what you do—it doesn’t come from carefully worded mission statements and committee meetings.

Culture isn’t what you say. It’s what you do.

What happens on a backpacking trip also turns out to be a perfect model for what happens in a startup. Startups are small, they’re often lean, and they’ve separated themselves from the dominant mode of thinking within their space. They’re made up of like-minded people who are on a journey, who share a common goal.

Steve Jobs used the analogy of a wagon train headed west.

So as a leader, the best way to ensure that everyone arrives at the campsite is to tell them where to go, not how to get there. Give them clear coordinates and let them figure it out.

Real innovation comes not from top-down pronouncements and narrowly defined tasks. It comes from hiring innovators focused on the big picture who can orient themselves within a problem and solve it without having their hand held the whole time. We call it being loosely coupled but tightly aligned.

People want to be treated like adults. They want to have a mission they believe in, a problem to solve, and space to solve it. They want to be surrounded by other adults whose abilities they respect.

Years later, Patty would end up revolutionizing the field of HR at Netflix, and much of her philosophy can be traced back to the realization we both had that day at Borland: People don’t want hot tubs—not really. They don’t want free snacks or Ping-Pong tables or kombucha on tap.

Her book: Powerful: Building a Culture of Freedom and Responsibility is a great read.

What they really want is freedom and responsibility. They want to be loosely coupled but tightly aligned.

My own approach has always been more measured. I think people are more productive when they’re happy, when their lives outside of work aren’t totally subsumed by their job.

Nowadays, they call that “self-care.” Back then, we just called it common sense. If we were going to try to fundamentally change an entire industry, we needed to have our wits about us.

Even in the trenches of pre-launch Netflix, I kept to a long-standing tradition with Lorraine. On Tuesdays, no matter what, I left the office promptly at 5:00 and spent the evening with my wife. We’d hire a babysitter, go for a walk on the beach, and then head to our favorite restaurant, Bittersweet Bistro, for some roasted salmon and a few glasses of wine. Sometimes we’d hit the theater in downtown Santa Cruz and catch a movie. I needed that time with Lorraine—just the two of us, no kids, no domestic duties. I needed to recharge, to be with my best friend for a few hours and not think about anything else.

Kibble had been my idea. It came from an old advertising and marketing adage: It doesn’t make a difference how good the ads are if the dogs don’t eat the dog food. The idea was that no matter how much sizzle you’d given the steak—no matter how well you’d sold it—nothing mattered if the product was lackluster. It doesn’t matter how brilliant your ad campaign for Alpo is if your dog won’t eat it. I’d picked Kibble as a working name because I thought it would remind us to focus on the product. Ultimately, we had to build something people would love. We were going up against some big guns, and we’d never succeed long-term if our service wasn’t something people wanted to use—if the dog food we were selling wasn’t tasty.

a general rule of web design is that if you have to explain something, you’ve already lost.

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.

We’d also heard from our VC connections that Bezos planned to use a good chunk of the $54 million raised during his company’s 1997 IPO to finance an aggressive acquisition of smaller companies. That’s normal—most companies looking to enter a new business arena do what’s called a “make-or-buy analysis,” in which they consider the cost, timing, and difficulty of starting a new business from scratch, then evaluate whether it would be cheaper, faster, and better to simply buy another company that’s already doing it. With that in mind, it didn’t take us long to figure out why Jeff and Joy wanted to meet. Netflix was in play.

But when Amazon calls, you pick up the phone. Even if it’s 1998, and Amazon is nowhere near the powerhouse it is today. The building we were winding our way through certainly didn’t look like it belonged to a powerhouse. The stairs to the second floor were warped and creaky. The reception area was cluttered and dusty. Piles of Amazon boxes were pushed into the corners. The chairs against the wall were mismatched. On the desk was a telephone with a printed directory of numbers under a piece of glass. Reed leaned over, squinted at the glass, and dialed a number.

If you have any interest in what Amazon was like early, this is a great read

That’s true, by the way. 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. Focus is imperative. Even when the thing you’re focusing on seems impossible. Especially then.

We call that CAC. Pronounced kack, it stands for “cost of acquiring a customer.”

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. You don’t have to have all the answers if you appear to be the sort of person to whom they’ll eventually come.

There’s a speaking tactic in business, useful for breaking bad news. It’s called a shit sandwich. You open up with a string of compliments, praise for work well done. That’s your first piece of bread. Once that’s done, you pile on the shit: the bad news, the less than glowing report, the things your audience doesn’t particularly enjoy hearing. You close with more bread: a blueprint for moving forward, a plan for dealing with all the shit.

Radical honesty is great, until it’s aimed at you.

Paradoxically, if I hadn’t relinquished the title of CEO to Reed in 1999, I wouldn’t be writing this book.

If you fill your company with people who lack good judgment, then you have to build all kinds of guardrails to keep them in line. You have to define everything for them: how much they can spend on office supplies, how many vacation days they take, when they are expected to be at their desk.

That’s where Patty McCord came in. She was brilliant at pushing the boundary of rules and freedom. She identified that what was special at Netflix was our particular combination of freedom and responsibility. And then she endeavored to put structure in place not to limit freedom—but to encourage and preserve it.

This is superbly described in Patty's book, Powerful: Building a Culture of Freedom and Responsibility https://amzn.to/2JJs5s5

This is one of the facts of startup life: change. When you’re building something from nothing, you rely on talented, passionate generalists: people who can do a little bit of everything, who buy into the mission, and whom you trust with your time, money, and ideas. But once you’ve gone from 0 to 1, and the seed you’ve planted is starting to grow, some shuffling happens. Often the person who was right for the job at the beginning is not right for the middle. Sometimes bringing in people with decades of experience and institutional know-how is the necessary thing to do.

Overplanning and overdesigning is often just overthinking—or just plain old procrastination. When it comes to ideas, it’s more efficient to test ten bad ones than spend days trying to come up with something perfect.

Lorraine laughed. She knew I was quoting William Goldman, whose book Adventures in the Screen Trade we’d both just finished. You might not have heard of Goldman. He writes screenplays, so he largely labors behind the scenes and out of the headlines. People of my generation can thank him for writing Butch Cassidy and the Sundance Kid. Those a bit younger may have enjoyed the script he wrote for The Princess Bride. He also did Misery, Heat, Magic, Marathon Man, The General’s Daughter…and over twenty-five more. He’s won two Academy Awards for screenwriting. But William Goldman is most famous for writing three words: Nobody. Knows. Anything. According to Goldman, those three words are the key to understanding everything about Hollywood. Nobody really knows how well a movie is going to do…until after it’s already done it.

There are bad ideas. But you don’t know an idea is bad until you’ve tried it.

But now we had a new model, one we never could have brainstormed into existence. The most revolutionary structure in e-commerce was the result of years of work, thousands of hours of brainstorms, dire finances, and an impatient CEO. The subscription model saved Netflix and quickly came to define it. But it wasn’t something that we thought our way toward—it wasn’t something anyone could have predicted ahead of time. It took a lot of hard work, a lot of hard thought. It also took a lot of cards falling just right. Other people call that luck. I call it nobody knowing anything.

To answer that question, I’d like to tell you about something I called the Canada Principle.

we thought frequently about expanding into Canada. It was close, the regulations were easy, and the postage and transport costs were low. When we ran the numbers, we saw that we could probably get an instant revenue bump of about 10 percent. But we didn’t do it. Why? Two reasons. First, we knew that it was inevitably going to be more complicated than it looked. Because French is the main language spoken in some parts of Canada, we would have translation headaches. Canadians use a different currency, which would have complicated our pricing—and the fact that Canada also calls that currency a “dollar” threatened to be a communications nightmare. Postage was different, too, so we would have had to use different envelopes. In other words, even something seemingly simple was bound to be a pain in the ass. But the bigger reason for staying out was even simpler. If we took the amount of effort, manpower, and mind-power Canadian expansion would require and applied it to other aspects of the business, we’d eventually get a far greater return than 10 percent. Expanding to Canada would have been a short-term move, with short-term benefits. It would have diluted our focus.

Focus. It’s an entrepreneur’s secret weapon. Again and again in the Netflix story—dropping DVD sales, dropping à la carte rentals, and eventually dropping many members of the original Netflix team—we had to be willing to abandon parts of the past in service of the future. Sometimes, focus this intense looks like ruthlessness—and it is, a little bit. But it’s more than that. It’s something akin to courage.

The longer we ran the test, the more apparent it was that next-day delivery was a real game changer—just not in the ways we thought. It didn’t affect retention—it affected sign-ups. Next-day delivery inspired real dedication, the kind that makes you tell all your friends about this new service you’re using. Over time, we noticed that our penetration into the Sacramento market was approaching Silicon Valley levels. Silicon Valley! Where all the early adopters of DVD technology lived!

The whole saga had provided a valuable lesson: trust your gut, but also test it.

In the end, we realized that the best way to give users what they wanted was to crowdsource data from them. At first, we did what Amazon did. Using a process called “collaborative filtering,” Amazon would suggest products to you based on common buying patterns. They still do this. Essentially, if you buy a wrench from Amazon, it groups you with other users who have bought a wrench, and then suggests that you buy other things that they’ve bought.

Excellent description of collaborative filering follows.

If we were going to use collaborative filtering to group customers and recommend films, we needed to know what customers enjoyed rather than just what they rented. We needed a reviews system: a movie rating system. Grouping customers by ratings—by “clustering” users according to overlapping positive or negative reviews—meant that we could efficiently recommend films to users based not on what they’d rented but what they liked.

We’d even started changing Netflix’s identity to appeal to risk-averse banks and their customers. The big trend, in the late 1990s and early 2000s, was for internet companies to be portals—entry points on the internet for a specific niche. The popular wisdom at the time was that if you wanted to be a successful website, you had to be all things to all people—if you wanted to chase money, you had to chase traffic first. That meant that Netflix couldn’t just be a rental service aimed at helping people find the DVDs they’d love—it had to be a place for movie lovers of all stripes.

Most times, deciding what not to do is harder than deciding what to do.