Co-Founder Marc Randolph Shares Why Everyone Doubted Netflix’s Success
Listen to Marc Randolph’s segment here
00:01 Speaker 1: Get ready for all the craziness of small business. It’s exactly that craziness that makes it exciting and totally unbelievable. Small Business Radio is now on the air with your host, Barry Moltz.
00:12 Barry Moltz: Well, thanks for joining this week’s radio show. Remember, this is the final word in small business. For those keeping track, this is now show number 567. Happy New Year, 567. This episode, of course, is provided by Nextiva, the all in one communications platform for your small business. It’s also sponsored by LinkedIn, the place to generate leads, drive traffic, and build your brand awareness. For a free $100 credit to launch your campaign, go to www.linkedin.com/SBR. It’s also supported by efile4biz, the easiest way to electronically process and file your 1099s and W2s for your business, go to www.efile4biz.com. It’s also sponsored by vCita, all you need to run your business in a tiny little app, try it for free at www.vcita.com, that’s the letter V-C-I-T-A dot com. It’s also supported by Blue Supplies. I’m gonna have to take that one more time, that last thing. Can I just… Blue Summit Supplies, get your IRS 1099 and W2 forms, go to bluesummitsupplies/SBR. Well, we wanted to kick this year off with one of the most explosive entrepreneurs of our time. Marc Randolph is the co-founder of Netflix, serving as their founding CEO, as the executive producer of their website, as a member of their board of directors until his retirement in 2004. He’s got a new book out, it’s called “That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea”. Marc, welcome to the show.
01:43 Marc Randolph: Pleasure to be with you. Explosive?
01:46 BM: Explosive.
01:46 MR: Man, not sure about that one.
01:48 BM: Explosive of course. Well, I love the title of your book because we hear that all the time when we come across entrepreneurs. And certainly, when I was running my own businesses, they said, “Nah, that will never work.” Why did you choose that title?
02:00 MR: Well, it’s actually simple. ‘Cause basically, most of the ideas that you come up with are pretty crazy on the surface. And maybe even crazy a few feet below the surface. And when I began telling everyone about this crazy idea that we had to rent video by mail, that’s what they said was, that will never work. And that came from employees, that came from the people we pitched to raise money. It even came from my wife. And that was pretty universally panned as an idea.
02:25 BM: So, why Marc did people think it never would work because folks enjoyed going into a store and getting their videos and seeing it all kind of up there on the shelves. I remember that. I’m not too young for that.
02:35 MR: Yeah, that was probably the dominant reason why everyone had thought that video rental by mail was pretty crazy because at the time, this is back in 1997 when we were pitching this. There was 9000 Blockbuster stores.
02:47 BM: Wow.
02:47 MR: You could basically throw a rock from pretty much anywhere in the country, even in the world, even, and hit a Blockbuster store. And so, people couldn’t understand how we possibly thought that somebody would be willing to go online, order a movie, wait two or three days for it to arrive, when they could just pop in their car or walk down the block, and be at a Blockbuster store. It just seemed completely irrational. And the weird thing is that the idea as originally envisioned, in fact the idea as originally launched, didn’t work. It was a bad idea. And which is why the subtitle for the book is “the amazing life of an idea”, because most of these ideas you have are not what the final business is. They’re not the be-all and end-all. They’re just a starting point, and it really… What makes success in the company is where you take it from there.
03:34 BM: So Marc, what was the idea that didn’t work? And then I guess you evolved it into mailing the DVDs by mail.
03:40 MR: The original idea which didn’t work was VHS, because this was back in the summer of 1997, and as you may remember, back then, back in the good old days, all video came on VHS cassettes, and it didn’t take a lot of research for me to realize that’s not gonna work.
03:56 BM: Unless you’re like me who had a Betamax, right?
04:00 MR: [chuckle] Exactly, yeah even less likely to work for you. But the breakthrough came, maybe a month or so after we originally had the idea, and we learned about this new technology called the DVD. And it was in test market in San Francisco and it was small and it was light. And we realized that we might actually be able to mail this in, using an envelope, and a stamp. And so, to validate that, Reed Hastings, my business partner and I, turned the car around. We were commuting at the time. And drove back down to Santa Cruz where we lived, and actually went and bought a music CD, because there was no DVDs to be found. And we mailed it to Reed’s house in Santa Cruz, and it got there in less than a day for the price of a stamp. And that’s when we realized, “Wow, we actually might be able to make this work.” And so the business that we launched, this was in April now of 1998, was mailing people DVDs through the mail. And it took anywhere from one to three days to arrive, and we had due dates and we had late fees, and you had to mail it back. And we charged a $4 per rental charge, pretty much the only real innovation here was the fact that we had a single store that we were serving the whole country from rather than trying to build out a chain of franchises or something like that.
05:14 BM: I remember, I was an early subscriber, and I was excited when those red envelopes came in the mail.
05:19 MR: Yeah, there was… We were wrong about some things. And in fact, people were willing to rent DVDs, but reluctantly, but only for a weird reason, only because there just was no other place to get a DVD. But for those first few years, while the installed base was building out, none of the video stores had any incentive to stock DVDs. There might only be a handful of players in their own neighborhood. Whereas for us, we were the only place to come. And so we were getting pretty much anybody with a DVD player coming to get their DVDs from us. Our problem is that it really was a pretty unsatisfactory experience. And even though we could maybe get someone to rent from us once, we’d have pretty much no repeat business. And they were small orders, and it was a dog. And we struggled for a year-and-a-half trying to find something that could unlock video rental by mail, but it really wasn’t until a year-and-a-half later, in the fall of 1999, that we finally stumbled on this even more crazy idea of doing it A, as a subscription, and B, eliminating due dates and late fees altogether, just let people keep the disks as long as they want. And when they were done, they just mailed one back. And we’d ship them the next one. And boy, that was an idea even more people thought would never work, but as these strange stories sometimes turn out, it did work. And it worked really, really well.
06:42 BM: And that was really was my next question ’cause I think initially, it was like three a month, and then you went to unlimited. Were you afraid about the financial risk of doing that?
06:53 MR: No, because there was a natural… There was two natural governors at work. One is you were only allowed to keep out three at a time, or four at a time, we had different plans. And so the rate that you could turn them back and forth was limited. I mean, someone if they really worked at it, might have been able to do 20 movies in a month, and that would have been definitely a big money loser. But the second thing we had going for us was human nature, and that the reality is that most people don’t watch that much. And what they were really doing was not using Netflix as a way to consume millions of movies, they were using it for incredible convenience, that now it turned this whole idea of immediacy on its head because now, ironically, we were faster than Blockbuster. If you wanted to watch a movie, there was three or four sitting on top of your TV. It was literally two steps away.
07:43 BM: Right. Was in already in your home, you didn’t have to go to the store.
07:46 MR: Exactly. And so that was what turned out to be the key, it was convenience. And so the average renter was not renting 20 times a month. They were renting in a more reasonable rate, one that… Now, this is gonna be a strange thing right before the whole dot com bust, where we actually could charge people more for the service than it cost us to deliver it. So actually having a net positive business model was a pretty cool thing.
08:15 BM: Especially during before the dot com bust. My understanding is you got an offer from Blockbuster somewhere around 2000. Tell us about that and what was the offer and why didn’t you take it.
08:25 MR: Well, I’m afraid it wasn’t an offer from Blockbuster, unfortunately so. In fact, it was the opposite. We wanted an offer. And the reality is this crazy plan that I just described to you with the no due dates and no late fees and its subscription service was complicated. And so my idea was, “Well, let’s just do a first month free. Let them experience the magic that is Netflix and all will work itself out.” And it worked incredibly well, as I mentioned. But what that meant is that the more orders that came in, on one hand I was going, “This is fantastic,” but the other hand, I’m going, “Boy, every order coming in is costing us money for the first free month and the acquisition cost.” And so the irony is we were losing a fortune in cash flow, and worse, the way that normally we’d have been very comfortable funding this short term cash flow issue was by raising money from VCs, but this was in the year 2000.
09:19 BM: Right, not a good year. [chuckle]
09:19 MR: Right at the tail end. No, definitely not. And so we were desperate. And in fact, ironically, we were going broke from our success. And so we go, “Wow, we’re stuck here.” And so we decided pretty much the only way out is Blockbuster, and we tried to sell ourself to Blockbuster. We flew to Blockbuster, we made our case that they should buy us and we would run the online business, they’d run the stores, we’d find the synergies, and boom. And they asked how much they thought we were worth, and we said, “Well, we think about $50 million.” That’s not coincidentally, that was exactly how much money we were in the hole for at the time. And they pretty much… They didn’t laugh, but they came close. And so rather than us turning down an offer…
10:06 BM: Wow.
10:06 MR: This meant us flying home empty handed with this feeling of desperation, because we knew there was no way around. And now there’s not going to be some magic deus ex machina that comes down and saves us. Now we would actually have to figure this out. And worse, the only way out was through, it was by taking on Blockbuster directly.
10:24 BM: I gotta believe that whoever made those decisions at Blockbuster, they gotta be thinking, “Well, that was kind of a bad decision that I made.”
10:30 MR: Yeah. It’s kinda funny because just a couple months ago back in early November I was at a film festival thing for a release of a Netflix documentary, and with us there were two… Were the ex COO of Blockbuster, as well as the person who ran Blockbuster online. And it was fantastic talking through the two sides and how they both felt about it. And yes, did they miss that big opportunity to buy us? Yes. But then there was other times when they felt they had us on the ropes, and other times that we thought we had them on the ropes. This was an amazing, an amazing time, seeing us going through that actual pitch battle once they finally decided that they had to take us seriously.
11:14 BM: So Marc, in hindsight, why do you think that you at Netflix was able to do something that Blockbuster wasn’t able to do? Was it because you were coming from outside the industry as a disruptor that we see so often?
11:25 MR: Yes, but not… I put less credence on the outside of the industry. Although it is true, this is a handful of people with zero experience in the video business taking down a $6 billion corporation. But I think the thing that took down Blockbuster was the same thing that takes down every established large player, which is this hesitancy, this unwillingness, this fear, this inability to be willing to cannibalize their past in order to invest in what the future is. Blockbuster saw it. They saw what was happening. They knew that unless they were able to get into the online business they were gonna go down. But it’s still was almost impossible in an organization with 60,000 employees for them to say, “Let’s take our A team and take them off the $6 billion of business and put them on the half a million dollars worth of business.” And by the time they eventually came to the realization that, “Wow, we’re gonna have to invest, we’re gonna to have to move our resources, we’re gonna to have to do things which hurt us in the short term,” it was too late.
12:29 BM: Wow. Now, Netflix created, people call now, “binge watching”, and it really did something that nobody else did at that time which was, “Hey, let’s release all the episodes at one time, like House of Cards.” Where did that come from?
12:43 MR: Excuse me. So it came from the place that most of these innovations came from, it came from starting with what the customer really wants. And as Netflix kinda looked at… As they began moving into original content and began releasing things on their own, they were saying to themselves, “What do customers really want?” And what we realized is that most of the ways that television was being presented was legacy. For example, it was all 30 minutes long, which is arbitrary based on the time slots of television. It was in fact not 30 minutes, it was 22 minutes to make room for the commercials.
12:51 BM: Right. The commercials.
12:51 MR: These 30 minutes were broken up into four to five, three to four-minute segments, so each of those segments had to have its own story arc, which means you had to have things very compressed and very over the top. You had to start every 30-minute episode with a recitation of where you were when you left off last week. You had to end it with a cliffhanger. Now, are these things because they’ve been determined to be the ultimate way to tell a story? Absolutely not. And so once you begin releasing creative talent and they’d say, “How long do you want the episodes to be?” And you go, “I don’t know, whatever you want. Whatever you think is gonna work for telling your story.” “And are they gonna be released once a week?” “No, they’ll be all simultaneous so you can begin building story arcs at multiple episodes.” Except with the understanding that people will watch them as long as they wanna watch them. In other words, this is not like us sitting down and redesigning what television should look like. This is basically saying, “It’s a new medium. It’s a new way of distributing content. What should content look like and how should it be delivered to take advantage of this new medium?”
14:18 BM: Well, I saw a statistic said now 60% of Americans binge watch, so you guys were right. Tell us what you’re up to now, Marc, besides going out there and talking about the book.
14:28 MR: So I left Netflix actually nearly 15 years ago now, 16 years ago. And Netflix was my sixth start up. And so I was kind of at a point where I was not sure I had it in me to start another company. But once you have this in your blood, you can’t stop.
14:44 BM: For sure.
14:45 MR: So I couldn’t go cold turkey and go off and play golf or fish, since I don’t like either of those things.
[laughter]
14:50 MR: I needed some way to get my fix. And it took a while, I had to kinda do a little business plan for myself, but I ultimately realized that the best way to get what I wanted was to mentor other early stage entrepreneurs, to help them with their start ups. ‘Cause it turns out the thing that I loved best about that Netflix experience was coming into the office and sitting around the table with really smart people and getting to solve these really interesting puzzles, and that now I could do that, but rather than it being for my company, I could be doing that with someone else’s company. That I could get in deep enough and know the product and know the people and know the competitors so that I could sit around their table with them and help them solve really interesting puzzles. And even better, I get to go home at night.
15:36 BM: Absolutely.
15:36 MR: It really was the perfect match for me. And unfortunately, I did get sucked into helping start another company after that, which we’re just a… We called it the Looker Data. And we sold it… The deal with selling it to Google is just about to close. So that chapter will come to an end. And I swear, I swear, never again. I’m done.
15:56 BM: You swear. [chuckle] It’s hard for an entrepreneur to swear that. Marc, thanks so much for being on the show. The title of the book is, “That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea”. I appreciate you joining us.
16:06 MR: Oh, thanks so much for the time.
16:08 BM: This is AM 820 WCPT in Chicago. We’ll be right back.