Stories from the origins of Netflix

Marc Randolph Co-founder, Netflix

Netflix’s co-founder, Marc Randolph’s episode on the Tim Ferris show is full of interesting stories and nuggets from the origins of Netflix. I will try to paraphrase a few of them which I found interesting:

“There is no such thing as a good idea. Every idea is a bad idea. Crazy ideas that might have been Netflix: “

  • Personalized Shampoo — Cut a lock of hair and mail it to us, our team of ace scientists formulate a personalized shampoo
  • Personalized dog food — Formulate a custom dog food for your dog based on the breed, gender, activity level, climate etc.
  • Personalized sports equipment — Skis, roller skates, bikes etc personalized for you
  • And then finally one idea that seemed reasonable which was video rentals by mail. But, in 1997, VHS tapes were big and expensive so it was not cost effective to mail them so we bagged that idea.

Then one day we heard about this new technology called the DVD. The video rental idea popped in our head and instead of doing more research about it or put together a business plan, we simply tried it by mailing a DVD for the cost of a postage stamp and then it worked. And that was the way of knowing whether it is a good or bad idea!

“I realized that the key to being successful is not how good your ideas are. It’s how good you are at being able to find quick, cheap, and easy ways to try your ideas.”

Blockbuster at the time had 9000 stores, 60000 employees & $6B in revenue. Why would anyone wait for DVDs for 1–4days when they could just drive to a blockbuster which was stone’s throwaway for anyone in the country?

They had a point. We did have some things up our sleeve, basically the fact that everyone hated blockbuster, you always want to compete against someone that everyone else hates, but why did they hate blockbuster?

Blockbuster’s attitude:

  • They did not believe that they were in the customer service business.
  • They also rely in their business model on late fees.
  • They actually had an internal term for it and they called it “managed dissatisfaction”.

“Oh my God, that’s great. And you always want to compete with someone whose core tenet is managed dissatisfaction”

  • They cant afford to buy enough copies to satisfy every single person who wants it on day one Their whole model is you buy it once & then you turn it 20–30 times.
  • They were really in the demand fulfillment side, they had this new release issue where a new release would come out & people like lemmings would all flock to the blockbuster & they would all want the same movie.

All these things were fundamentally frustrating to customers.

“We fly to Dallas & end up being ushered up into this big 17 story steel skyscraper. And then they asked the obvious question which is how much are we going to pay? And we had obviously rehearsed this one on the plane.

So Reed screwed up his courage and kind of leaned in and said $50 million. And they, Laughed at us. I mean, maybe not out loud. But I swear they were trying to hold back a laugh. And as you can imagine, the meeting went downhill pretty quickly after that.

Sometimes the only way out is through that we were going to have to confront this head on. It took us 10 plus years, but eventually, you know, the company that had 9,000 stores is down to one and the company they could have bought for $50 million is now worth $250 billion”

When you’re starting to get a little bit of traction in the US, people say, you should go into Canada. That’d be an easy 10% bump in your revenues because Canada is approximately 10% the market size.

Then you begin to think about it:

  • They have a different currency
  • Some of our DVDs have different rights arrangements in Canada
  • Part of Canada speaks French which means there are language requirements

You begin accumulating all these small things. But what we realized is we were growing so quickly at that point that were we to take the exact same effort as minimal as it might be, that it took to get into Canada and just apply it back on our core business, we would get a way bigger bump than 10%.

What the Canada principle really says is you’ve got to focus, that the real key is picking the two, three things that are the most important. If you get those right nothing else matters. You have to very consciously choose not to do things which appear easy.

Software Engineer | Curious about technology and the economics of the tech industry | https://twitter.com/karthikkalyan90

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