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In the tradition of Phil Knight’s Shoe Dog comes the incredible untold story of how Netflix went from concept to company-all revealed by co-founder and first CEO Marc Randolph.
Once upon a time, brick-and-mortar video stores were king. Late fees were ubiquitous, video-streaming was unheard of, and widespread DVD adoption seemed about as imminent as flying cars. Indeed, these were the widely accepted laws of the land in 1997, when Marc Randolph had an idea. It was a simple thought-leveraging the internet to rent movies-and was just one of many more and far worse proposals, like personalized baseball bats and a shampoo delivery service, that Randolph would pitch to his business partner, Reed Hastings, on their commute to work each morning.
But Hastings was intrigued, and the pair-with Hastings as the primary investor and Randolph as the CEO-founded a company. Now with over 150 million subscribers, Netflix’s triumph feels inevitable, but the twenty first century’s most disruptive start up began with few believers and calamity at every turn. From having to pitch his own mother on being an early investor, to the motel conference room that served as a first office, to server crashes on launch day, to the now-infamous meeting when Netflix brass pitched Blockbuster to acquire them, Marc Randolph’s transformational journey exemplifies how anyone with grit, gut instincts and determination can change the world-even with an idea that many think will never work.
What emerges, though, isn’t just the inside story of one of the world’s most iconic companies. Full of counter-intuitive concepts and written in binge-worthy prose, it answers some of our most fundamental questions about taking that leap of faith in business or in life: How do you begin? How do you weather disappointment and failure? How do you deal with success? What even is success?
From idea generation to team building to knowing when it’s time to let go, That Will Never Work is not only the ultimate follow-your-dreams parable, but also one of the most dramatic and insightful entrepreneurial stories of our time.
Getting to a good idea takes hard work and systematic vetting.
Marc Randolph recalls the ideas he pitched to Reed Hastings as they drove to work. Most of his ideas were bad, but he did have one good idea: that they should start a company together. They had no money and would soon be out of jobs, but with some investment capital from their former employer, they could pursue this new idea.
Randolph knew the future of Netflix involved internet sales, but he didn’t know how to go about it. Hastings was studying education in college and wanted to change the world. Randolph had experience starting a new company with two other employees who moved with him from New York City, so he wanted to keep his team together. Christina Kish helped manage projects for them while Smith handled press releases and public relations. Together they were able to help Randolph pitch ideas for new companies that would sell through the internet instead of in stores.
Hastings wanted to create something that would encourage repeat business. He thought about selling books, but the cost of shipping was prohibitive. He also admired Jeff Bezos’ success in selling books on Amazon and considered videotapes as well, but they were expensive at the time.
In 1997, the US market for DVDs started to expand. Discs cost less than videotapes and were light enough to mail.
The author tells us how he and Hastings tested an idea to rent movies by mail. They mailed a CD in a cardboard envelope to Hastings, who received it undamaged. In mid-1997, only 125 movies were available on DVD. Building a website required six months and several engineers. The truth is that the author likes headaches; he enjoys having problems every day with which he can deal.
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Randolph and Hastings agreed that their idea was worth $3 million. They created six million shares of the company, which they split in thirds. Randolph felt comfortable with this because he only risked his time; he had three young children at home to take care of.
Hastings wanted “other people’s money,” too, so they’d have skin in the game.
Netflix wanted to test the idea with potential investors. Hastings and Randolph went to Alexandre Balkanski, who made a lot of money digitizing analog content. They thought he would understand the potential for their idea. However, he wasn’t interested in it at all. He believed that once you digitize analog content, there is no need for physical media anymore.
The future, according to Balkanski, was either downloading or streaming content. However, the author notes that Balkanski underestimated how long it would take for his vision of the future to be a reality. Hollywood invested in DVDs and not online streaming. Hastings and Randolph believed that building a DVD rental business would create a customer base for their online streaming service in the future. They were right; however, Balkanski did not agree with them at first about investing in DVDs instead of focusing on streaming technology immediately.
Randolph was uncomfortable asking his friend for money. He knew he’d say yes because they were friends, so it wasn’t a good idea to ask him. Randolph’s mother gave him $1.9 million and the business started up with little furniture and tech hardware.
Randolph assembled an impeccable team and built a great culture.
Randolph and Hastings recruited a team of people to help them. They met in diners and hotel conference rooms, bringing in Kish, Smith, Meyer (as chief technology officer), Cook (for operations) and Lowe (to handle the movie rental business). Randolph also wrote that he had “a lot to do” but it was “pleasure” because they were all working on something they loved.
Netflix was started by Marc Randolph and Reed Hastings. They raised money from investors for the company, which is now worth billions of dollars. Corey Bridges joined the company to help with customer acquisition efforts. Patty McCord ran human resources at Netflix after she left her job as a consultant at Bain & Company, where she advised companies on how to be more efficient and productive in their work environments. She brought that philosophy to Netflix’s culture when she came onboard as its HR director.
The company gave employees unlimited vacation time and hassle-free expense reimbursement policies because they believed people would take care of themselves if they were trusted to do so without being micromanaged or having every move watched over them by management or HR staff members who constantly checked up on them whenever they took time off or submitted expenses for approval before reimbursing it later (which is common practice at many other companies).
At launch, April 1998, 926 movies were out on DVD, and Netflix had them all for sale or rent.
Netflix was a startup company that had a difficult time when it first started. It needed to get people interested in its product, but no one thought it would be successful. The name they chose for the company was Kibble; however, they knew that this wasn’t going to work because launch day was coming up and the company needed a new name.
No one liked Netflix at first, but it ended up being their best option since customers were ordering right away once the service launched. Since there weren’t many orders on the first day of launching, Netflix bought more servers and other supplies so that they could handle all of these orders by themselves. By 2:52 p.m., 137 orders had been sent off to post office boxes around Los Angeles as part of their initial launch strategy for getting customers involved with using Netflix’s services.
Six months later, DVD sales were robust. However, rentals stayed around $1,000 per month and didn’t rise. Still, Netflix was on its way to $1 million in business in its first year. But it couldn’t yet buy lists of potential customers because hardly anyone owned a DVD player at that time.
That’s why, Randolph says, he sought a partnership with a DVD player manufacturer. What if the company gave out free rentals to people buying their machines? A few months later, Randolph got a call from the Toshiba representative he’d met at an electronics convention.
The two companies recognized that they could reach more customers by partnering up. Toshiba advertised its deal on the side of its box for DVD players and it made purchasing less risky for consumers because they knew they would be getting three free rentals along with their purchase. After Sony saw what Toshiba was doing, it wanted in as well so Netflix had to pay $100 per customer but it was worth it because now both brands were reaching new audiences and gaining popularity among consumers who would have otherwise stayed away from them.
The firm had a good start, in spite of high customer acquisition costs, future DVD sales competition and unsustainable rental income.
Randolph and Hastings worked hard to build Netflix into a premiere DVD rental site. In 1998, Randolph writes about meeting with Jeff Bezos of Amazon.com, who wanted to expand into music and video sales. He offered to buy Netflix but the two declined his offer in order to keep growing on their own terms.
Randolph knew that after Amazon started selling DVDs, Netflix would be doomed because they were still unprofitable. Hastings was also aware of this and had to figure out a way around it. He decided to focus on renting the DVDs instead of selling them, which helped him get more subscribers (institutional venture partners invested money in them). By 1998, Netflix became a successful company with 40 employees working for them.
Randolph and Hastings built their relationship on “radical honesty,” enabling Hastings to confront Randolph about Netflix’s leadership.
Randolph was very good at putting together a team. However, Hastings told him that he had made some financial decisions that were questionable. He thought it would be better if Hastings became the CEO and Randolph became the president of Netflix. Although Randolph disagreed with his decision, he admits that it probably worked out for the best because Hastings has more business experience than him and could take Netflix to another level. Ultimately, “the dream belongs to everyone who helped you make it happen.”
Netflix brought in Barry McCarthy to be the CFO. Start-ups need passionate generalists, but as a company grows it also needs specialists. It then recruited Tom Dillon to run operations and Randolph admits that having someone of Dillon’s stature running operations was like getting Miles Davis to play at a bar mitzvah.
Monthly subscriptions, now ubiquitous, were a pioneering model in 1999.
Under the leadership of Hastings and Randolph, Netflix decided to do away with late fees and move to a subscription model. Customers would pay a monthly fee for four DVDs at a time. When customers returned one disc, they’d get another on their waiting list.
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Randolph admits that he thought it wouldn’t work because people are used to paying late fees. However, customers loved the flat rate and lack of extra charges; this proved Randolph’s belief that “nobody knows anything.” This is why you should test your ideas continually because if people want what you have, they will break down your door or leap over broken links just to beg you for more of it.
Netflix stuck to the Canada Principle, which states that if an idea can be done in another country, it should be. This is because the logistics of expanding into a new country are complex and require a lot of energy and focus. If you apply this principle elsewhere, your company will gain even greater revenues than it would by expanding into other countries.
At first, Randolph wanted to do both à la carte rentals and the membership model. However, when he applied The Canada Principle (which states that “no decision should be made at a meeting if you can make it in advance”), it made sense to streamline their efforts into subscriptions. Next-day delivery helped boost subscriptions, and Netflix was fully subscription-only by February 2000.
Just as Netflix planned to go public, the dot-com bubble burst and nobody wanted tech investments.
In 2000, Netflix employed 350 people and had almost 200,000 subscribers. It was a website for renting DVDs that served movie lovers. Bankers wanted to see this “all things to all people” approach as the company contemplated going public. But after the dot-com crash, going public wasn’t an option. Randolph considers that lucky because it would have locked Netflix into an early-2000s approach instead of keeping it on track for its core mission of getting movies to movie lovers.
Netflix had a good revenue model, but not much capital in reserve. It gave away the first trial month for free, and it took weeks to recoup its investments in customer acquisition. Without an infusion of cash, Netflix needed to sell. Blockbuster was the brick-and-mortar behemoth at that time; however, they didn’t have online infrastructure for rentals yet. They were behind on the times with their rental services and failed to see the importance of having an online presence as well as physical stores..
Blockbuster refused to buy Netflix for $50 million. The author was annoyed with Blockbuster CEO John Antioco, who had to stifle a laugh. As a result, the little DVD-by-mail company that Blockbuster could have bought is now worth $150 billion.
Randolph knew that Netflix needed two million customers to be profitable. But in 2001, they were far away from reaching that goal. They had to figure out how to be profitable with one million customers. One way was by laying off 40% of their employees.
Netflix went public May 23, 2002.
In 2001, Netflix had one million customers. They realized they didn’t need to have warehouses across the country that could ship DVDs by next-day delivery. Instead, they created 60 “hubs” where people could send back their DVDs and get new ones right away.
Even though Netflix became profitable by mailing DVDs to customers, they foresaw the future of streaming. Studios and networks were reluctant because of piracy concerns. They partnered with Microsoft for a streaming service through Xbox, but Microsoft couldn’t see why it needed Netflix.
The day Netflix went public, its stock opened at $16.19 and by the close of trading that day, it had made 80 million dollars. Randolph doesn’t beat around the bush: He and Hastings were rich.
After his father died from brain cancer in 1999, Reed Hastings left Netflix to focus on spending time with family and helping new start-up CEOs. He now runs Netflix, which has more than 150 million subscribers worldwide. Happiness is not about money; it’s about life experiences that don’t come with a price tag.”
Radical Honesty
Netflix’s credo is to be radically honest. Their first CEO, Marc Randolph, writes with startling candor and a willingness to make himself appear ridiculous that is rare among CEOs and even more rare among Silicon Valley self-made millionaires. He doesn’t take himself seriously, which makes him unique in the world of business people who are usually taken very seriously.
His lack of vanity coupled with his dead-serious ambition and determination to succeed make this self-told tale about building a groundbreaking company worth reading. Randolph isn’t much of a stylist but he tells readers about his life experiences in such a way that they can relate it back to themselves if they were in his shoes at any point along the line.
So not only does he demonstrate compassion for others (his humor comes through), he also demonstrates compassion for himself by being able to laugh at some missteps he made while growing Netflix into what it has become today—a well renowned brand name around the globe. He shows how flexible one must be under pressure when starting up something new and innovative; this lesson was hard won over time but serves as an invaluable tool for anyone looking forward toward success in their own endeavors.
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