The REAL story behind Netflix
6 surprising insights from the first CEO, who was fired from his company
You’ve probably heard the famous Netflix origin story:
Reed [Hastings] found an old rental copy of Apollo 13 in his house, went to return it to Blockbuster, and saw a $40 late fee. Then he thought: what if I never had to do this again? And thus Netflix was born.
What an amazing lie!
In That Will Never Work: The Birth of Netflix, the first CEO and co-founder Marc Randolph shares the real story behind Netflix, and his insights from the way. We are going to cover the main 6:
Netflix Was Not an Epiphany - The Idea
Use Other People’s Money - Getting Started
The Only Way to Not Break Some Eggs - Going All In
The Birth of the New Netflix - Innovation
The Canada Principle - Focus
There is Always Someone Better than You - Being Fired From Your Company
1. Netflix Was Not an Epiphany - The Idea
The idea for Netflix was born on a long commute to work, that Randolph and Hastings shared together (while working at Pure Atria).
During the commute, Randolph just threw random ideas at Hastings for the next venture he wanted to start. Initially, he considered renting VHS cassettes by mail, which was shot down because they were heavy and expensive to send.
Epiphanies are rare. And when they appear in origin stories, they’re often oversimplified or just plain false. We like these tales because they align with a romantic idea about inspiration and genius.
We want our Isaac Newtons to be sitting under the apple tree when the apple falls. We want Archimedes in his bathtub. But the truth is that for every good idea, there are a thousand bad ones. And sometimes it can be hard to tell the difference.
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. And in fact, when you finally have one, you might not realize it for a long time.
Finally, when they heard about DVDs starting to take hold, the idea crystallized. There were very few available DVDs, so they were the first players in the market for a while.
Randolph started as the CEO, with Hastings being the main investor.
2. Use Other People’s Money - Getting Started
Once they decided it was a good idea, they needed to raise $2M to work on it. Remember - it was the 90s, with no Cloud or no-code tools.
Hastings said he would put in $1.9M, and Randolph would need to raise the additional $100K. Eventually, he resorted to asking his friend and mom for money, which was a tough experience for him.
… Before you pour your life into starting a company, it’s not a bad idea to get just a little bit of reassurance that you’re not completely out of your mind. Convincing someone to part with their money tends to separate those who are blindly supportive (“I love that idea!”) from those who are supporting you with their eyes wide open.
I often counsel young entrepreneurs to start by asking people what they think, but then immediately follow up the inevitable “I love it” reply with the ask: “Can I count on you to invest a few thousand dollars?” The backpedaling is so fast and furious that it makes Lance Armstrong look like my grandmother.
3. The Only Way To Not Break Some Eggs
Initially, Netflix offered you a catalog of DVDs, which you could buy or rent. Amazon was already getting big, so Randolph and Hastings went to talk to them about potential acquisition or cooperation.
Amazon evaluated them at the ‘low 2-digits’ [millions], and they decided there was bigger potential, and they are not willing to sell.
…Amazon’s entry as a competitor would undoubtedly make things more complicated and difficult. But we had a bit of time. And it still didn’t seem like the right moment to give up.
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 makes us different and unique.
“We just have to figure out some way to get out of selling DVDs,” I said to Reed. “Doing rental and sales is confusing for our customers and unnecessarily complex for ops. And if we don’t sell [the company to Amazon], Amazon will destroy us when they enter the field. I think we get out now. Focus on rental.”
Reed arched his eyebrows. “Kinda puts all our eggs in one basket,” he said.
“That’s the only way to make sure you don’t break any,” I replied.
Back then, 97% (!!!) of their revenue came from DVD sales! I’m not sure how many people would have taken this is one hell of a decision.
4. The Birth of The New Netflix - Innovation
By mid-1999, Netflix was bleeding money, and it needed to make some changes, fast. They were giving one-month free promotions, but people were not staying at the site, the churn rate was astronomical.
The main offer was still à la carte rentals, where you could choose a DVD and get it by mail the next day.
….We’d come up with three ideas that we didn’t think were total trash. They were:
Home Rental Library - allowing users to rent four DVDs at a time and keep them as long as they want. As soon as they had returned one of the DVDs, they could come back to the site and rent another.
Serialized Delivery - People were busy. Once a watched DVD was in the mailbox, it would be out of sight, out of mind. So maybe, we could have each customer create a list of DVDs they wanted. That way, when they returned a DVD to us, we could automatically send them the next movie on their list.
Subscription - having people hold on to our discs for as long as they wanted seemed good for customers – but we weren’t sure what the business model should be. Do you pay a rental fee each time you swap? What if you never send one back? We decided that we should test a monthly fee – that we charged you every month you used the service.
Remember, this was 1999! At that time, the only monthly subscription models were antiviruses - Norton and McAfee. The out-of-the-box thinking on this one is crazy! Read this great overview by on how consumer pricing models evolved.
From the beginning, we’d designed our site so that the impact of even the slightest change could be measured and quantified. So, by mid-1999, we were old pros at testing. But even quickly, each test would take about two weeks. When I ran this by Reed, he looked at me like I was crazy. “That makes no sense,” he said. “We don’t have the time for that.”
“Listen,” I told him. “We’ve got to do something. We can’t retain anyone, and no one’s renting, and–” “Exactly. That’s why you should just test everything at once,” Reed said, cutting me off.
We all know how that experience ended. It was an instant and huge success, that propelled their growth.
5. The Canada Principle - FOCUS
Netflix, for its first twelve years, limited its services to the United States. When we were just starting out, we didn’t have the infrastructure or the money to serve the international market. We thought frequently about expanding into Canada:
It was close
The regulations were easy
The postage and transport costs were low
We knew that we could probably get an instant revenue bump of about 10 percent. But we didn’t do it for two reasons:
First, we knew that it would be more complicated than it looked - different currency, additional language (French), different envelopes, and so on.
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 is the 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, focusing this intensely looks like ruthlessness–and it is a little bit. But it’s more than that. It’s more like courage.
Netflix is one of the rare companies that are willing to ‘cannibalize’ themselves. Years later, the streaming service was in direct competition with the DVD rental one.
6. There is Always Someone Better Than You
Reed Hastings was the biggest shareholder and the one who actually convinced VCs to put money in the investment rounds. One day, he called Randolph to the office and told him he thinks he should no longer be the CEO, and that he is ‘losing faith in him’. He suggested Randolph should move to the president role, and he will become the CEO.
Randolph shares the amazingly candid story of the transition - what he felt, and how he managed to get over it. In my opinion, this is the best part of the book, and my short summary doesn’t do it justice.
The company was one dream. I at the helm was another. And if the company was going to succeed, I needed to confront my own limitations honestly. I needed to acknowledge that I was a builder, someone creative and freewheeling enough to assemble a team, create a culture, and launch an idea from the back of an envelope into a company, an office, or a product that existed in the world.
But we were exiting that initial stage. Now we were going to have to grow, and rapidly, and that took a different skill set entirely. I have a pretty good sense of my skills as an entrepreneur. I think it’s realistic to say I’m in the 98th percentile. I knew, even then, that I could lead the company as it grew. But I also knew, even then, that Reed was in the 99.9th percentile. He’s one of the all-time greats. And he was better at this stage of things than I was.
We now had forty employees, each of whom was as emotionally committed as I was to making Netflix a success. Didn’t I owe it to them to do everything I could to ensure that we survived, even if it meant that my role would no longer be the one I’d imagined for myself?
When your dream becomes a reality, it doesn’t just belong to you. It belongs to the people who helped you – your family, your friends, your co-workers.
Netflix might have survived with me continuing as sole CEO. But you don’t write a book about a company that survives. There is no doubt in my mind that without him assuming more of a leadership role, Netflix would not have become the company it is today.
This lesson is tremendously valuable in my opinion, also for software engineers. Being willing to concede to other, better, engineers - is a true mark of a professional. There is ALWAYS someone better than you.
Final Words
I love how Randolph summed up with this quote, so I’ll steal it from him:
Nolan Bushnell, the co-founder of Atari, once said something that has always resonated with me. “Everyone who has taken a shower has had an idea,” he said. “But it’s the people who get out of the shower, towel off, and do something about it that makes the difference.”
Do You Envy Marc Randolph?
I don’t believe you if you say no :) Eventually, he made tons of money in Netflix’s IPO and is currently working on anything he wants (and even writes a newsletter).
I’ve been playing with the idea of being an entrepreneur for a while, and I’m sure I’ll get to it someday 😅
For now, I enjoy reading about the journey of braver people:
- founded Microns, a marketplace for buying and selling micro-SaaS companies. He shares his experiences in a newsletter by the same name: . It’s inspiring to see how people make money from simple ideas!
- is one of the most famous indie-hackers, who recently sold another product for $150K and has a product that generates $40K in MONTHLY revenue! He shares his experience in the great .
- writes , where he shares various playbooks on building micro-SaaS businesses.
They were so early to the consumer subscription!