Netflix Co-Founder Marc Randolph on the ‘Best Decision’ the Streaming Giant Ever Made

Netflix has come a long way since 1997, from an upstart Blockbuster competitor to a streaming powerhouse with more than 150 million global subscribers. And there aren’t many people better to talk about the early days than Marc Randolph, the company’s co-founder and first chief executive. Randolph documents the streaming giant’s formative years in his new book “That Will Never Work.”  There’s plenty to cover, including Netflix’s now-infamous pitch to Blockbuster in 2000 to be bought out for $50 million. The Blockbuster execs, Randolph told TheWrap, had a hard time keeping a straight face. (Blockbuster filed for bankruptcy protection in 2010.) Randolph also revisits a key PowerPoint presentation from his friend and co-founder, current Netflix CEO Reed Hastings, in 1998. The subject: Why Randolph wasn’t cut out to be chief executive — and should give up 650,000 shares (current valuation: nearly $190 million) in the process. The conversation was a textbook example of the “radical honesty” Randolph said made his working relationship with Hastings so fruitful. Randolph ended up becoming the company’s president and stayed on for another five years. TheWrap recently caught up with Randolph to talk about his time at Netflix: Take me back to 1997, when Netflix decided to start mailing DVDs rather than VHS. What was the driving force behind that decision? DVDs were in their infancy at the time. Problems are usually a pretty good motivator. In 1997, when I decided I was ready to start another company, I really had no preconception of what it would be, except that it would involve selling something over the internet. The whole idea of doing video rental by mail was really intriguing from the beginning, since [the video rental industry] was an $8 billion category and the experience was really crappy, to put it lightly. At the time, as you point out, it was VHS [that dominated the industry], and I did a bunch of research. I had spent years in the mail order-business, so I knew people at Federal Express and got quotes and concluded it just wouldn’t work. These things would cost too much to ship back and forth, they cost $100 a piece. There’s just no way. And we abandoned that idea entirely. What happened was, the advent of the DVD being in test market wasn’t necessarily an a-ha [moment], but it was an a-ha that it was the missing puzzle piece in an idea that we’d already thought out quite a bit. Then, having heard about the DVD, we realized it might eliminate a bunch of problems we had seen with VHS — the biggest one, of course, was that rather than being $8-9 to ship it each way, we could do it with a 34 cent stamp. Can you tell me what happened in 1998, when Reed Hastings walked you through, via PowerPoint, why you shouldn’t be CEO? As I write about in the book, it was not something that happened in one moment. But Reed and I had always — and have always — had this extremely direct and honest manner of talking to each other. Radical honesty, we call it. You tell the truth, and you move on. And that one night when Reed poked his head into my office and said “we need to talk,” he was expressing concerns about things he was seeing — about judgment, about my ability to raise money. He said there’s smoke at this level and there’s going to be fire when we’re bigger and move faster. And of course I was [like], “Hey, wait a minute. I’m doing this. This is my company. What are you talking about?” But then I realized these two dreams I had: 1) making the company successful and 2) being the CEO were not the same dream. In fact, the dream of making the company successful wasn’t mine anymore. It was the employees, it was the investors — it was my mom — it was the customers. How do you stick around after something like that? It’s funny, “Why would I stick around” implies I would be so bitter that I couldn’t do it. But it wasn’t that at all. Because Reed wasn’t saying you’re kicked out. It was saying, “Lets run this together. You’re going to do the things you do well better than me and [enjoy]. You’re going to do the marketing, the website, the content, the customer service.” And he was going to run the things he was better at than me — the operations, the finance, the engineering. And together, we’d have something that’s way better than the sum of the parts. And in some ways, I’m not saying this is something that’s easy to follow. Of course it takes time to adjust to this. But in many ways, what happened afterwards was the renaissance at Netflix. We had this run of 2-3 years where amazing things happened because of this combination of skills and approaches. Looking back at the decision, wow, that was the best decision ever made.

You mentioned a “renaissance.” Is there a critical decision that sticks out, where Netflix wouldn’t be where it is today if that didn’t happen? There are a couple candidates. The first one is probably stumbling on the business model that finally made us, at least for the DVD years, was figuring out a sustainable, repeatable, scalable business model. Which was the no due dates, no late fees subscription model. And that came about a year after Reed and I started working together. And that transformed the company. We stopped being a struggling startup and started being a real company. But the one that really made the company what it is today was the realization we couldn’t position the company as a DVD company. It couldn’t be about being the world’s fastest shipper of plastic. But neither could it be we’re the world’s best streaming company — because it was too early. Instead, we positioned the company as, Netflix is a place that will help people find the entertainment they love. And we began making Netflix delivery agnostic. And thats’ when we began building out the dynamic website that would give an individual experience to every individual visitor. That’s when we started working on CineMatch, to do the personalization taste algorithms. That’s when we began working on the content. All of those things came about because of that positioning. What happened during the meeting with Blockbuster in 2000? And what was the impetus behind setting up the meeting? Success is expensive sometimes. We had finally stumbled on this business model, [and] it was not a complicated model – no due dates, no late fees. To make people comfortable, we gave people their first month free, and all of a sudden, it took off. So on the one hand, we were getting hundreds, if not thousands, of orders a day. On the downside, each of those new orders, because it was the first month [for] free, was costing us $50. So we were rapidly going broke becoming successful. And it also happened to take place right at the end of the dot-com bubble bursting. It was no longer the case where people were pulling up the dump truck if you had “dot com” in your name and unloading all the money. We were desperate. We couldn’t raise money, and we were losing money hand over fist. So the obvious thing to do is pursue the strategic alternative everyone talks about and sell it. And Blockbuster was the only candidate we could think of we could really fit well with. And the atmosphere in the room was at first great. Because we pitched what we thought was a really great solution. We’d combine forces: They’d run the stores; we’d run the online business, and, more importantly, we’d find all the ways these two things could interact. And it was all going great (laughs) until they asked the big question about how much they should pay for us. John Antioco was the CEO of Blockbuster at the time. He was one of those guys that when you’re with them, you’re like gosh, he gets it. He sees it. He’s just naturally that kind of embracing person. And then I was getting these mixed signals where I saw “Right, this is it. We’ve solved their problems.” Then I realized, no, I’m seeing something different. He was kind of struggling to avoid laughing at the fact we were asking for $50 million. And the immediate aftermath? Obviously, it was disappointing because we’d finally gotten this meeting and went, “Oh my gosh. We’ve solved the problem.” Either they have the deep pockets that will allow us to grow or we can hand off these problems to someone else. As we flew back [to Netflix’s Los Gatos, California-headquarters], we realized the only way out was through, and we were going to have to do it in a hurry. It was sobering, but, wow, we did it. What is the biggest challenge facing Netflix today? I haven’t worked at Netflix in 16 years, and I don’t know their tactics and strategies. I’d imagine that mostly, as they become larger, [the challenge is that] they continue to think like the startup they were — and are. At the beginning, when you only have 7 employees and there’s so many things going on, you don’t have the time to tell each person, “Here’s what to do, and here’s how to do it.” All you can do is say, “I’ll meet you over there,” and hope they get there. And trust them to get there in their own way. You can do that even when you have 70 people, but it’s hard when you have 700. And Netflix has about 7,000. The challenge for them is, you never know where the next challenge will come from. You never know who the next big competitor is — they may not have even started yet. You always have to think like a startup — be prepared to pivot, be prepared to win and learn from the past to do the right thing in the future. But quite frankly I think they’re in a really great position to do that. Your book title is “That Will Never Work.” What did the skeptics say wouldn’t work? And do you have a bit of schadenfreude now when you think back on any of those predictions? Of course, the reality is, when people tell you that will never work, 99 percent of the time they’re right. [laughs] What I take pride in is not the schadenfreude in proving them wrong, but of the challenge and of having to figure out a way to get [the company] from there to here. That is really what this book is about. Yes, it’s the story of starting and building Netflix, but it’s much more the story of how anybody who has these ideas — and everyone says it’ll never work — they can do it.