The year was 1997 and Reed Hastings sold his software company Pure Atria to a competing firm for a whopping $700 million. Working for Pure Atria at the time was Marc Randolph, heading up the company's marketing efforts as it continued trying to find a larger foothold in the marketplace. Once Pure Atria was purchased, both Randolph and Hastings realized they'd be out of jobs in a matter of months and flush with capital from the sale, the two put their heads together on a new idea. Brainstorming for several months, the pair wanted to settle on an online business that allowed consumers a certain sense of personalization.
First, there was the idea of personalized shampoo that'd allow you cut off a lock of your hair and mail it in to the company to craft a special shampoo created specifically for the chemical makeup of your hair. Thinking that was a bit much, the pair scaled back and thought about more average consumers. Maybe they could come up with a way to custom-mill baseball bats to specifically fit with the specifications of the end-user; or perhaps, there'd be a way to craft completely custom dog food for your beloved pet. Eventually, both ideas fell flat.
Thanks to the likes of Blockbuster, the video rental industry was valued at a whopping $8 billion at the time and maybe, just maybe, they thought they could make the process of renting easier. VHS tapes were a bit too heavy to ship through the mail in a cost-effective manner, but thankfully, a brand-new physical medium was being introduced — DVDs.
Stuck on the idea of mail-order video rentals, the two left the office and went into a music shop to purchase a used music CD; DVDs were so new at the time, they weren't readily available. Finding an envelope, the two took the CD and envelope straight to the post office, trying to mail it to Hastings' home address in hopes the post office would actually process something of that nature. Lo and behold not even a day later, the CD showed up at Hastings' home and it cost them just one stamp. As fate would have it, Netflix was born.
We recently had to speak with Randolph about his experiences in helping grow one of the world's biggest entertainment companies and its meteoric rise into self-produced entertainment. "We believed it left some room for improvements in the customer satisfaction category," Randolph says about the rental distribution system at the time. "We rejected it because back then, this is '97, video rental was all on VHS cassettes. So what broke it open for us was a few months later when they announced this new technology being test-marketed called the DVD and we realized this would actually be the missing puzzle piece, this old video rental by mail idea."
Netflix instantly grew into a fan-favorite service with a sizable customer base. Before long, the company was able to strike deals with studios and distributors, adding over 950 titles to its catalogs; in 1997, that included every single DVD currently in print.
The company grew so fast it started to be noticed by some other rising companies at the time. Working on perfecting their craft, Randolph and Hastings got a call one day from fellow entrepreneur Jeff Bezos. Bezos was looking to add some more product offerings through Amazon.com, the internet's most prominent mail-order bookstore at the time. Here, three months after officially launching Netflix, Randolph and Hastings were on a plane to Seattle to speak with one of the champions of the dot-com boom.
"When we went up, we kicked the tires, he expressed some interest, and they were floating numbers," Randolph recalls of the chat. "We thought it was probably going to be $14 to $16 million, which was pretty good for less than a year's work. But it was that critical time where we'd launched the company, we'd figured out how to get a website to work. We'd accumulated every single DVD there was. We had partnerships with DVD manufacturers and we thought it's too early. We want to see where this goes."
Needless to say, the two didn't end up selling to Amazon. They continued building the company they founded and eventually, they turned it into a mail-order juggernaut. Three years later, the team had a budding headquarters in Los Gatos and had just launched its monthly subscription service, something it still runs today. Using the subscription model, the company grew to over 200,000 subscribers.
Feeling the company would be valued substantially more, Randolph and Hastings got together and proposed the idea of seeing if Blockbuster would be interested in an acquisition. Days later, they flew themselves to Dallas and met with the movers and shakers at the video rental giant. As Randolph puts it, the pair were essentially laughed out the door. "We had finally, after a year and a half of struggling, figured out a business model which actually worked, but it was making us go broke because we were doing a first month free," Randolph recalls.
"So every order that flooded in was a validation that they loved this thing, but we had to pay all those costs upfront and because it was a subscription, we didn't recover them for months afterwards. We were going to go broke being successful and so we did the thing that a prudent entrepreneur would do, is we decided, 'How do we get the hell out of this?'"
He adds, "We decided to sell ourselves to Blockbuster, but unfortunately Blockbuster did not see it quite as clearly as we did. We flew ourselves to Dallas and we pitched ourselves and they basically laughed at us. Rather than coming home and saying, 'No, let's give this a shot,' we were now going, 'Wow, we had hoped this would be the deus ex machina that saves us, the hand from God to solve the problem,' But now we were going to have to figure it out on our own and even worse, we were going to have to get through Blockbuster to do it."
By now, you know Randolph and Hastings figured it out. Their mail-order DVD subscription service continually grew over the course of the next decade, eventually allowing the company to test the waters with a digital streaming service in 2007. Blockbuster, on the other hand, ended up filing bankruptcy in 2010 and today, only has one store left in existence, a privately-owned location in Bend, Oregon.
Eventually, Randolph — Netflix's first CEO — ended up leaving the company to pursue other ventures and was replaced by Hastings, who still serves as chief executive to this day. Despite no longer having an official capacity with the world's largest streamer and mail-order rental service, Randolph has been sure to keep up with the world of direct-to-consumer products and SVOD programming. Like many others, he's all aboard the streaming train, pointing out he's just as big of a Game of Thrones fan as the rest of us. According to him, the one to win the streaming wars will end up being the service with the best content, rather than the company with the lowest price or fanciest mobile app.
"People don't join Netflix because they like the color of the logo or like the packaging," says Randolph. "They like the fact that this company connects them with great content and originally when I was there, Reed and I were doing it and the connecting for great content was with DVDs. But it was the building the personalization engine. It was building the deep content. But it always stood for helping you find great content and that's never changed, and it will never change. What changes is how you get movies, and who knows where that's going to go? And it will certainly change how they create it, but I think it's not a marketing battle, it's a content battle."
Since leaving Netflix, Randolph's become a motivational speaker and mentor to aspiring entrepreneurs. He's still active in various business pursuits and every so often, he'll invest in an idea he's pitched that he believes in. If you're someone with a big idea, Randolph says, the key to making it happen is to simply take that initial step forward.
"So many people, all of us, have ideas," Randolph reminds us. "All of us have that idea in the shower. It's just that most of us don't get out of the shower, towel off, and do something with it. It's because we're nervous or we don't know how to test it or we think we need money or a partner. There are simple, easy and inexpensive ways to take your idea and take those first steps, but you never learn anything if you don't start."0comments
Marc Randolph's book — That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea — is now available wherever books are sold. What streaming services do you currently subscribe to? Do you plan on adding HBO Max and Peacock to the bundle next year? Share your thoughts in the comments below or by tweeting me at @AdamBarnhardt!
Photo by George Pimentel/Getty Images for Audi and Netflix