Transcription
We were in deep trouble at Netflix; we had losses of about $50 million. We had to sell this sucker fast. Mark Randol is an American tech entrepreneur, the co-founder and first CEO of Netflix, with a career spanning numerous startups and ventures. Mark's expertise in innovation, leadership, and business strategy is unparalleled. August 1997, Netflix was founded. Yes, and the reality is the idea was ridiculous. It didn't work; nobody would rent DVDs by mail. But with over 40 years of being an entrepreneur, I've learned every idea is bad; we just don't know why they're bad yet. The important thing is how clever can you be to come up with a quick and cheap way to test it. For example, we thought, let's just have a subscription and no late fees. It was a ridiculous idea, but when we tested it, people loved it. The Netflix DVD service has changed the world.
You explored selling Netflix to Amazon two years after you launched for probably 10 to 15 million. That's not a bad return for 12 to 18 months' work. But I thought it was much more interesting to take the shot and see what Netflix could become. But all of a sudden, in a matter of a week or two in the spring of 2000, we were going to go broke being successful. We tried going to Blockbuster for months, but they weren't going to save us; they were going to compete with us. Netflix wouldn't have survived. But there's a story which hasn't really been told, which took one of Netflix's biggest impediments and turned it into one of its biggest assets.
So the DI of AO raffle is about to close. Anyone that subscribes to the DI ofo before we hit 7 million subscribers, which is probably going to be in a couple of days' time, will be included in the raffle. And on the day we hit 7 million subscribers, we are giving away a lot of money, can't-buy prizes to all of you. So hit the Subscribe button, get in before 7 million, and I'll announce the prizes and the winners in the comments below when we hit 7 million subscribers. [Music]
Mark, in this season of your life, if you could consolidate your mission and the work that you're doing across the content you produce, the people you speak to, your professional endeavors—if you could consolidate that into a singular focused mission—what exactly would that mission be in this season of your life?
For me, at this point in my life, it's all about mentorship. You know, I've done seven startups. I kind of recognized quite a while ago I do not have the appetite to do another one. It's that 7 by 24 focus that I don't want to do anymore. I have other things that I would love to be spending time on, but you can't turn it off. I've also realized that over 40 years of being an entrepreneur, I've learned a few things about how to actually play this game, and so my mission now is how do I pay that forward? How do I help other people either have a shot at it like I did, or if they're already playing the game, how do I try and increase their odds of success?
You wrote this book called *That Will Never Work*. Why are books painful and hard to write? What is it that you want someone who gets to the end of this book to walk away with?
I've come to believe that almost all of the information that people receive from the general media about entrepreneurship is wrong. It glorifies entrepreneurship in what I think is a damaging way. You watch these movies that are about entrepreneurship, and it's all about driving around in fast cars and having parties, and that's not it. It's a very lonely profession. So, in a simple answer, the reason I wrote the book is I wanted to give people a true story of what it really means to come up with a crazy idea that everyone thinks is never going to work and the struggle to make it real. And if someone reads that book and gets to the end and goes, "This sounds great," then that's the exactly the right person who should be an entrepreneur. If someone goes, "This sounds a lot harder than I expected," well, then I've done a service in that way as well, which is I've kept someone from getting into this for all the wrong reasons.
When you look back on your journey to Netflix, I remember hearing Steve Jobs speak about the decisions he made in hindsight that, when he reflects on his life, resulted in him starting Apple and the decisions he made within Apple. So obviously, you know, things he's famous for saying is that he went to a typography class he dropped in, and he started learning about design and typography, and that shaped him. What are those early experiences that, in hindsight, fed into the creation of Netflix?
Probably the meta thing was the fact that most of these endeavors were entrepreneurial. So, for example, initially my first foray into direct response marketing was when I asked if I could run the mail order division of this sheet music company that I was working for. And so what it meant to run the mail order division was every day you got the mail, and if you found someone asking for a list of great songbooks, you'd make a copy and you'd mail it out. And then if an order came in, you'd go to the warehouse and pick, pack, and ship it. And that spoke to me, and I began experimenting and said, okay, now what happens if I do two pages or do it in color? What happens if I mail it out? And I built this mail order division into a real mail order company. So it was this combination of direct response, but more importantly, it was building something; it was creating a company inside a company. So there are certainly those preparations from the direct response side, hugely formative for at least Netflix, because if you think about it, what direct response marketing is about is all about testing; it's all about analytics. And when the internet came along and I saw what the internet was, what immediately popped into my head was, "Oh my gosh, this is the power to do direct marketing, but on steroids. This is so much more positive." I'm doing this personalization, but it's very brute force personalization. I mean, it's "Dear Steven, wouldn't your friends at 17 Crescent Cir...?" It's like this ridiculous personalization. What the internet let me do is personalize every webpage for one person. But one of the direct response endeavors that I did was I was a circulation director for a magazine; we launched a magazine, and that's subscription. And so you go, okay, well, look at this: you have someone who's doing direct marketing, and there's someone who's doing subscription, and then all of a sudden they're trying to figure out how to do video rental better. It's not that big of a leap to say, okay, it was subscription, and it was direct response on the internet. So yeah, these things were pretty formative.
So interesting. So, on one hand, you had this business where you were physically sending things in the post, and then you got involved in another business where you were doing subscriptions, and these kind of, I guess, plant these seeds in your brain to industries that you start to understand. And it's funny because when people think about creativity, I heard someone say before that creativity is essentially collecting lots of different clouds and then connecting them in new ways. So getting lots of different points of inspiration in life and then connecting them in new ways, which create a new thing, and that kind of sounds like what you're describing there.
It is. And the thing is, at the time, you don't necessarily know you're in the right place at the right time, because I certainly wasn't the only person who said, "Wow, the internet could be a powerful force for selling things." Jeff Bezos was one of the first people to recognize the power it could have to sell things when he started Amazon, which at the time was only books. But there were a lot of different models we could have looked at. And so, in terms of Netflix going into video rental and doing video rental by mail, that was entirely driven by the fact that I had worked for so long in a catalog business where I had mailed things in boxes, and I had seen—I knew a lot about all the shippers, and I knew a lot about fast shipping. I mean, I had this huge repository of information and experience, and I didn't know how it would be used, but all of a sudden you're looking at a problem, and you're kind of in your mind going through how could I possibly solve this in different ways? And one of the things that comes up is something you've experienced in the past.
You launched this company, Integrity QA, between sort of '96 and '97, and that's ultimately acquired by Reed Hastings' company, Pure Atria. Yes. And that's where you and Reed Hastings met.
Yes, correct. Who's the other co-founder of Netflix? What was that like, that first meeting with Reed Hastings?
Meeting Reed was like this instant junction of two like minds. We both recognized something in each other. One is that we both approach problems very differently. I was very emotional about it. I don't mean emotional like I'm running crying from the room; I mean empathy. That I'm a marketing person; when I put something out there, I can almost intuitively sense how someone's going to respond. Reed's background is mathematics and computer science—much more logical, much more methodical. And we kind of realized as we began solving problems together how well those two integrated. But at the same time as having these differences and approaches, we were very similar in that we both shared this commitment to honesty. Not because we both swore an oath, it just was our nature—that life was too short to shade the truth; that if you had something to say, you say it, and you say it in a respectful way, in an empathetic way, and you don't have ulterior motives. Um, and we both were like that, and it allowed us to have these really intense, interesting conversations where we were trying to find the truth out of something, but pushing each other and challenging each other, and it ended up being a very, very powerful way to solve problems. And we were only at Pure Atria together for seven or eight months, and then lightning happened to strike again where Pure Atria was now being acquired. And this time, both Reed and I were going to lose our jobs. They already had a CEO; they already had a senior VP of worldwide marketing, so we were going to be out of a job. We had six months, and Reed was going to go back to school, get a higher degree in education. I was going to start my next company. And Reed wanted to keep a finger in the pie here, and we came to an agreement that I would start the company; he would be my angel investor and he'd be my board chair. And all we needed was a business idea.
And all you needed was a business idea? Exactly. Only that. Yeah, just this small matter of needing something to do. And thus began this process, which went on for months of Reed and I kind of searching for a business idea, and we had a methodology, so don't think this is random. And Reed and I happened to live in the same town; we lived in Santa Cruz, California, together, and we had gotten in the habit many months earlier of commuting to work together. And so once we knew we were selling the company, once we were losing our jobs, we still were commuting to work, but now the conversation in the car shifted. And what would happen is Reed would pick me up at my house, and we'd barely be down my driveway, and I'd go, "Okay, Reed, I've got one for you: personalized shampoo. You're going to cut off a lock of your hair; you're going to mail it to us, and we're going to have a team of hair scientists who are going to formulate a custom blend, and people are going to subscribe to it." And the same thing would happen no matter what I pitched: there'd be silence; Reed would be staring out the window, just steering the car, and you'd think he hadn't even heard me, but I knew that kind of behind that stoic face all the calculations were taking place—like, you know, the risk and reward and the costs and the benefits. And it might take five minutes, 10 minutes of silence, but then eventually he would turn to me and go, "That will never work," and he would lay into me with all the reasons it was such a bad idea. But of course, I could come prepared, and I'd come right back at him with all the research I had done, all the reasons I was sure it was a good idea, and we would do one of these arguments all the way to the office and, if need be, all the way home, until we either decided there was promise or no promise. And almost all of the time there was very, very little promise in these ideas. But the next day I'd have another one. I'd pitch Reed personalized pet food, custom sporting goods, vitamins. I mean, I pitched all those ideas. I pitched them on video rental by mail: people are going to come to the website; they're going to pick out a movie; we're going to mail them the movie, and they'll keep it for a week, and then they'll mail it back. And at the time, though, this was 1996, 97; video rental, you may remember, was on VHS cassettes, so they were too big and too heavy and too expensive. And so that idea got trashed the exactly the same way that the dog food and the personalized shampoo did. And we kept on searching. And then the breakthrough, if there was one, came one morning when Reed picked me up, and I'm on my way out the door, out at the driveway. I go, "I've got one for you," and he stops me and goes, "I've got to tell you about something I read about: there's this technology that came out; it's called the DVD; it's this little disc that holds a movie, and it's thin, and it's light." And we brainstormed that a little bit and realized this could be the unlock for that old video rental by mail idea we had talked about six or eight weeks ago. And then we did this quintessentially entrepreneurial thing, which is mid-commute, we turned the car around and drove the car back into Santa Cruz to try and validate this idea. We did not go to the office and do a business plan; we did not work on a pitch deck. We tried to collide the idea with real people that day. That day, mid-commute, turned the car around, went down into Santa Cruz, tried to buy a DVD, couldn't find one, settled for buying a used music CD—same size, same weight—then went two doors down and bought a little envelope like you'd put a greeting card in, put this CD in the envelope, addressed it to Reed's house, bought a stamp, and dropped it in the mail and went to work. And that very next morning, when Reed picked me up, he held up a little pink envelope with an unbroken CD in it that had gotten into his house in less than 24 hours for the price of a stamp. And that was probably the moment we said, "This actually might work. We can use the post office." Um, and that shifted everything, and that's the point we began saying this could be the idea that we do together.
So many entrepreneurs and aspiring entrepreneurs are at that exact phase where they want to leave their corporate job; their brain's everywhere they go now because they've wired themselves to be looking for an idea. Is finding lots of random ideas their dog or like throw up and they’ll be like, “Oh, new dog food,” or whatever, and they’re going through that process. And I think it’s so important to just pause there and try and interrogate what the framework is for knowing if you if you’ve got a winner or not. Like, how, how did you—presumably you had got yourself passionate about the um shampoo idea—so like, how do you know when to drop an idea and how do you know when to commit to an idea? What was the framework you’re using?
The framework is that every idea is stupid. There is—everyone, you know—listen, you probably haven’t had a corporate job yet in your—no, thank God. Yes, thank God is right, because there’s this thing in corporate—I say Corporate America, corporate world—and it’s the brainstorming session, and they put everyone in a conference room, and they go, “We’re going to brainstorm and try to come up with an idea for whatever it is,” and he goes, “But first, some ground rules for the brainstorming. Rule number one: there is no such thing as a bad idea.” And I call—there’s plenty of bad ideas; in fact, there’s no such thing as a good idea. Every idea is bad; we just don’t know why they’re bad yet. And so the framework I approach—I assume all these ideas are ridiculous; I assume none of them are going to work. But here’s the difference: the reason I start from that position is I don’t want to commit the single worst thing you can do as an entrepreneur, which is fall in love with your idea. And you talk about the person who sees the dog throwing up and they go, “I’ve got a great idea!” And then what happens? Nothing. They go home, and they go, “This is a great idea,” and they tell their partner, and their partner goes, “Oh, that’s brilliant; I’d buy that.” And so they go, okay, and they begin working on a business plan, and they write this 10-page business plan, and they’re dreaming about how amazing it’s going to be. Just think about—we have this line of—we can do cats too, and then giraffes. You know, they’ve built this incredibly ornate business in their head, all based on this feeling that this must be a good idea. And you’ve got to nip that in the bud. And the way you nip it in the bud is you try—rather than dreaming how amazing this idea is, the first thing you think about, the only thing you think about, is how can I quickly, cheaply, and easily collide this idea with a real person and find out is it, in fact, a good idea or a bad idea? How can I do some kind of hack that will allow me to quickly find out whether customers actually would want this or not? And almost always you build this quick, cheap, down-and-dirty—I don’t mean minimal viable product; I mean unviable—something you can quickly do, like turn the car around and mail a CD to yourself, just to find out the basic premise of, can I actually use the US mail to send movies back and forth? Because if that had failed, well, great, on to the next one. And that’s such a critical, critical step. That’s the framework that everyone has to have. It is not about having a good idea; having ideas is easy and trivial. The important thing is how clever can you be to come up with a quick, cheap, and easy way to test it? Why? Because I know you and me understand this, but I didn’t understand this when I started my career, so I know that there’s a lot of people listening right now that are probably right in the moment you’ve described. They’ve spent a year building up this thing in their bedroom—for anyone that can’t see, he’s got his head in his hands—they’ve spent a year in their bedroom building and working on this project. Why is that a terrible idea?
It’s such a waste of time because what happens is two things happen: one is this idea becomes so large and ornate and complicated in your head that you go, “Okay, Mark, I need to get started; I need to raise $5 million because it’s going to have to hire all these people to build this thing,” and they’re probably building the absolutely the wrong thing. You can’t—you can’t just go ahead and based on what you think is going to happen; you’ve got to start from a position of real information. Listen, perhaps the cleanest way, since we have a bit of time, is to give you an example. I do a lot of work with university students, and I was meeting with a young woman who—at the university—and she goes, “Okay, Mark, I’ve got this idea. Um, what I want to do is peer-to-peer clothing sharing. In other words, I’ve got all this clothing in my closet that I never wear or I don’t wear very often, and I know my friends have a lot of clothing in their closet, and other friends have clothes in their closet. It’d be great if we had this website, and we could all post what we have, and we could borrow each other’s clothes.” And I’m going, “Okay, that’s interesting. What can I help you with?” She goes, “I’m trying to figure out should I drop out of college to do this? How do I raise the money to hire a team to build this for me?” And I went, “Whoa, you know, slow down here. Okay, interesting idea, but let’s figure out if we can come up with a quick, cheap, and easy way to collide this idea with reality.” I said, “Do you have a piece of paper?” She goes, “Yes, smartass, I’m a college student; I have a piece of paper.” I go, “Great. All right. Do you have a magic marker?” She goes, “I have a marker.” “Do you have a piece of tape?” She goes, “Got a piece of tape.” I go, “All right. I want you to write on the piece of paper, ‘Would you like to borrow my clothes?’ And I want you to tape that to the outside of your dormitory room, and we’re going to find out in the next 24 hours whether the very, very first principle behind your idea is real—is anyone going to knock? Because if nobody knocks, well, you’ve learned something very important right there: this thing you think is so attractive might not be. But let’s be optimistic; let’s assume a bunch of people knock. Great, you’ve learned something, but you’re also going to learn the next thing, which is, are there problems with fit? Are there problems with style? Are the people who knock and look at your clothes actually going to want any of them? All right, let’s be even more optimistic; let’s say they do find out ones they want to borrow. Well, you’re going to find out the next piece: how do you feel when your favorite blouse comes back stained or torn? You’re going to find out about the cost of doing dry cleaning; you’re going to find out all of these things, and you’re going to find out about all this for a piece with a piece of paper, a tape, and a marker. None of this raising money, dropping out of school, and doing any coding. You’re going to do something very simple. Now, is this scalable? No. Is this repeatable? No. But that’s fine. You’re going to do it all with 3x5 cards or on a pad; you’re going to do it manually, and you’re going to start losing your mind. But when you finally get to the point where you are ready to go and maybe raise money or drop out of school, you’re going to know what you’re dropping out of school for; you’re going to know what you’re raising money for; you’re going to be able to tell someone, ‘Here’s my acquisition cost; here’s my lifetime value; here’s my CAC; here’s my…’ You’re going to know all of these metrics; you’re going to know the complexity; you’re going to have tried all these different things; you’re going to know what demographic—and you found out all of that for nothing except for your time. That’s what I mean by figure out some way to validation hack, and that is the key to being an entrepreneur: you have an idea; quickly, cheap, and easy, test it; find out it’s ridiculous; abandon it; go on to the next one.
It’s funny because, uh, obviously I’m a dragon on Dragon’s Den, which is basically a show like Shark Tank where we see 100 pitches a year from entrepreneurs, and what I observe in some of those pitches, especially when they’re a little bit early on and they haven’t got product-market fit quite yet, there hasn’t been evidence that the market actually cares, is a huge amount of delusion to the point that you could give someone some feedback, but because they’ve spent one, two years of their life and maybe mortgaged their house and invested it into this business, they’re now in the sunk cost fallacy, which is that sort of cognitive bias where you’ve invested so much in something that you’re basically defending your bad decision at all costs, and you can’t see the light of day. And um, and that, you know, my first business was the death of my first business, but for many entrepreneurs that I meet, it’s quite clearly the death of them because if they don’t have that humility, if they’ve got romantic—they can’t take any feedback, which is a conflict with what they want to believe—it’s—you’re Stephen, you’re absolutely right; it is the single biggest reason that either they don’t start because they’ve built this thing up in their head and it’s so big and complex that to get started is almost impossible, or they are so far along they can’t stop. It’s tragic in a lot of ways, which is why you have to start from the belief that your idea is a bad one, because that makes it easier to walk away from it as soon as you realize you are right. Um, but what happens if you can get this discipline of taking your idea and immediately trying it is almost always takes you in a new direction. Yes, your original idea was terrible, but, “Oh my gosh, did you see how this person did? Let’s try this. Oh, that doesn’t work; let’s try this.” And that is entrepreneurship; it is just leaping from the back of one alligator to the next, and there those alligators just hold long enough to before they sink or before they bite you, and you jump to the next one.
I, I, I think I found two sorts of species of entrepreneur, and the real distinction between them is how long they’ve been doing it. And one species of entrepreneur that I know, they care entirely about being right, which is their initial hypothesis being correct, and that’s typically the young entrepreneur. And then the more seasoned entrepreneur cares entirely about being successful, regardless of whether it’s via their initial hypothesis or not; they care entirely about like saving time and being successful, not being right. And I think it’s interesting that tenure as an entrepreneur seems to determine which camp you sit in. It’s also your personality. Jumping back to our conversation earlier about what attracted Reed and I to each other was that both of us were in that camp that said, “We don’t care whose idea it was; we just care about getting to the right answer.” And part of this culture that we had with each other and we built with other people was you could argue like cats and dogs, and eventually you’ll arrive at what you think is the right way to go, and as soon as that happens, you all fall in behind, and no one says, “I was right; I was wrong,” and you don’t even remember who was right and who was wrong. It’s a big piece. August 29, 1997, Netflix was founded by yourself and Reed Hastings. From that day onwards, did you know at the moment that Netflix was going to ever become what it went on to be? What were you thinking it was going to be?
I am completely astounded and amazed at the direction that Netflix has gone. Never in a million years could I have dreamed of the company that exists now being the same one that we were thinking about in August of 1997. It’s astounding to me what’s happened. And it’s the nature of entrepreneurship; you can’t predict where these things are going to go. That wasn’t the point, though. It wasn’t like Reed and I were in the car going, “Okay, when do we enter the streaming war? And when, how do we deal with ch…?” No, this was a very, very simple, straightforward problem: video rental in the United States is $8 billion a year. It’s very unpleasant that the company who has the lion’s share of that market is doing things which customers hate. There has to be—Blockbuster—there has to be a better way. That’s where it starts from; that’s the problem you’re trying to solve. And trying to solve the problem is this dual thing, which is how do you do something that a customer might want—solve the problem for the customer—but also how do you make a business out of that? And that’s all-consuming. I remember we had a company meeting early on—maybe we were two or three months in—and I remember getting up in front of the company and laying out what I thought was going to be this big, hairy, audacious goal for us: someday we’re going to be one of the top 10 largest video chains in the United States, which in retrospect was ridiculously trivial. But from where we stood then, it may as well have been saying we’re going to ride our bicycles up Mount Everest. What hubris! Because even the 10th largest chain was many, many, many millions of dollars a year bigger than we were at the time. But something to aim for. And we actually passed that one way faster than we thought. And then you set your goal; you know, eventually we’re going to be as big as Blockbuster. In other words, if you were to set your goals to be what Netflix is now, I would be locked up; I would have been this most ridiculous flight of fancy, hallucination you can imagine. They would have thought you were psy—gone psychotic or something if you had ever done a presentation saying Netflix would be as big as it is now.
You—for people that don’t know, because the world has moved on so much, and there’s a generation of people that are listening to this conversation right now that probably don’t even know what a like a VCR and a cassette player is—but you launched the business at a time when Blockbuster was the big incumbent, and Blockbuster was a store where you went to a physical location; you rented a like cassette VCR—what do they call it, like a VCR? VHS. VHS tape. You took it home, and then you brought it back the next day. And your real innovation was that you were going to send these DVDs to people in the post on a rental basis. That was the—that was the crux of the business, right?
That was the crux of the business. And in fact, when we originally started, there wasn’t a lot of business model innovation there either. You know, there were due dates, and there were late fees. The innovation was it was one centralized store on the internet that served the entire country, so that we could have every single movie that was available on DVD; we had perfect inventory. And unlike a video rental store where you can picture it in like a supermarket with rows of shelves, each movie could be placed in one place; you could either put it in the mystery aisle or in the Alfred Hitchcock aisle or in the new releases. You had to pick where it was, whereas on the internet, you could have that same movie listed in 30 different places based on—finding movies. We thought finding movies would be easier, too. We had a bunch of things we thought would allow us to take on this incumbent, this huge, huge, huge company. But yes, it was very, very focused; there was no streaming. If you wanted a movie, we mailed it to you. We mailed it to you on a little plastic disc.
It’s funny because, in hindsight, when I think about a lot of these big breakthrough ideas that ended up changing their industry, you learn in hindsight that there was some big macro factors that caused the timing to be right. And I think about in the case of your business, Netflix, there’s a bunch of big macro things that you’ve already described: things like DVDs, the internet. Is there any other sort of big macro factors that made the timing right for Netflix?
Those were the two big ones, right? Is that the internet was certainly the big one—was that all of a sudden there was this way to have a single store which served the entire country? Before, for a bricks-and-mortar, as we call it, business, you want to serve the entire country; you’ve got to build 9,000 different stores, and Blockbuster did just that; they had 9,000 different stores, and then you have to staff those stores, and they had 60,000 employees. And we served the entire country with one inventory and with a group of 12 to 15 people. So that was certainly one big shift. The DVD was a bet, which was—at the time, DVD was just getting started, and if the DVD had not worked, if it had not reached a full household penetration, this whole thing never would have worked.
How many people were watching DVDs at the time when you launched Netflix?
There were fewer than 250,000 DVD players sold. That was the total addressable market was 250,000 DVD players. So is that like 1% of America or something? Yeah, there’s 130 million households in the United States, so—and of those 130 million households, movie—but it was tiny; it was really—it created all kinds of interesting marketing challenges of how do you launch a company when there’s so few eligible customers?
In September '99, you explored selling Netflix to Amazon, which is shy of two years after you’d launched. What was—was that the first time you met Jeff Bezos? Yes. And how does that come to be? You know, because he’s—he, at the time, I guess, was fairly early in the Amazon journey as well.
But yeah, he was. And at the time, to show you how early Amazon was in its journey, they were only a book seller; so they sold nothing else; they were a bookstore. But Jeff had made no secret of the fact that his aspirations went way beyond that—that he was going to be the everything store—that the things they had found about how powerful it was selling books on the internet applied to everything else. And it was pretty clear his next two categories were going to be music and movies. And we got a call from the CFO at Amazon, basically saying, “Hey, Jeff, we’d love to meet with you. How about coming on up to—up to Seattle and having a little sit-down?” And Reed and I didn’t need to think too long to understand why they might want to meet with us. It was pretty clear they were going to be entering video, and this was going to be a make-versus-buy analysis: would buying Netflix accelerate their entry into video? Because we had done a tremendous amount of work about building out the content and making those things work, so there was some value there, not to mention the people. And so we all flew up to Amazon and were ushered into this building, which was pretty hard to imagine that this was the headquarters of this world-changing e-commerce company because it was a mess. You know, people were jammed in under stairs and in closets, and there were pizza boxes everywhere, and dogs running around, and the desks were all the same; they were all made from doors that had been laid—supported by four wooden posts at each corner—that everyone sat at these doors. And, and in comes Jeff Bezos, and we begin to have this conversation about what is Netflix and what’s it all about, and it went—went pretty well. And as the CFO is showing us to the door at the end of the meeting, um, she said, “I just want to set your expectations that in the event we decide to do something, our offer is probably going to be in the low eight figures.” And we guessed that was probably going to be 10 to 15 million. And at the time, we had launched in April of ‘98, and so we were still pretty young. And I remember Reed and I kind of looking at each other and going, “That’s not a bad return for 12 to 18 months’ work.” But at the same time, we felt we had already solved the big problems; we had built a functioning e-commerce website; we had managed to source every single DVD that was available; we had figured out how to make movies go out to customers and bring them back. And we weren’t quite ready to let Jeff
He was talking about how Netflix's original name, Kibble, was changed. He said they were initially called Kadabra, aiming for an "Abracadabra" feel, but their lawyer pointed out its similarity to "cadaver." This led to a back-and-forth, with Reed impatient to move on. Finally, I said, "Reed, let's talk about what we're really here for: the next big milestone in Netflix's journey."
The dot-com crash was a significant event, but for me, a more profound moment happened earlier—a leadership transition within Netflix. This was in late 1999, before the spring 2000 crash. Netflix was young, and Reed and I had an agreement: he was the angel investor and chairman, I was the CEO. Reed had a day job.
One afternoon, Reed popped into my office and said, "Mark, we have to talk." That never bodes well. He had a PowerPoint presentation showing my CEO strengths and weaknesses. I stopped him, saying I wouldn't let him pitch how much I sucked. He closed the computer but explained concerns about minor errors in my judgment and some hires. He emphasized the need for flawless execution as things accelerated. He wanted to return full-time as CEO.
For a moment, I thought he was firing me. Reed had more equity. But he proposed a COO/CEO arrangement where we'd run the company together. After he left, I sat in the dark, feeling crushed. It felt unfair; it was my company, my idea. But I realized there were two dreams: my CEO dream and the dream of a successful Netflix. Reed's full-time involvement increased our chances of success.
It wasn't easy. I talked with my wife, and eventually decided he was right. Stepping down and letting Reed become CEO, while working together, was the best chance for success. Looking back, that decision to put my ego aside was the smartest I ever made at Netflix. Those years with Reed were a renaissance for the company, shaping its future. His achievements since then are even more astounding.
A CEO’s role involves ensuring the right people are in the right seats, sometimes saying goodbye to people who were crucial early on but not at scale. That lens eventually turned to myself. Many founders need to ask: am I the right person for tomorrow? Great early-stage and late-stage entrepreneurs are rare. I recognized the right thing to do for the company.
With hindsight, could Reed have approached the situation better? Yes. He's not as strong at framing things, delivering bad news, and understanding emotional reactions as I am. But he genuinely believed it was the right thing for the company. Our strong, trusting relationship meant I heard him.
What did Reed have that I didn't? He’d already taken a company public, scaled it, and shown he could hire talented people. It wasn't about my inability to do it; it was about increasing our odds of success. He also had a strong reputation with VCs, crucial for fundraising. Reed had mentioned in that conversation that I didn't appear tough and candid enough to command respect. I'm better at that now.
My empathy, a gift in marketing and sales, made delivering bad news painful. Great marketers empathize and struggle with delivering bad news. I've gotten much better at it. I've stopped searching for painless solutions; sometimes, you just have to do what hurts. The dot-com crash layoffs were painful, but I've gotten better at delivering that kind of news. It's still the hardest thing.
Have I forgiven Reed? 100%. It came from love, not malice. Delivering that news must have been tough for him. I respect his courage and discipline. What makes Reed successful? He sees interconnectivities exceptionally well, identifying solutions others miss. He’s extremely analytical and less emotionally driven, enabling hard decisions.
Is hard work essential for success? Not necessarily. Early in my career, I had to sprint; I worked harder than anyone. That's sometimes needed, especially early on. But it's not the only answer. I've learned that running for the plane—working frantically on small details—often doesn't matter. Success comes from focusing on the right problems, not just working harder.
Small changes made a big difference. The “no late fees” decision was pivotal. Product-market fit is when customer momentum dramatically shifts. Before that, it's constant struggle. We tried hundreds of things, initially striving for perfection in our tests. We eventually learned that quick, sloppy tests were better. A good idea shines through, even in a poorly executed test.
The “no late fees” idea was initially considered ridiculous. It eliminated a major impediment, turning it into an asset. Blockbuster's late fees were hated. Removing them gave us a huge competitive advantage. It leveraged loss aversion: people feel the pain of loss more acutely than the pleasure of gain. Plus, it improved the overall customer experience.
The transition to a subscription model was also huge, demonstrating its applicability to a seemingly unintuitive area. This drew on prior experiences understanding subscription economics. Should you run more tests? Yes! Don't debate in boardrooms; test constantly. We stumbled onto the subscription model, optimizing it later. It's a powerful business model.
Most companies don't embrace a testing culture because failure is associated with blame. Creating a culture where failure is celebrated is essential. I don't view them as failures, but as tests that provide learning. Quick, cheap, easy tests are crucial.
A week before the dot-com bubble burst, I gave a speech in NYC. My dad, risk-averse and fundamentally opposed to my venture, was there for brain tumor treatment. It was bittersweet: he started understanding my work while also beginning our goodbye. His passing was tragic, but even more unfortunate was that he missed seeing the dot-com bubble burst.
Losing my father didn’t fundamentally change my perspective; he lived authentically. He instilled in me the “Randolph Rules of Success,” emphasizing decency and success.
Don't complain; stick to constructive, serious criticism. Don't express opinions about things you don't have the facts for. That's what my dad emphasized—being a "mensch."
The dot-com bubble happened; most of us don't remember. I must have been seven or so. I can't recall the specifics, but it was bad, especially for us. We were talking earlier about subscription economics. Their amazing aspect is acquiring a customer who pays monthly—ideally, for years. This allows greater investment in customer acquisition. You might spend $100 to onboard a customer confident they'll pay $10 a month. In month one, you lose $90. When a subscription business booms, cash floods out the door to acquire new customers, while the initial revenue is low. We even had a first month free policy! This wasn't a problem in March 2000, during the era of irrational exuberance. Companies with no revenue and questionable business models were worth hundreds of millions. It was ridiculous until the dot-com crash. In a week or two, funding dried up. A ".com" was no longer a golden ticket; it was a scarlet letter. We were in deep trouble—about to go broke from success. This led to "pursuing strategic alternatives," code for a quick sale. Blockbuster was our obvious option.
Were you losing money at that point? Oh my god, yes. We'd accumulated losses of about $50 million, with revenues of $5 million. Our yearly burn rate was high; most of the $50 million was lost in the previous 12 months. On paper, it was terrible. Startups aim for repeatable, scalable business models; we didn't have one. Many businesses hope to make it up in volume or monetize later. When that opportunity vanishes, it's disastrous. We were completely upside down.
Did Blockbuster approach you? No, we reached out for months. We were doing $5 million a year; they did $6 billion. We had 150 employees; they had 60,000. We were a gnat to their elephant. They showed no interest. Finally, we got a call while at a corporate retreat at Alisal Ranch in Santa Barbara. It's a dude ranch, very casual. I only had shorts, a t-shirt, and thong sandals. Blockbuster wanted a meeting the next day in Dallas. There was no way we could fly directly from Santa Barbara; the time difference was too great. So, we chartered a private jet—a rounding error given our situation. We arrived in Dallas, went to a huge conference room with a massive hardwood table, and there I was in shorts and sandals. Reed had a Hawaiian shirt—I was jealous!
We pitched our blended model: Blockbuster would run stores, we'd run online, creating a game-changer. It went well, until they asked, "How much?" We'd rehearsed this on the plane. $50 million, given our $50 million debt. Silence. Then, I realized they were suppressing laughter at our hubris. The meeting quickly went downhill. The ride back to the airport, and then the jet back to Santa Barbara, was quiet. I was confident our blended model was great, but they weren't going to save us; they'd compete. We were in trouble.
Did they make an offer? No, they rejected our $50 million offer. My dad used to say, "Sometimes the only way out is through." We had to compete. We laid people off, dropped side businesses, focused, and survived. Eventually, we surpassed Blockbuster, which later went bankrupt.
How could Blockbuster not see your success and react? It's the innovator's dilemma. Imagine you're Blockbuster CEO John Antioco. You have $6 billion in revenue from your core business, and someone proposes an online component projected to generate $2 million the first year. Would you invest your best engineers? No. Netflix wasn't just a movie company; it was a software company with Silicon Valley talent. Even with Blockbuster's A-team, it would have been challenging; they used their B and C teams, repeatedly. Eventually, they reacted, but it was almost too late. They came very close to taking down Netflix. Our blended model, where customers could rent from Blockbuster and return by mail or in-store, was a near-killer for us. Blockbuster almost had us, until unrelated corporate issues led to a CEO change, and they abandoned their online business.
You discussed John Antioco's departure on Instagram. His leaving significantly contributed to Netflix's survival, correct? Corporate raiders bought Blockbuster stock, taking board seats and prioritizing short-term profits. They denied Antioco his bonus. He quit. His replacement, with retail experience, focused on selling gum and clothing in their 9,000 stores, neglecting the digital side. It's like Spielberg's robot movie; Blockbuster was seconds from grabbing us, but then they turned and walked away. They lost focus.
You left Netflix the day after the May 2002 IPO. Your life changed; it was a lot of money. You left for the reasons you mentioned, and later, the streaming wars ended with Netflix's victory. Blockbuster went bankrupt eight years later.
After going public in 2002, what mattered? The day of the IPO, my son and I were in a cab in New York City. I realized my life had changed. I had the option to never work again, but I liked what I did. The IPO was a milestone, but not life-altering. Leaving Netflix was more profound; I could spend my days doing what I loved. Since then, I've worked with early-stage companies, started another successful company, and have a great life, spending time with my family and pursuing outdoor activities.
Was there grief after leaving? Surprisingly, no. There was uncertainty. Many in Silicon Valley have the financial freedom not to work, but most go back, starting new companies. We're entrepreneurs because we love solving problems, building companies, working with smart people on interesting projects. Success is doing what you love.
So, you didn't retire or immediately start another company; you took time to think. You ended up starting another company—another story for another time. It's not about the IPO, success, or money; it's about creating something new. I feel blessed to spend my days doing this.
The Netflix culture was pioneering. When I started my first business, it was all about "family," etc. Then I read Netflix's "Freedom & Responsibility" culture deck. It was the opposite of what I thought a business should be. Radical freedom with a high bar. Where did it come from? Is it right for every company? What's the unseen part of implementation?
It's not right for every company. Culture is observational, not aspirational. It's how founders and senior executives behave. People model their behavior. You can't have a "family" culture if you don't behave like a family. Our radical honesty came from how Reed and I treated each other and our employees. It has to be genuine, with accountability. Actions must match words. The culture of the first 10 people sets the tone for the next 90, and so on. Consistency is key. Kids model what you do, not what you say.
Freedom & Responsibility is common in early-stage companies due to limited resources. You give people the freedom to achieve a goal, with responsibility for the outcome. It's easy with 10 people, harder with 100, and very hard with 1000. People start needing daily status reports and expense approvals; you're treating them like infants. Instead of guardrails to prevent errors, hire people with good judgment and remove the guardrails. At Netflix, there were no policies, just "use your best judgment." This only works if people have that judgment.
We saw engineers complaining in the hot tub at a competitor's lavish campus. It made us think: what really motivates people? It's not perks; it's agency. Treat them like adults, give them clear responsibilities and the freedom to achieve them. This was a huge unlock for Netflix. It's more important than compensation.
I've always had unlimited holiday, even in my current company. The reason rules change is due to a small percentage of people lacking judgment. You end up changing rules for everyone because of a few. I realized I should just fire those few, instead of changing policies.
I'm an entrepreneur because I hate jobs. I created a company where I'd want to work. Arrival time doesn't matter, only results. Responsible people, like Jack, don't need to be told when to work. He focuses on the mission. You make rules for the exceptions, not the norm. Removing guardrails means a few can't work there, but it attracts others who value freedom and responsibility.
You mentioned a viral LinkedIn post about Tuesday date nights. In my late 20s, I worked all the time. My relationship suffered. To build a sustainable relationship, I prioritized it. Every Tuesday, I left work at 5:00 sharp for date night. Remarkably, crises stopped happening after 5:00 on Tuesdays. It showed that you can run a company and have a relationship. It wasn't always easy; sometimes I'd work late after dinner with my kids. I carved out time for family, work, and outdoor activities, balancing my life.
Was there a risk of losing the relationship? Yes, around age 29-30, my wife made it clear she wouldn't put up with it. It was sobering. I decided that the relationship was important, and that I could balance work and family. I could prioritize, delegate, and make it work. I managed to have a successful entrepreneurial career, remain married, raise my kids, and pursue my passions.
What matters more—business, family, or passions? It's a trick question. You need all three. You can't pick one and be happy. My focus is balance. I think about it daily.
The closing question is: What were you most wrong about? I regret it took me over two years to realize we could use the subscription model for Netflix. We wasted so much time and money. Hindsight is a wonderful thing.
Your book, "That Will Never Work," encapsulates these lessons. Thank you for writing it, and thank you for your mentorship of entrepreneurs.