What Can You Learn From Netflix First Years?
The book ‘That Will Never Work’ is a must-read to feel what it takes to create an innovative company.
The book ‘That Will Never Work’ is a must-read to feel what it takes to create an innovative company.
Years ago, during my MBA, Netflix’s story fascinated me. After being charged forty dollars for a late rental fee, Reed Hastings had the idea that later originated Netflix, and today they have more than 200 million subscribers worldwide. However, an idea is nothing without excellent execution.
Marc Randolph, the first Netflix CEO, shared the story from its founding in 1997 to the IPO in 2002. The book That Will Never Work is a great read, and it generates many insights.
Let me share with you what I learned from this book and what inspired me. I hope it inspires you as well.
Forget About a Plan, Get Your Hands Dirty
In 1997 DVDs were something new, only a few people had DVD players, and almost no movie rental had DVDs. Marc Randolph and Reed Hastings saw that as an opportunity. They wondered, what if people could rent DVDs online and pay no late fees? Reed was skeptical and thought that would never work as DVDs were fragile, but Marc had another take on it.
Instead of investing time on the hypothesis of why that would never work or creating a plan for a viable business, Marc decided to give it a try. He simply got a DVD mailed to Reed’s address, and surprisingly it arrived perfectly.
Ideas are worthless until you validate them. The faster you can validate an idea, the easier it will be to create something meaningful. After proving that DVD per mail worked, Reed and Marc founded a startup that later would become Netflix.
“The truth is that no business plan survives a collision with a real customer. So the trick is to take your idea and set it on a collision course with reality as soon as possible.”
― Marc Randolph
Don’t Give Up
Netflix needed to get closer to DVD owners, and Marc had a brilliant idea of establishing partnerships with DVD producers. He approached Philips, Toshiba, and Sony, trying to make a deal with them. Most of them ignored him. But Marc is not the kind of person who gives up.
“No doesn’t always mean no.”
― Marc Randolph
Sony and Philipps didn’t show any interest, but Toshiba decided to open the door. Netflix made a deal; Toshiba clients would get three free rentals once they bought a DVD player, which helped them get closer to potential clients.
Well, competition triggers actions. As Sony realized Toshiba had a deal with Netflix, they couldn’t be left behind. Immediately Sony reached Marc to set a deal, but of course, they pushed for something better than Toshiba.
Sony wanted Netflix to offer ten free rentals and three free DVDs for everyone who bought a Sony DVD player. The deal was too expensive for Netflix but promising. Ultimately Netflix signed the agreement and massively increased the customer acquisition cost.
Although it was costly for Netflix to afford free rentals and DVDs, they could benefit from getting close to potential clients. The deal only happened because Marc didn’t take a “no” as a final answer; he never gave up.
You’ve Got to Be Brave
Netflix was growing at a fast pace, yet something was going differently than planned. Clients were buying DVDs and not renting them. DVD sales represented more than 90% of Netflix’s revenue, which made them afraid of potential competition.
Marc feared Amazon would start selling DVDs, so they decided to try to set a partnership. But instead, Amazon tried to buy Netflix for around 14 Million USD. Of course, Netflix didn’t even consider the offer. Still, it became clear Amazon would soon be a competitor, which Netflix could not afford.
Netflix was not founded to sell DVDs. Their initial goal was to rent DVDs instead. Although selling DVDs was profitable, it became a distraction from Netflix’s original goal. Marc and Reed could continue selling DVDs and wait for a massive competition, but they were brave and decided to kill their only profitable business. They stopped selling DVDs to figure out how to make DVD rental attractive and profitable.
“Focus. It’s an entrepreneur’s secret weapon.”
― Marc Randolph
Netflix’s Culture
Netflix is famous for its culture. Still, that was not designed; it emerged from the founders' attitudes. After getting tired of the corporate world, Marc wanted to start his own company, and he wanted to work with freedom and have joy from it. He didn’t aim to get rich; he longed for pleasure at work.
“Working, for me, was never about getting rich — it was about the thrill of doing good work, the pleasure of solving problems.”
― Marc Randolph
Since its origin, people at Netflix enjoyed the freedom to do whatever they wanted, but they knew their responsibilities and expectations. And everyone was honest with each other. Marc would tell anyone that he didn’t care where and how long they worked but cared what they delivered, and if they failed their commitments, there would be a problem. Other than that, everything was allowed.
It’s impossible to design culture. You need to live it. Netflix culture is based on two principles: freedom and responsibility, and radical honesty. Everything follows this foundation; for example, they don’t have fixed holidays, everyone is allowed to take as many days off as needed.
“Culture isn’t what you say. It’s what you do.”
― Marc Randolph
Be Humble And Accept Your Limitations
Netflix was founded by Marc and Reed in 1997. Initially, Marc was the CEO, while Reed funded the operations and helped raise capital. Reed had little involvement with operations until he realized Netflix wouldn’t thrive if it continued that way.
During the Fall of 1998, Reed had an intense talk with Marc about his performance in the company. Marc said that Reed served him a “shit sandwich.” First, Reed started highlighting his achievements, and then he pointed out all failures and why Marc couldn’t be the CEO any longer, and he finished with a solution for a transition where Reed would be the CEO and Marc the President. Marc was pissed off and didn’t want to accept what Reed suggested; he stood up and went home.
As Marc reached home and reflected on the conversation with Reed, he realized that Reed was right; Netflix wouldn’t succeed with him as the CEO. It was tough to admit that he needed to step down, yet he was humble to accept his limitations and Reed’s proposal.
Marc knew he played a critical role in helping Netflix get where they were, but more experience would be vital to go further. That’s why Reed had to be the CEO. His experience and network would accelerate Netflix’s growth.
“The best managers figure out how to get great outcomes by setting the appropriate context, rather than by trying to control their people.”
— Reed Hastings
Transform Rejections Into Opportunities
The dot-com bubble started in 1995, and it burst in 2001. During this timeframe, dot-com companies publicly traded had exponential growth. Yet, they couldn’t sustain the expectations, and the hype was over in 2001, many companies went out of business, and venture capitalists became skeptical of any “dot com” company. That led to a massive problem for Netflix as they wouldn’t have enough cash to survive for the upcoming months.
Netflix had to search for strategic options. In other words, they had to find a company to buy them, or they would face the risk of going bankrupt. Marc and Reed thought Blockbuster would be the ideal company to acquire Netflix because they could combine forces and become stronger together.
Due to persistency, Netflix got a chance to pitch this idea to Blockbuster. However, the executives laughed at Reed’s 50 Million proposal. Blockbuster decided not to buy Netflix as they didn’t see its value. Instead of taking it personally, Marc said, “let’s kick them out of business.” Yet, Netflix faced a challenging financial scenario. They wouldn’t last a year if they continued that way.
Marc and Reed had no alternative but to make a massive layoff. Otherwise, they wouldn’t survive any longer. In 2001, a third of employees had to go. Although it was tough, they had to reduce costs to reach profitability faster. After this critical moment, Netflix put all of its energy into figuring out a profitable business model.
That’s when Netflix evolved the subscription business model and reached its first million subscribers. As Netflix started growing sustainably and had a profitable business model and potential to expand, they decided to make their IPO in 2002. The initial price was 15 USD, and since then it grew exponentially. If you had invested a thousand during its opening, now you would have around 470 thousand USD.
Final Thoughts
If you have an idea, don’t waste time thinking about a business plan. Just go out and test your idea as fast as you can. Execution is what matters the most.
“You’re going to get things wrong. you just don’t want to get the same things wrong twice.”
― Marc Randolph
Setbacks are inevitable but how you deal with them is what matters. After almost going bankrupt, Netflix persisted and became a massive corporation that worths around 240 Billion USD.
“Companies rarely die from moving too fast, and they frequently die from moving too slowly.”
— Reed Hastings