Netflixed

by Gina Keating

  Armed with data that showed a wide potential audience, Netflix committed $100 million for two seasons of the show, which debuted to critical acclaim and popular buzz on February 1, 2013.

  In a move that defied television industry wisdom of building audiences—and ratings—through “appointment television,” Netflix released all thirteen first-season episodes at once, believing more in data that showed subscribers would excitedly “binge” on the show and evangelize it to their friends.

  While the data did not guarantee the show would succeed, the fact that a ready audience awaited mitigated the risks associated with its high cost.

  Less than a month after its release, House of Cards became the most-watched series on Netflix. The same month, Netflix reported higher-than-expected subscriber growth in the United States and new international markets—more than regaining the losses it suffered in 2011. Its share price soared past $200 per share, and Hastings set 90 million subscribers worldwide as the company’s next goal.

  “The real advantage we have is not in picking the perfect content, it is in marketing it more efficiently,” Netflix spokesman Jonathan Friedland said. “It’s just like any other artistic risk. [The data] helps you create a package that is likely to be more attractive and gives you the ability to merchandise and market it. Math won’t help you make a great show.”

  Netflix has teed up a roster of original series designed to change, perhaps forever, the way television is made and marketed. Its next shows, including horror-thriller Hemlock Grove, prison dramedy Orange Is the New Black, and Derek, with comedian Ricky Gervais, provide a glimpse into the future of television—as viewers would like it to be.

  Hastings has predicted that the linear TV schedule will be relevant for about five more years, when the bulk of mainstream consumers find more of what they want, when and where they want it, online.

  But Netflix isn’t out of the weeds yet.

  The latest American Customer Satisfaction Index shows that the company still hasn’t recouped the fourteen points it dropped in that survey in 2011—one of the largest-ever single-year drops in the ACSI survey’s history. It remains at 75 percent, well below the average customer satisfaction rating of 85 percent among its e-commerce peers.

  Hastings has now remade Netflix in his own image—a sleek, visionary corporation with confidence born of simply being the best way to watch television. Netflix has bet its future, and perhaps that of home entertainment itself, on this dream of a better world, where viewers are served just what they want before they even know they want it. Along the way it is changing the industry, and the world is watching.

  ACKNOWLEDGMENTS

  NETFLIXED IS MY FIRST BOOK. I may have performed all the tasks associated with producing the manuscript alone, but I had a mighty team backing me up, and turning what could have been a mysterious, fraught process into one of all-consuming joy and absorption.

  My agent, David Fugate, was consistently patient (and tough when necessary) in molding a rather nebulous concept into a compelling proposal that sold its first day on the market. I am grateful to him for being ever accessible, practical, and honest throughout this journey.

  The support and feedback I received from my team at Portfolio, Courtney Young, Emily Angell, and Bria Sandford encouraged me to find the best possible rendition of this remarkable story. I thank them for their gentle care of my initially less than wonderful manuscript. My publicity team, led by Penguin’s Jacquelynn Burke and my own publicist, Carla Sameth, declawed a process that I initially feared with their enthusiasm for this book and their diligence in finding the right audience for it.

  My writing coach, Stacie Chaiken, helped me define the story’s structure and define its characters through her “wild brain” exercises, which freed me from my mental cul de sacs and allowed me to turn out a remarkably clean first draft. Her husband and my good friend, Martin Berg, provided the same excellent journalistic guidance I enjoyed when we worked together as reporter and editor.

  I am deeply indebted to Marc Randolph, cofounder of Netflix, and to Shane Evangelist and John Antioco, formerly of Blockbuster, who were extremely generous in agreeing to meet with me, in encouraging others to speak frankly with me, and in answering many sometimes uncomfortable questions even before I had a book deal.

  Netflix’s Steve Swasey and Ken Ross were indispensable—Swasey was in the strange position of constantly denying my requests for access while agreeing to help fact check the manuscript, and Ross by also checking it over for accuracy and fairness. Although Netflix’s former chief financial officer Barry McCarthy had no intention of becoming a source, he was kind enough to correct several misapprehensions I had about crucial events after I pestered him for more than a year, and for this I thank him. I would also like to acknowledge the others, named and not, at Netflix and Blockbuster, and in the financial and entertainment communities who gave me their time and perspectives.

  There were a number of dark nights of the soul on this project—when I was not sure whether I could deliver the story I had witnessed and that I wanted to tell—and I have my family and friends to thank for slapping me back into reality.

  My father, John Sopuch, provided critical support and encouragement, as did my brother Michael Sopuch and my sisters Amy Gonzalez and Maggie Marcrander and their families. My sister and brother-in-law Alicia Romero and Mike Spence put me up at their home in San Francisco and fed me in the city’s finest restaurants more times than I can count or could have afforded on my meager budget. My uncle Harry Shapiro also deserves more thanks than I can express for moving me and two dogs halfway across the country by himself, as I faced my manuscript deadline.

  My dear friend Carmela Wise and her husband, Rick, put their homes in Boston and New York at my disposal to facilitate my research and interviews in those cities.

  This book is dedicated to my brother, John A. Sopuch III, for correctly advising me that the terror induced by quitting my job to write a book would carry me safely through the process, and to my mother, Margaret Romero, for keeping me on course. She and my stepfather, Richard Romero, saw to my every need and provided a haven for me during the unfamiliar process of writing so long a work. I will never be able to repay their care of me.

  A NOTE ON SOURCES

  THIS BOOK IS BASED PRIMARILY on my own reporting on U.S. entertainment companies for Reuters between 2004 and 2010 and on more than one hundred interviews with as many of the players in this drama as would agree to speak with me. All but a handful of the interviews were conducted on the record, and these were audiotaped with the interviewees’ consent and transcribed by a professional transcription service. I also conducted a few interviews and asked many follow-up questions via e-mail.

  I traveled extensively over two years of research and writing to meet with my subjects in person and to familiarize myself with the settings they described. I knew or had met most of my subjects in the course of my work for Reuters, so many of the character descriptions consist of my own impressions and nuances gleaned from my research.

  Much of the financial and strategy information comes from: my review of a couple of thousand pages of transcripts from quarterly investor conference calls; from investor presentations by Blockbuster, Netflix, Movie Gallery, and Hollywood Video; and from lawsuits and regulatory filings by these companies and others. I filled in gaps in my rather utilitarian wire service copy with well-sourced stories from a number of reputable news outlets and blogs. I have endeavored to include attributions along with the material I used wherever possible. A list of the articles I referred to follows.

  I came across Hastings’s connection to millionaire-scientist Alfred Lee Loomis in the New York Times society pages in the course of researching his family. I owe a debt to Jennet Conant’s excellent book Tuxedo Park: A Wall Street Tycoon and the Secret Palace of Science that Changed the Course of World War II, for her meticulous descriptions of Loomis, and for pro
mpting me to consider the wider implications of the marriage of science and marketing that is Netflix.

  I learned about Marc Randolph’s great-uncle Edward L. Bernays primarily from Bernays’s books, and about Bernays’s profound impact on American culture from Larry Tye’s The Father of Spin: Edward L. Bernays & the Birth of Public Relations.

  I could not have written the early chapters about Netflix’s nonpublic years without generous and enthusiastic support from the company’s founding team—Marc Randolph, Mitch Lowe, Christina Kish, Te Smith, Jim Cook, Corey Bridges, Boris and Vita Droutman, and others—and the documents, screen shots, photos, and mementos they shared with me.

  Although Reed Hastings did not consent to an interview or otherwise cooperate for the purposes of this book, I gleaned much essential information from the more than two dozen interviews I conducted with him over my nearly seven years covering Netflix’s quarterly earnings reports, product rollouts, and other company events.

  In addition, while Hastings did not allow any of Netflix’s current executives or employees to participate, he did not—as I know—dissuade former executives or employees from speaking with me. Silicon Valley is, in many ways, a small town; Hastings’s star was on the rise for most of the time I was collecting information and doing interviews, and many people feared offending him.

  As a result, some sources asked not to be identified by name when revealing information that could have been interpreted as unfavorable or damaging to him. I agreed to these terms in cases in which I could verify the same information with at least one other reliable source who had direct knowledge of it. I was easily able to verify these facts with two or more other sources in nearly all of these cases.

  I used direct quotes to re-create several conversations that were told to me in most cases by participants. I have also either confirmed the framing of these conversations with both parties to it, or with people who were present, or who were informed about it contemporaneously.

  In re-created conversations that do not use direct quotes I was able to verify the gist of them, but not the wording, with at least two people who were present or who were told what was said by a participant.

  When I first approached the Netflix and Blockbuster executives about writing an account of the battle between the two companies and how it transformed American home entertainment, both sides agreed it would be a great story. I found it relatively easy to persuade the former Blockbuster executives to speak to me about their battle with Netflix. Those who had left the company shortly after Jim Keyes changed the company’s direction from online back to store-based rental went on to high-ranking corporate jobs where they faced questions about how Blockbuster had failed, and they were eager to set the record straight.

  Blockbuster’s corporate communications team declined to respond to several requests made over a number of months for an interview with Keyes. I had interviewed him several times in the course of covering Blockbuster for Reuters and am confident that I represented his thinking and strategy fairly as a result of those interactions.

  On the Netflix side, as noted above, Hastings declined to participate in this book in any way, but the redoubtable Ken Ross and Steve Swasey were kind enough to fact-check parts of the manuscript I could not confirm from other sources. Of the key Netflix executives I tracked down and interviewed, most were generous enough to introduce me to colleagues, whose accounts enriched this story.

  These executives humbled me with candid self-assessment, the likes of which I had rarely heard as a longtime journalist covering the financial, political, and legal realms. Simply being allowed to share their thoughts and emotional journey at such close range made this project highly satisfying.

  BIBLIOGRAPHY

  BOOKS

  Bernays, Edward. Propaganda. New York: H. Liveright, 1928.

  Conant, Jennet. Tuxedo Park: A Wall Street Tycoon and the Secret Palace of Science that Changed the Course of World War II. New York: Simon & Schuster, 2002.

  Novak, David, and Boswell, John. The Education of an Accidental CEO. New York: Three Rivers Press, 2007.

  PricewaterhouseCoopers. Global Entertainment and Media Outlook: 2004–2010. New York: PricewaterhouseCoopers, 2004.

  Redstone, Sumner, and Knobler, Peter. A Passion to Win. New York: Simon & Schuster, 2001.

  Tye, Larry. The Father of Spin: Edward L Bernays and the Birth of Public Relations. New York: Henry Holt and Company, 1998.

  Wilkofsky Gruen Associates. Global Entertainment and Media Outlook: 2010–2014. New York: PricewaterhouseCoopers, 2010.

  ARTICLES

  “Blockbuster to accept online DVD returns at stores.” Reuters, Nov. 1, 2006.

  “Blockbuster names former 7-Eleven chief as its new CEO and chairman.” Associated Press, July 3, 2007.

  “Blockbuster Rollout and Sony Ad Campaign Boost DVD.” Video Week, Sept. 14, 1998.

  “Deaths: Randolph, Stephen B.” New York Times, March 16, 2000.

  “DIVX Says It’s Poised for National Rollout.” Audio Week, Sept. 28, 1998. USA Today, April 22, 1998.

  “DIVX and DVD Jockey for Position.” Audio Week, Aug. 17, 1998.

  “DVD Online Service Stresses Rentals.” Consumer Multimedia Report, May 4, 1998.

  “DVD Rentals Ready for Mainstream with Blockbuster Announcement.” Consumer Multimedia Report, Oct. 18, 1999.

  “Exec Exits after Offer; Mark Wattles Leaves Hollywood Entertainment Corp. on Blockbuster Inc.’s Proposal of Takeover.” Daily Variety, Feb. 4, 2005. “Factory Sales of DVD Players.” DVD News, Sept. 1999.

  “First Online DVD Rental Store Opens: Netflix Site Offers Unprecedented Title Selection, Availability and Convenience.” Business Wire, April 14, 1998.

  “Internet’s Netflix Debuts DVD Rental Program.” DVD Report, April 20, 1998.

  “Janet Bissell Fiancee of William Loomis Jr.” New York Times, Nov. 1, 1962.

  “Joan Amory Loomis Becomes Affianced.” New York Times, Dec. 23, 1957.

  “Miss Violet Amory Engaged to Marry.” New York Times, March 15, 1937.

  “Miss Joan Loomis Becomes Engaged.” New York Times, Dec. 22, 1957.

  “Mrs. V.A. Loomis Married.” New York Times, Sept. 3, 1946.

  “Netflix Cancels $86 Million IPO.” DVD Report, Aug. 14, 2000.

  “Netflix Makes $86 Mil. IPO Bid.” DVD Report, April 24, 2000.

  “Netflix shares feel tailwind of good news.” Associated Press, Dec. 7, 2011.

  “New DVD Online Service Emphasizes Rentals.” Audio Week, April 20, 1998.

  “Online Renters Swamp Netflix.” DVD Report, June 15, 1998.

  “Online DVD Sales Grow.” Consumer Electronics. Sept. 7, 1998.

  “The Rental Revolution.” Inside Multimedia, Oct. 26, 1998.

  “$700 Million for Next Generation Nets.” CBS MarketWatch, April 14, 1998.

  “Tech Group Backs Charter Schools Step.” San Jose Mercury News, Feb. 28, 1998.

  “2 named to Board of Education.” San Diego Union Tribune, Feb. 26, 2000.

  “Unit Sales to Dealers—DVD Players.” DVD News, Oct. 4, 1999.

  “Video Biz in Slash Rash.” Daily Variety, Dec. 23, 2004.

  Video Software Dealers Association. “The Annual Report on the Home Video Market.” PRC News, Sept. 13, 1999. “Washington: For the Record.” New York Times, Sept. 8, 1970.

  “We’ll Support DIVX Only after DVD Is Established—Sony.” Audio Week, Nov. 16, 1998.

  “Wrong Disks Ship to Some Clinton DVD Customers.” DVD Report, Oct. 12, 1998.

  Abkowitz, Alyssa. “How Netflix Got Started.” Fortune, Jan. 28, 2009.

  Ali, Rafat. “Interview: Blockbuster CEO: Skeptics Aside, Confident of Physical’s Digital Future.” paidContent, Aug. 14, 2008.

  Anderson, Nick. “A New Lesson Plan? Voter Initiative Prop
osed for Fall Ballot Could Spawn Hundreds More Charter Schools.” Los Angeles Times, Feb. 25, 1998.

  Antioco, John. “How I Did It: Blockbuster’s Former CEO On Sparring with an Activist Shareholder.” Harvard Business Review, April 2011.

  Applefield Olson, Catherine. “Online Retailers Slash DVD Prices—Competition Over New Format Heats Up in Cyberspace.” Billboard, May 16, 1998.

  Arango, Tim. “Time Warner View Netflix as a Fading Star.” New York Times, Dec. 12, 2010.

  Arnold, Thomas. “Company Town: Virtual Video Chain Builds Its Presence on PCs.” Los Angeles Times, Aug. 12, 1998.

  Bathon, Mike. “Movie Gallery Files for Bankruptcy.” Bloomberg, Feb. 3, 2010.

  Bazeley, Michael. “Pair Attempt to Change Law Pushing for More Charter Schools.” San Jose Mercury News, Feb. 2, 1998.

  ———. “Boost for Charter Schools Bill Advances: A Silicon Valley Group Helps Broker a Deal that Gov. Wilson May Sign by Friday.” San Jose Mercury News, April 29 1998.

  Bebitch Jeffe, Sherry. “The State: Hi-Tech Makes Its Political Mark.” Los Angeles Times, Nov. 5, 2000.

  Bell, Robert; Bennett, Jim; Koren, Yehuda; and Volinksy, Chris. “The Million Dollar Programming Prize.” IEEE Spectrum, May 2009.

  Bell, Robert; Koren, Yehuda; and Volinksy, Chris. “Matrix Factorization Techniques for Recommender Systems.” Computer, August 2009.

  ———. “Statistics Can Find You a Movie, Part 2.” AT&T Labs Research, May 19, 2010.

  Bloom, David. “Digital LA: Shortage of Outlets Carrying DVD Movies Creates Niche.” Daily News (Los Angeles), June 24, 1998.

  Bond, Paul. “Netflix.com Subscribes to DVD Passions.” The Hollywood Reporter, Oct. 14, 1999.