That Will Never Work

by Marc Randolph

  It’s two months after launch. I lie in the dark, squinting at the clock radio, waiting for the onslaught. Already it’s starting: There’s a faint rustling coming from somewhere down the hall, then a series of soft ploomphs. Hunter is greeting the morning, hurling his stuffed animals over the bars of his crib. Soon he’ll wedge his feet in the bars, grab the rail, and swing himself up and over, onto a landing pad of plush tigers and elephants.

  Who needs an alarm clock?

  I dress in the weak light, and when I step into the hall, Hunter is there to meet me, a well-loved zebra dangling from his hand by one dingy, furless ear.

  “What’s up, little man?” I ask as he follows me sleepily down the stairs. In the kitchen, he lifts his arms over his head and lets me hoist him up into his chair. I ritually mix cereal, bananas, and milk in a bowl and set it in front of him. He plunges his hands into the bowl and starts to eat, just as the coffee machine gives three beeps and sputters the last drops into the pot.

  Perfect timing.

  I sit across from Hunter and open my laptop. The morning monitors are already in my in-box.

  In the weeks since launch day, we’ve learned to take full advantage of the data we can gather through The Store. Our website never misses a thing. Every night, just after midnight, the Netflix servers—which number twenty-four by now—systematically begin grinding through the previous day’s business in order to get ready for the next. They balance accounts, adjust inventory, and reconcile payments. They read every one of the previous day’s transactions from the production servers and add them to a log, creating a data warehouse. Unlike the overcrowded vault, there is nothing physical about the data warehouse. The entire thing fits onto a single hard drive.

  Every customer. Every order. Every shipment of a DVD. Our data warehouse knows where every customer lives, how and when they joined, how many times they’ve rented from us, and how long, on average, they keep their discs. It knows exactly what time someone visited the site, where they came from, and what they did once they got there. It knows which movies they looked at and which ones they chose to put in their cart. It knows whether they completed checkout—and if they didn’t, it knows where they gave up. It knows who was visiting us for the first time and who is a repeat customer.

  One hard drive knows almost everything.

  With so much data to consider, it’s easy to get overwhelmed. That’s where the monitors come in.

  Monitors are data summaries: short, clear, and easy to digest. The top ten movies in both rentals and sales, how many new customers we’ve acquired over the previous twenty-four hours, how many orders we’ve received, how many of those were rentals and how many were sales. That sort of thing.

  This morning’s monitors—which I scan with one eye, the other trained on Hunter’s slowly emptying bowl—contain good and bad news. The good is in the left column: Sales are up 50 percent over May, our first full month in business. Monthly revenue has just passed $94,000 for the month of June. With twelve months in a row like that, we’ll hit one of those magic startup numbers: a million dollars of annual revenue. I make a note to myself to bring that up at our company meeting at the end of the week.

  The bad news is one column over: Rental Revenue.

  I wince when I see that it is still in the four digits.

  And that the first digit is a 1.

  We have $93,000 in DVD sales. Barely $1,000 in DVD rentals.

  “Shit,” I murmur to myself. Hunter looks up at me for a moment, then goes back to his cereal, oblivious to anything that isn’t a banana.

  I pour a second cup of coffee and ponder the numbers. One reason for the great disparity between sales and rental revenue is pricing. Customers pay $25 for a DVD but only $4 for a rental. We make six times as much selling a DVD as we do renting it once. Of course, you can only sell a DVD one time. You can rent it hundreds of times.

  The problem is, no one is renting from us. And when we are able to convince someone to rent a DVD, they almost never come back for a second one.

  I methodically lay out bread, peanut butter, and marshmallow fluff, and construct sandwiches for Logan and Morgan. They love it when I make their lunches, because unlike Lorraine, I let them eat garbage. I just have to balance it out with something healthy. Hence the carrots I’m slicing, my mind a million miles away now, pulling up mental images of each of our current round of promotions—imagining how I might be able to tweak the words, the graphics, or the offer itself to make a difference. To make people rent.

  I barely even notice when Lorraine glides into the kitchen, an efficient hurry of noise and activity. She herds Logan and Morgan, already dressed and ready for the day, ahead of her and to their places at the table, simultaneously dishing out cereal and yogurt, shoving the lunches I’ve made into lunchboxes, squeezing Hunter into pants and a shirt, rounding up soccer shin pads, preschool projects, sweaters, and bathing suits—and then, seemingly within seconds, she’s swept three children out the kitchen door, strapping them into their car seats in the big maroon Suburban, with a quick kiss good-bye to me.

  Talk about efficiency. Talk about project management. Lorraine is a genius.

  7:30 a.m.

  Christina is scribbling at the whiteboard when I walk into the office. Six months ago, we used the board to brainstorm possible company names. On launch day, it was filled with journalists’ questions. Now, it looks like a DVD magazine marketing department got drunk and tried for a rebrand.

  DVD Watcher?

  The Digital Bits

  DVD Express

  Surround Freak

  DVD Resource

  Short Cinema Journal

  DVD Insider

  “What’s all this?” I ask, squinting to make out the names and numbers that follow each entry. “Does Digital Bits really have seven hundred readers?”

  “Pretty sure,” Christina answers, rubbing the side of her hand across one of the entries. We lost the eraser long ago. “But they’re far and away the biggest. Some of these are…pretty small. DVD Insider has about a hundred readers.”

  “Let me show you something,” Christina says, putting down the dry-erase marker and swiveling to her desk. She flips open her computer, types for a moment, then slides the screen toward me. “Check out all the engagement!”

  The screen is filled, top to bottom, with back-and-forth web forum conversations. She points with her marker at a post halfway down the page, from a name I don’t recognize: Hamilton George.

  Just curious. Anyone try out that new DVD by mail company yet? Netflix? Looks like they have 100s of DVDs. Prices are pretty good, too.

  “That’s one of Corey’s,” Christina explains. “He’s one of the most active members of this group.”

  Corey’s black-ops tactics haven’t stopped, post-launch. He has seventeen different personas, each of them engineered for a different site, and now that Netflix is a go, he can keep track of who is actually visiting the site and ordering from us.

  Before launch, he was our pusher. Now, he is our spy.

  Christina scrolls through Hamilton’s comment history, reading the responses.

  “People love him. Or… ,” she hesitates. “They love Hamilton, anyway.”

  I’d asked Corey once where he came up with the names for his personas.

  “Celebrities,” he said. “I just invert the names.”

  Hamilton George = George Hamilton.

  Meet our spy: the perpetually suntanned star of Love at First Bite.

  9:00 a.m.

  I spend the morning in my office, going over the terms of a revised coupon deal with Toshiba and calling dry cleaners in the Santa Cruz area, because I’ve forgotten where, exactly, I dropped off my “New Media Outfit.”

  Let me explain. To understand the New Media Outfit, you need some background on one of the biggest issues we faced as a young company. Essentially, it’s a version of the chicken and the egg.

  How can we market a DVD rental service to people if hardly anyone owns a DVD player?


  In direct marketing, if you’re trying to reach a group of people, you contact a list broker and rent a list. “Give me two million DVD owner addresses,” you might say, and then you do a mailing to that list. But in the case of a brand-new technology, there is no list yet. Because there are hardly any DVD players.

  The big consumer electronics companies that make DVD players are in the same boat as we are, but they’re rowing in the opposite direction: it’s hard to convince people to buy a $1,200 DVD player when there are hardly any DVDs.

  Back in January, I’d sensed an opportunity. We needed a way to reach people who owned DVD players. The manufacturers needed a way for their new customers to access DVDs. What if we could come up with a promotion that would link our interests?

  In January, I’d flown to Vegas for the Consumer Electronics Show. At that time the largest trade show in the world, it made VSDA—which to me had seemed like an acid trip—look like Sunday school. Every major consumer electronics company was there. They rented out entire hotels to house their employees. The booths were the size of football fields, and they were filled with hi-tech gadgetry. Think 3-D. Think robots. Think PlayStations. Think 3-D robotic PlayStations. All months before their release dates.

  In addition to Mitch, my companion through this foreign land was Kirby Kish, Christina’s husband, who worked in consumer electronics and had volunteered to act as a so-called jungle guide—someone who could make introductions and show me how to navigate the complex hierarchies of the multinational conglomerates we’d be dealing with. “It’s a different world, man,” Kirby warned me before we stepped off the plane at McCarran International Airport. “Buckle up.”

  It was a true East-meets-West moment—not just because most of the companies were headquartered in Asia, or because their American offices were all on the East Coast, in suburban office parks in New Jersey. It was a difference in culture. Employees at Sony or Toshiba went to work in suits. They parked their cars in front of anonymous office parks in Secaucus or Wayne or Park Ridge and entered drab, sterile buildings with thousands of other people. They obeyed a rigid hierarchy, in which each employee had clearly delineated responsibilities and tasks to accomplish. They answered to their superiors along vast and complex chains of command. They worked from nine to five every day and got paid overtime if they stayed late. Once a month, they came to work in khakis and polos for casual Friday. But only once a month.

  In other words, the ethos of a consumer electronics company was about as far from the startup mentality as possible.

  That was understandable, though. Consumer electronics companies were selling products with an incredibly long lead time. From research and development to packaging to marketing to shipping, it took years to roll out a new TV, VCR, or CD player. There were quite literally hundreds of thousands of tiny decisions that had to be made, and they all had to be made in concert. Coordinating these decisions across a multinational company with tens of thousands of employees and hundreds of products took time, and more than a few product managers. We had one Christina. Sony must have had thousands.

  A major challenge that the consumer electronics companies were facing was how to standardize the technology behind the DVD. Details like storage space, dimensions, and user-facing functions were still different from company to company. To simplify things—and to prevent a format war—representatives from the three biggest companies formed an uneasy alliance, agreeing to a set of specs for the nascent technology. They called it the DVD Video Group.

  The 1998 CES conference was one of the first public appearances by the DVD Video Group, and I’d been there for it. The occasion was not exactly auspicious. In contrast to the gaudy displays of the rest of the conference, there was just a small area, about the size of my kitchen at home, surrounded by a velvet rope. Inside of it, a couple of dozen people milled around, among them representatives from each of the major manufacturers: Toshiba, Sony, and Panasonic. The whole event had a kind of Yalta Conference feel—three uneasy allies, unaccustomed to collaborating with each other, circling with tiny plates of cheese.

  I was angling to meet three people: Mike Fidler from Sony, Steve Nickerson from Toshiba, and Rusty Osterstock from Panasonic. Between the three, they controlled roughly 90 percent of the DVD player market. I knew that if I wanted to cut any sort of deal, I’d have to get my foot in the door with one of them.

  Easier said than done. After all, I ran a seventeen-person startup that hadn’t even launched yet. Nickerson, Fidler, and Osterstock worked for corporations so large they needed their own phone books. I was a gnat. They were elephants whose tails I wanted to ride.

  Still, I was confident. For one thing, I was wearing the aforementioned New Media Outfit. I’d bought it for IBMs (Important Business Meetings) outside Silicon Valley—for times when I needed to wear something nicer than jeans and sneakers. I thought it was important to never be seen wearing a tie, and to also look like I could navigate entertainment circles. To that end, I’d bought a pair of greenish khaki pants, a blazer with a fluorescent glow, and a shirt with a subtle geometric print that a salesperson told me was “moiré.”

  It was absolutely hideous. When Lorraine saw me trying it on for the first time, she couldn’t stop laughing. “You look like a chameleon,” she said.

  In a way, that’s exactly what I was. I needed to be able to adapt to a number of different environments—media, consumer electronics, tech. Wearing the New Media Outfit—or NMO, as I sometimes called it—gave me a way to blend in with companies and entities far larger and more powerful than my own.

  That afternoon I sweated through my NMO many times over. I gave every one of the manufacturers the same pitch: What if I could, in one fell swoop, eliminate their biggest obstacle to selling more DVD players? What if they could assure every one of their customers that if they bought a DVD player, they would have immediate access to every DVD available?

  And then the real heart of the pitch: What if every new player they sold came with a coupon offering three free Netflix rentals?

  Chicken.

  Egg.

  Simultaneous!

  We’d get traffic to our site, and they’d help grow the DVD user base. Sounds good, doesn’t it?

  I got polite demurrals from all three.

  “This sounds interesting,” Mike Fidler said. He was a California guy. Easygoing, well dressed, and with a better haircut than most of the other suits at CES, he exuded confidence. And why shouldn’t he? Mike worked for Sony, the industry leader. He told me it would be a hard sell but that he’d think about it.

  Rusty Osterstock, who was in charge of the DVD operation at Panasonic, turned out to be a short man in a blue oxford shirt who looked older than his thirty-five years—one of those men who has looked like his dad since age twelve. He was noncommittal.

  “Hmm,” he said, maybe just because he’d seen me talking to Fidler five minutes prior. “Let’s set up a call.”

  Steve Nickerson sounded the most interested. A former college lacrosse player, he was dressed in a style I recognized from my preppy East Coast upbringing—conservative and obviously expensive suit, glossy wingtips, a class ring from Drexel. His entire bearing was athletic and animated. I pegged him as a risk-taker.

  “Let’s talk,” he said.

  I left CES that afternoon with a pocketful of business cards, a DVD swag backpack with ten DVDs, and a head of steam. When Mitch said he had some friends he wanted to say hello to before dinner, I thought nothing of it—until we were outside, walking to a different corner of the Las Vegas Convention Center and into a parallel universe.

  “Hi, Mitch!” giggled a beautiful young woman in a halter top.

  “Mitch! It’s been so long!” said another, pressing her impossible curves into Mitch’s chest for a hug.

  He just beamed. “Meet Helen,” said Mitch. “And Juliet.”

  That’s when I finally looked around me. All around, buff, suspiciously tan men walked arm-in-arm with peroxide blondes wearing a lot o
f makeup and not much else. A huge sign over the check-in desk read, in seductive cursive letters the color of lipstick: AVN.

  AVN stood for Adult Video News, the trade publication for the porn industry. We were at the Adult Entertainment Expo—held, every year, the same week as CES.

  Mitch, it turned out, was a veteran attendee. Years running a chain of successful video stores meant that he was well-acquainted with the porn business. He knew all the major players and was as at home here as he had been at VSDA. Over the next four hours, as I nervously stammered out my name and made copious eye contact—all the while brainstorming ways to explain the whole thing to Lorraine—Mitch glad-handed, greeting studio heads, major distributors, directors, and on-screen talent like old friends. The executives here didn’t look that much different from their counterparts at CES. If it weren’t for the scantily clad women flocking to Mitch, I would have thought we were still back with the suits at Sony.

  “You know everybody,” I said a couple of hours later, as we headed back to our hotel. My DVD backpack had a couple of new titles in it.

  Mitch just grinned. “Pays to have friends in high places,” he said.

  As January turned to February and then March, I hadn’t heard anything from Fidler or Osterstock. And to be honest, I wasn’t all that surprised. It was a hard ask for them. Companies like Sony and Panasonic had years-long product development timelines. To put a sticker or a coupon into one of their boxes would require months of negotiation with dozens of different project leaders. Going by the normal processes, to have any chance of getting our coupon into a Sony DVD box, you’d need to start about a year ahead of time. To jump into the middle of a new release, as I was hoping, you’d have to really stick your neck out. It was a big risk for them. And CES companies didn’t usually reward risk.

  I still don’t really know why Steve Nickerson called me. I think it was because he saw—even in the risk-averse field he worked in—an opportunity for a big risk to have big rewards. Yes, it would be a nightmare to navigate the chain of decisions. Sure, if it backfired his job might be in danger. But if a promotion with a new company called Netflix helped him connect with DVD customers, it could grow the base for a new, fledgling technology.