That Will Never Work

by Marc Randolph

  Plus, Nickerson worked for Toshiba, the perpetual second banana. In the CES world, Sony was the undisputed king. They didn’t need to take risks. But for a company like Toshiba, always vying for market share, a risk or innovation could help set the company apart.

  Whatever his reasoning, I’m eternally thankful to Steve Nickerson for taking the plunge. In my estimation, he’s one of the single most important players in the Netflix story. Without his help, there is absolutely no way the company would have succeeded.

  I’d flown up to New Jersey, the NMO in tow, and over the course of a few days in April, Steve and I had settled on a deal. In every DVD player Toshiba sold, they’d allow us to include a small promotional flyer, offering three free DVD rentals through our site. All a customer would have to do would be to visit Netflix.com and enter their DVD player’s serial number, and they’d have three free DVD rentals.

  It was a win-win. We got direct access to DVD player owners, at precisely the moment when they needed us most. And Toshiba solved its biggest problem: convincing reluctant buyers that they’d actually be able to find something to play on their new machine. The promotion was advertised right there, on the outside of the box: 3 FREE RENTALS WITH PURCHASE!

  But it was more than a win-win. It was a revelation. You see, a startup is a lonely place. You are working on something that no one believes in, that you’ve been told time and time again will never work. It’s you against the world. But the reality is that you can’t really do it on your own. You need to enlist help. Bring others around to your way of thinking. Let them share in your enthusiasm. Give them the magic glasses that will let them see your vision of the future.

  Steve Nickerson had glimpsed and believed. And it was already paying off. Within days, we’d seen an immediate uptick in traffic, and we knew where it was coming from. Corey, using his moniker Damon Matthews, had been listening to the chatter on the Toshiba message boards, and it seemed like our promotion was resonating with their customer base.

  So why, once they used their three free rentals, weren’t they coming back?

  11:15 a.m.

  After making a few small changes to our agreement with Toshiba—minor stuff—I call Michael Dubelko, from DVD Express. I’ve spent countless hours trying to convince him that we can help each other.

  “It just doesn’t make sense, Marc,” he says. “We sell DVDs, too. Why would we partner with a competitor?”

  “We just need you to push rentals,” I said. “Different ball game.”

  “How?”

  The conversation doesn’t really go anywhere. It often doesn’t. Sites that sell DVDs don’t really want to do business with a site that could chip away at their market share.

  I understand, I tell him. But I know it’s possible. As I hang up the phone with Mike, I think about Steve Sickles, administrator of DVD Daily, one of the largest DVD sites, whom I’d convinced to do a deal with us over raw yellowtail at Nobu in New York City. Every mention of a movie on his site would now be a link to Netflix. I think about Bill Hunt, of Digital Bits, who, in a hallway of the gaming industry trade show in Atlanta, had agreed to pump our service in his editorials provided we gave him an online shout-out now and then.

  Maybe the key is meeting in person.

  I’m leaning back in my chair, brainstorming new places to wear the NMO—I’ve just tracked it down to Mission Dry Cleaners in Santa Cruz—when Eric pops his head in. “You almost ready? I’ve got Ishaan and Dev out front. They’re ready to go, but they’re both really nervous.”

  “Nervous? Why? Am I really that intimidating?”

  Eric shrugs and tilts his palms up. “Not to me,” he says. “But those guys are freaking out about everything here. They don’t know what to expect from lunch with the CEO.”

  Nearly a year after Reed and I had mailed that Patsy Cline CD, the company is growing beyond its founding team. When it comes to hiring, I’m not just hitting my own Rolodex anymore—which means new faces. To ensure that we remain a tight-knit group, I’ve instituted the monthly ritual of taking all new employees out to lunch. This serves a number of purposes. At a minimum, it’s a chance to get to know everybody. I’m present for nearly all of our job interviews, but it’s hard to get past someone’s nerves and ambitions in an interview setting, and a lunch allows me to see past all that.

  More importantly, though, lunch is a chance to start imprinting culture: to explain the most important aspects of working at Netflix, what we expect of people, and what they can expect of us.

  In today’s lunch, though, “culture” is going to take on a different meaning. That’s because I’ll be eating with two of our newest engineers.

  Two months in, hiring engineers is shaping up to be a bigger problem than we’d imagined. In Silicon Valley, the fight for engineers is always intense, with hundreds of companies competing for top talent. I have some experience in the recruitment fight, and over time have recognized a key truth: For most engineers, it’s not about the money. That’s a good thing for Netflix, since our pile of chips is quite a bit smaller than the more established companies’.

  Most engineers can choose where they want to work, and the way they make their decision boils down to two questions:

  1) Do I respect the people I’m working for?

  2) Will I be given interesting problems to solve?

  We have an answer for question #1: Eric Meyer, a certified genius who commands respect. And if you ask me, the answer to question #2 is a resounding Yes.

  Pre-launch, I’d also counted on another recruiting advantage: Location. About 19,000 people per day commute from Santa Cruz “over the hill” to tech jobs in Silicon Valley. Probably 18,997 of them hate it. (And I can’t imagine what those other three are thinking.)

  I’d assumed that there would be plenty of local engineers so fed up with their commute that they would jump at the chance to take a job closer to home. I’d been so confident about it that I’d run pre-movie advertisements—HELP WANTED—in the Scotts Valley movie theater.

  But I’d made a deep miscalculation. I had assumed that we would need a lot of “front-end” engineers—people with the skills to build web pages designed for e-commerce. But it turns out that what we really need is help with “back-end” problems—processes having to do with order processing, inventory management, analytics, and financial transactions.

  And if you want engineers for that kind of work, no amount of pre-movie advertising in Scotts Valley will do the trick. Most of the good back-end engineers live near San Francisco, and despite Eric’s reputation (and my powers of persuasion), it is virtually impossible to convince someone to drive 75 miles each way to work.

  Eric has come up with a solution, though. Forget engineers from 75 miles away. How about engineers from 7,500 miles away? Turns out, there’s a large population of recently arrived Indian engineers in Silicon Valley, looking for work and eager to join a fledgling startup. With Suresh’s help, Eric has hit the cultural centers and cricket fields of Silicon Valley, recruiting talented immigrant programmers like Dev and Ishaan, who are waiting for me now. As I rush out to say hello, I’m already thinking about what I can say to make them more comfortable in their new life, how I can ease the transition to the United States, and how I can ensure that their job is rewarding.

  And what I’m going to order at Zanotto’s, the Italian restaurant across the street.

  12:45 p.m.

  When I get back from lunch, I see that Lorraine has called to check in. I’m not looking forward to talking to her, because I’m pretty sure I know what’s coming. Financial worries. Morgan is getting ready to start kindergarten in the fall, and we are planning on having her join Logan at the private school down by the water in Santa Cruz. And kindergarten at a private school is much more expensive than preschool.

  “How are we ever going to afford this?” Lorraine starts in when I finally reach her. In the background, I can hear kids, and what sound like seagulls.

  “Are you at the beach?”


  “I’m with a bunch of Logan’s school friends. I know Morgan’s really excited about going to Gateway, but I think we’re making a big mistake.”

  She pauses, and I hear the crash of a wave, followed by a child’s delighted squeal.

  “We should sell the house,” she says.

  This is a common refrain. Almost as common as a reminder that Montana—and my dream life as a postman—beckons, should everything go south with Netflix. It has gotten more frequent lately. It is as close to an argument as we usually get.

  “We’re going to be fine,” I remind her. Through the glass I can see Dev and Ishaan ripping open boxes containing brand-new Gateways. Eric is watching them, a smile on his face.

  “I just want you to be realistic,” she says. “We can do without a lot of stuff. Maybe we should think about cutting back more.”

  “We’re making great progress here,” I tell her. “As of today, we’re officially a million-dollar company.”

  I don’t tell her that we’re a projected million-dollar company, or mention how concerned I am about where that money is coming from. I just say we can talk more about it at dinner—as usual, I’ll be there.

  2:00 P.M.

  “Are you off the phone?”

  Without waiting for an answer, Te swooshes into my office. As always, she knows the answer to her question before she even asks it.

  “We’re trying to finalize the press announcement for the Sony promotion.” She pauses, pushing her lips together in an exaggerated pout. “It’s going to be almost impossible to get them to approve our release.”

  Sony hadn’t really given me the time of day when I first approached them about a coupon deal. But once they’d seen that we were working with Toshiba, they felt like they had to keep up with the Joneses. You see this all the time in business and in sports—a younger upstart tries something new, and when it works, the industry leader co-opts. Why? Because they can.

  Plus, their own promotion—bundling a free copy of James Taylor in Concert with every DVD player—hadn’t really moved the needle. James Taylor is a Sony artist, so it had cost them almost nothing. But they should have known better. It’s 1998, a full twenty years after “Fire and Rain.” Sweet Baby James isn’t really all that enticing to tech geeks.

  Te spreads a sheaf of papers out across my conference table.

  “Look at this mess,” she says, shaking her head so hard that I get a whiff of hairspray. “I don’t know how they ever get anything done. There doesn’t seem to be anyone with the power to make decisions. I’m starting to think we should just say screw it and announce, whether they approve the release or not.”

  “That’s a terrible idea,” I say, coming around from behind my desk and bending over the pages. “I’ve spent weeks trying to get them comfortable trusting a startup. If we go Wild West on them now, it’ll screw everything up.”

  But she isn’t lying about their nit-picking. The draft of the announcement is spattered with revisions and cross-outs. “What are they having a problem with now?”

  “Everything!” Te throws up her hands, then grabs the release and stabs at it with her bright red pen. “Everything we bring up—the growth of the DVD market, the number of movies coming out, even how excited we are, blah, blah, blah—everything needs to go through about six layers of approval. And that’s not even talking about legal.”

  “I’ll call Mike,” I answer. But I’m not optimistic. Mike Fidler is famous for delivering “the smiling screw”: asking you for a deal point that will be brutal, expensive, and difficult, all with a big smile on his face. That’s exactly what he did to me three weeks ago. He’d caught wind that Toshiba was interested, he said, and he thought we could work together, too. But he didn’t want three free DVD rentals: He wanted ten. And that wasn’t all. In addition to the free rentals, he also wanted five totally free DVDs.

  This had been an enormously expensive proposition for us. Five free DVDs from our library was essentially a hundred dollars. So, under the terms of his deal, we were basically paying Sony a hundred bucks just for one person who owned a DVD player to visit our site. And that was on top of the cost of fulfilling the five free rentals. Worst of all—I’d promised exclusivity to Toshiba.

  But the opportunity to work with Sony, the largest player in the game, had been too good to pass up. It was worth it. I’d given Mike what he wanted.

  Pushing him now might piss him off. But calling Mike to argue about the language of the press release would be a lot easier than calling Steve Nickerson, tail between my legs, to admit that I’d been cheating on Toshiba with its hot older sister. Now that is a call I’m dreading making.

  “Give me twenty minutes,” I say to Te. “Let’s see if I’m any good at the smiling screw.”

  4:00 p.m.

  Crisis averted. No hard feelings. Just promises from Mike.

  “We’ll try to be a little speedier, a little more proactive,” he says to me. “We’re being careful on this because we think it can really work.”

  Music to my ears.

  Now, I just have to figure out some way to get people to rent when it isn’t free. It’s taken all day, but I finally have a moment to pull up the data from the morning and begin digging.

  Turns out, it’s even worse than I thought. We aren’t just stagnating. We’re losing ground.

  Don’t get me wrong—it’s great that we’re doing so much business, two months in. The $100,000 coming in every month from DVD sales not only pays a few of our bills, it demonstrates to our suppliers and partners that we’re real. It gives Eric and his team a chance to stress-test the site under the load of real customers, not projections. It gives our operations team the thrill of seeing real packages going out the door each day. It gives the entire company a sense of momentum.

  But it’s a sugar high.

  Right now, we’re the only game in town. But it won’t be long before Amazon expands into selling DVDs. And after Amazon, there will be Borders. Then Walmart. And then virtually every other store—online or brick-and-mortar—in America.

  When you get down to it, selling DVDs is a commodities business. Looking at the figures, I know that once everyone is selling the exact same thing, pretty much exactly the same way, it will only be a matter of time before our margins shrink to nothing. It might not happen next week, next month, or even next year, but it is inevitable. And when it happens, we’ll be toast.

  DVD rental, on the other hand, has real potential. It’s hard to find places to rent DVDs in person, much less online—and it might be a while before that changes. As we’ve found out the hard way, renting DVDs online is operationally difficult, which means that it will be difficult for potential competitors to figure it out. We have at least a year’s head start. Plus, the margins are higher, since you can rent the same disc dozens of times.

  The monitors show that we’re selling a lot of DVDs. We just can’t convince anyone to rent from us. And doing both rentals and sales at the same time is really hard. It’s complicated for our inventory: there are some titles that, legally, we can both rent and sell, but others we can only rent, or only sell. Our warehouse and shipping procedures have to accommodate some movies that go out and come back, while others go out and stay out.

  Offering both DVD sales and rentals is confusing for our customers, who arrive at Netflix.com unsure of what, exactly, we do. We have to explain on our home page that users can either buy or rent most titles—and a general rule of web design is that if you have to explain something, you’ve already lost. The checkout process is cumbersome, too.

  Everything is harder than it needs to be, I think, leaning back in my chair. We have to focus.

  But on what?

  Should we focus on selling DVDs, which is bringing in 99 percent of our revenue, but will slowly—inevitably—evaporate as competitors crowd the field? Or should we throw our limited resources behind renting DVDs—which, if we can make it work, could be a hugely profitable business, but at this point is showing absolutely no sign
s of life?

  There’s no easy answer.

  5:15 p.m.

  As I pull into the driveway, I can already hear the murmur of kids in the kitchen, and before I’ve even gotten up the steps to the porch, Logan is running out the door to throw himself into my arms.

  “Did you bring home the bacon?” he asks, with a big grin, six years old and in on the joke.

  When I carry Logan inside, Morgan looks up from the tiny toy kitchen that she likes to set up while her mother busies herself in the real one. Lorraine is heating up a frozen lasagna, and Morgan appears to be scrambling eggs. “Did you climb the ladder?” she asks, as she always does, knowing by my smile that there is something funny about it, but not exactly sure what.

  Lorraine turns away from the oven, blowing a strand of hair away from her face. She kisses me on the cheek and winks. Whatever anxiety about money and the future she was feeling earlier in the day seems to have calmed—money worries and private school tuition can wait. I set Logan down and pick Hunter up out of his high chair, feeling applesauce on my neck as he snuggles himself against my collar.

  For the moment, Netflix seems very far away.

  8:00 p.m.

  The only light in the office spills out of the open door to the “warehouse”—even two months in, we’re still storing all the DVDs in the safe. When he hears the front door open, Jim steps out, a piece of pizza in one hand and a grease-stained paper plate in the other.

  “We’re in trouble,” he says, wiggling his arm in a way that signals I should grab the manila folder tucked under his arm. He puts down his pizza, wipes his hands on his jeans, and grabs the folder back. He pulls out a page and points to a column of numbers. “You’ve seen this before, but it’s getting worse.”