That Will Never Work

by Marc Randolph

  I liked him because he was smart, no-nonsense, and efficient. Also, he called me “Mr. Founder,” even after I told him to say “Marc.”

  Barry’s arrival spelled the end of Jim Cook’s time at Netflix. Jim had always, from the start, wanted to be the CFO, and once Barry came in, it was clear that it would never happen. His departure wasn’t dramatic—these things rarely are. But it underscored what was happening, that spring and summer: the startup team was starting to peel off, and the next phase was replacing them.

  This is one of the facts of startup life: change. When you’re building something from nothing, you rely on talented, passionate generalists: people who can do a little bit of everything, who buy into the mission, and whom you trust with your time, money, and ideas. But once you’ve gone from 0 to 1, and the seed you’ve planted is starting to grow, some shuffling happens. Often the person who was right for the job at the beginning is not right for the middle. Sometimes bringing in people with decades of experience and institutional know-how is the necessary thing to do.

  That was definitely the case with Tom Dillon, whom we brought in as head of Operations after Jim left, in early 1999. Tom was semi-retired, in his mid-fifties, and had spent his entire life managing global distribution for massive companies, most recently as Chief Information Officer at Seagate and Candescent. These were huge businesses. Seagate in particular was massive and complex. They had twenty-four factories all over the world, staffed by more than 100,000 employees. It’s hard to fathom what it takes to be in charge of tech for a company of that size and scale. Even more amazing, Tom presided over a time when Seagate decided to automate all its factories—which allowed the company to cut the number of factories (and employees) in half.

  I don’t know where Patty McCord found him, but I think Tom was one of the most important hires that Netflix ever made. I’m still kind of astounded that we got him. We were doing two thousand movies a week, all shipped within the United States, and this was a guy who had overseen companies doing millions of shipments, all over the world. Frankly, he was way beyond our pay grade—literally. We could only pay him about twenty percent of what he was probably used to.

  But Tom Dillon’s a different kind of cat. He’s a total type B personality—surprising, for someone charged with the extreme detail-work his job required. A tall, somewhat shambling fellow, he had a big beard and a shock of receding white hair. He favored loose clothes and laid-back jokes. I never saw him stressed. He was like a real-life embodiment of Jeff Bridges as “The Dude” in The Big Lebowski—everyone’s favorite stoner grandpa. Tom Dillon abided.

  He saw our little company as a kind of retirement hobby. I think he liked the challenge. I mean, we had one warehouse and were still sorting everything by hand on card tables. It was like hiring Miles Davis to play your kid’s bar mitzvah.

  We had a new office, filled with new faces. But we had the same old problem: No one wanted to rent DVDs from us.

  Sounds insane, doesn’t it? Within a year, Netflix would be almost synonymous with rental. But from ’98 to ’99, the only way we could convince people to rent DVDs from us was to do it for free. We were a year and a half in, and we’d tried everything we could think of: rent-one-get-one-free, give-a-ways, bundles, promotions. We’d tried every single possible home page design we could think of. But we were coming up short. We still hadn’t developed a way of obtaining customers—and then a way of getting them to come back—that made more money than it cost to acquire them in the first place.

  Not exactly a stellar business plan.

  But Amazon, as we’d always known they would, had started selling DVDs the previous November. And after a few months of directing our customers to Amazon when they wanted to buy, Reed had quietly shelved the initiative. We’d invested hundreds of hours adding Amazon links to our site, all designed to send our customers to Amazon to buy their DVDs. We fully expected them to make the same efforts pushing their customers back to us to rent—but the returns had been paltry. Amazon’s links back to us were lackluster and hard to find. We were sending them tens of thousands of customers—they were sending us hundreds.

  When the deal collapsed, Reed informed us that it had never been that important. Everyone was crestfallen, especially Christina. From the beginning, she had opposed the deal, but as always, she’d been a complete team player—and had worked hard on the Netflix end. A lot of conversations with Reed (and with Patty) were needed to get him to realize how demoralizing it could be, when you made something a priority, asked people to break their backs doing something they didn’t agree with—and then didn’t honor the work they put in.

  Also demoralizing was the fact that without new renters from Amazon, and now without DVD sales to keep us afloat, we were hemorrhaging money. Reed and I put on a good face in front of our teams, spinning our depressing results as a kind of blessing. If we were ever going to figure out a way to make Netflix work, we pointed out, the company had to focus on one thing. And that thing was rental.

  By the summer of ’99, things had reached a breaking point. I was spending most of my lunch breaks jogging through the park next to our offices, hoping that at some point during my sweaty peregrinations on the Los Gatos Creek Trail, I’d land on a solution that would keep people renting from us.

  There was one idea I couldn’t shake. On one of my last trips to our warehouse in San Jose, I noticed that we had thousands—no, tens of thousands—of discs just sitting unused and unwatched on the warehouse shelves. When I came back to the office and shared my observation with Reed, it sparked another interesting Reed and Marc conversation: Why were we storing all those DVDs in a warehouse? Maybe we could figure out a way to let our customers store the discs. At their houses. On their shelves. Just keep the DVDs as long as they wanted.

  What if we did away with late fees?

  The more we thought about this idea, the more we liked it. We knew that one of the biggest problems with our current rental program was that it relied on a somewhat organized, prepared renter. Someone who thought several days in advance about what they might want to watch.

  In other words, pretty much nobody that any of us knew. Most people (and loath as I was to admit it, I included myself in this category) figured out what movie they wanted to watch right around the time they pulled into the parking spot in front of Blockbuster. And in my world, that would have been considered prepared. Most people made the decision what to rent about ten seconds after they spotted it on the new-release rack.

  But if they could keep the disc as long as they wanted? That changed things. Now they could let that disc sit on top of the TV as long as needed. And when the mood struck that it was time to watch a movie, it would be instantaneous. Even faster than driving to a Blockbuster. And if you had a bunch of movies sitting there, you could choose what to watch based on your mood. Was The Thin Blue Line a little bit too intense after a hard day at the office? Fine, let it languish. Luckily Groundhog Day was happy to step into the breach and lift your mood.

  In a single stroke, this would completely turn our biggest weaknesses into our greatest strength.

  And when they were done with a disc? Here we weren’t sure what should happen. Well—what if users simply mailed the discs to the next renter, a peer-to-peer approach?

  In other words, we were basically pulling things out of our asses. But by mid-summer, after weeks of debate and about a hundred miles of running, we’d come up with three ideas that we didn’t think were total trash. They were:

  The Home Rental Library. When we sent out an informal e-mail survey about the possibility of eliminating late fees, we’d gotten a warm response, so we’d designed a format that allowed users to rent four DVDs at a time, for $15.99 a month, and keep them as long as they wanted. As soon as they had returned one of the DVDs, they could come back to the site and rent another.

  Serialized Delivery. We suspected that we might have problems with the “come back to the site and rent another” part. People were busy. Once a watched DVD
was in the mailbox, it would be out of sight, out of mind. So maybe, we could have each customer create a list of DVDs they wanted. That way, when they returned a DVD to us, we could automatically (Te used the term “auto-magically”) send them the next movie on their list. I suggested we call our list the “Queue.” I knew that queue meant line, but I also loved the idea that I could call the help section for this feature “Queue Tips.”

  Subscription. Having people hold on to our discs for as long as they wanted seemed good for customers—but we weren’t sure what the business model should be. Do you pay a rental fee each time you swap? What if you never send one back? We decided that we should test a monthly fee—that we charged you every month you used the service.

  Our plan was to test each of these initiatives separately, to see what worked and what didn’t. We’d done this from the beginning, at Netflix. We’d designed our site so that the impact of even the slightest change could be measured and quantified. We’d learned, before launch, how to test efficiently. It didn’t matter, in the end, how great a test looked—there could be broken links, missing pictures, misspelled words, you name it. What mattered was the idea. If it was a bad idea, even more attention to detail in our test wasn’t going to make it a good one. And if it was a good idea, people would immediately fight to take advantage of it, despite obstacles or sloppiness on our end. Faced with a problem on our website, they would try again and again to make it work. They would reboot the site. Try to find a way to work around the problem. Call us up to place their orders (and we had an unlisted number!).

  If people want what you have, they will break down your door, leap over broken links, and beg you for more. If they don’t want what you’ve got, changing the color palette won’t make a damn bit of difference.

  So, by mid-1999, we were old pros at testing. We could do it quickly. But even quickly, each test would take about two weeks. When I ran this by Reed, he looked at me like I was crazy.

  “That makes no sense,” he said. “We don’t have the time for that.”

  “Listen,” I told him. “We’ve got to do something. We can’t retain anyone, and no one’s renting, and—”

  “Exactly. That’s why you should just test everything at once,” Reed said, cutting me off.

  I started to argue, but then I remembered the previous year of tests. It wasn’t a bad idea. And it fit in with our ethos of faster, more frequent testing. We were always trying to avoid one of the number one pitfalls of startup entrepreneurship: building imaginary castles in your mind, meticulously designed, complete with turrets, drawbridges, moats. Overplanning and overdesigning is often just overthinking—or just plain old procrastination. When it comes to ideas, it’s more efficient to test ten bad ones than spend days trying to come up with something perfect.

  What the hell, I thought. I told Christina and Eric to combine all three tests into one offer. At this point, we had a pretty good flow of customers coming to our site to redeem their Free-Rental coupons, so it wouldn’t take long to get some results. We set it up so that every tenth customer clicking the redeem button on the site would be directed to a custom page, offering them the opportunity to try—for free—a monthly subscription to the Netflix Marquee program: no due dates, no late fees. We would send them four DVDS, and when they sent one DVD back, we would send them another one. As many times as they wanted. And at the end of the month—if they didn’t cancel—we would automatically (and here it was me describing it as “automagically”) hit them up for only $15.99 a month, payable by any major credit card.

  Home Rental Library × Serialized Delivery × Subscription. Just the last three halfway decent ideas we’d had, thrown into one pot.

  “This probably won’t work,” I told Christina. “But, hey, at least we’ll know.”

  14.

  Nobody Knows Anything

  (fall 1999: a year and a half after launch)

  IT WORKED.

  People didn’t just like no late fees, a flat monthly rate, plus serialized delivery with a queue.

  They loved it.

  The first day of the test, 90 percent of the people who clicked on the banner ad gave us their credit card information. That’s insane. I’d expected something closer to 20 percent—that’s usually what happens when you ask someone for sixteen digits, even if they’re getting a month free and can cancel before any charges. And it wasn’t a fluke—day after day, the sign-up rates were that high. Visitors to the website were signing up for subscriptions at four or five times the rate they had chosen our à la carte rentals.

  If people saw this new offer, they were taking the bait. Hook, line, and sinker.

  We scrambled to build a service that could actually do what we were promising. There were a lot of things to figure out—how to run a rolling serialized delivery system alongside our normal operations, how to do automatic subscription billing, how to build a serviceable queue system. But within a week, the results were so positive that we knew we had a winner.

  Several times a day, I’d pop over to Suresh’s desk. Suresh extracted all the important data from the river of information we created each day and put it into a form that we could all digest and play with. I’m sure he grew to dread my caffeinated approach to his desk, my jittery requests for numbers. But I wanted to know—Were there more than yesterday? Fewer? How many were signing up for the plan? How many saw it and ignored it? Where in the process were they dropping off?

  We’d know for sure after a month, when people who had signed up for their free trial (and given us their credit card information) could cancel their subscriptions. But things were looking up. It had taken hundreds of failed experiments, thousands of hours of work, and many millions of dollars, but it appeared that we had finally come up with a workable model for DVD rental by mail.

  No one was more surprised than me. Not only had I fought against taking the risk of testing all three of our ideas simultaneously, but this was perhaps the least likely solution I could ever have imagined. If you had asked me on launch day to describe what Netflix would eventually look like, I never would have come up with a monthly subscription service. Even if you had tried to make it easy for me and put it in the form of a three-part multiple-choice question, I still would have had a one-in-three shot at picking the right answer.

  A few days after we launched the test, Lorraine brought the kids over to Los Gatos for lunch. No more jogging for now. Instead, we ordered a pizza and had a picnic in the park. Afterward, Logan, Morgan, and I climbed up into the steam-powered train that ran along the park’s periphery. Lorraine slid into the row behind us, holding a grunting Hunter. As we circled the lake in the middle of the park and I talked through our exciting new idea with Lorraine, I thought of my father, setting up his steam-powered train in the basement and calling me down to watch the wheels turn.

  “Guess I was wrong, huh,” Lorraine said when I told her about the initial numbers. “This thing is gonna take off, isn’t it?”

  “I really think so,” I said. “But don’t feel bad. It wasn’t that good of an idea a few years ago. And besides, nobody knows anything.”

  Lorraine laughed. She knew I was quoting William Goldman, whose book Adventures in the Screen Trade we’d both just finished. You might not have heard of Goldman. He writes screenplays, so he largely labors behind the scenes and out of the headlines. People of my generation can thank him for writing Butch Cassidy and the Sundance Kid. Those a bit younger may have enjoyed the script he wrote for The Princess Bride. He also did Misery, Heat, Magic, Marathon Man, The General’s Daughter…and over twenty-five more. He’s won two Academy Awards for screenwriting.

  But William Goldman is most famous for writing three words:

  Nobody. Knows. Anything.

  According to Goldman, those three words are the key to understanding everything about Hollywood. Nobody really knows how well a movie is going to do…until after it’s already done it.

  For instance, how is it possible that you can have a film directed by an Acade
my Award–winning director (Michael Cimino), starring a best-actor Academy Award winner (Christopher Walken), with a can’t-miss script and a $50 million budget…and end up with Heaven’s Gate, one of the biggest Hollywood flops of all time?

  On the other hand, how can you have a film with a first-time director, a handful of amateur actors, no script at all, a budget under $50,000…and end up with The Blair Witch Project, which, after grossing more than $250 million, is one of the most successful independent films of all time?

  There’s a simple explanation.

  It’s because Nobody Knows Anything. And it’s not just in Hollywood. It’s true in Silicon Valley, too.

  “Nobody Knows Anything” isn’t an indictment. It’s a reminder. An encouragement.

  Because if Nobody Knows Anything—if it’s truly impossible to know in advance which ideas are the good ones and which aren’t, if it’s impossible to know who is going to succeed and who isn’t—then any idea could be the one to succeed. If Nobody Knows Anything, then you have to trust yourself. You have to test yourself. And you have to be willing to fail.

  Silicon Valley brainstorming sessions often begin with someone saying, “There are no bad ideas.” I’ve always disagreed. There are bad ideas. But you don’t know an idea is bad until you’ve tried it.

  And, as Netflix shows, sometimes bad ideas have a way of becoming good ones.

  Not only had all the people who told me that Netflix would never work (including my wife) gotten it wrong, but so had I. We all had. We’d all known that the idea could work, but in the end nobody knew anything about how—until it did.