NFLX Netflix Inc

By Marc Randolph 

"Jesus, Reed, where are you taking us?"

The street we were walking on looked like a movie set of skid row. There was trash on the sidewalk, broken glass in the window casements.

"Should be right around the corner," Reed replied, squinting down at the Seattle map he'd printed out that morning.

I glanced toward a group of shabbily dressed young men huddled in the doorway of a large building. "Somehow I think I expected something a little more...I don't know, modern?"

"There it is," Reed said, pointing to a rundown four-story brick building. He seemed less certain now. Leaning in toward one of the tall windows, I could just see into the dimly lit lobby. On the wall, behind a faded wood desk, was a large sign reading Amazon.com.

It was the summer of 1998. DVDs had been in the U.S. market for a little over a year, and Netflix, the e-commerce company Reed Hastings and I had co-founded to sell and rent them through the mail, had been live for just over two months. I was the company's CEO, Reed its largest investor.

Netflix was still pretty small, but we had big dreams: We saw ourselves as an alternative to Blockbuster and Hollywood Video. The bad news was that we weren't making much money. And what little money we were making was coming almost entirely from DVD sales, not rentals. I feared that once others started selling DVDs, our margins would shrink to nothing.

So when Joy Covey, Amazon's chief financial officer, called Reed to see if we would be interested in coming up to Seattle to meet with her and Jeff Bezos, Amazon's founder and CEO, I felt a mixture of both fear and hope.

Amazon was only a few years old, but Bezos had already decided his site wouldn't just be a bookstore. It was going to be an everything store. And we knew that music and video were going to be his next two targets.

We'd also heard that Bezos planned to use a good chunk of the $54 million raised during his company's 1997 IPO to finance an aggressive acquisition of smaller companies.

It didn't take us long to figure out why Jeff and Joy wanted to meet. Netflix was in play.

That feeling -- although thrilling -- was also a little bittersweet. I wasn't quite ready to hand over the keys. But when Amazon calls, you pick up the phone. Even if it's 1998, and Amazon is nowhere near the powerhouse it is today.

The building Reed and I entered certainly didn't look like it belonged to a powerhouse. The reception area was cluttered and dusty. On the desk was a telephone with a printed directory of numbers. Reed leaned over, squinted and dialed.

Within seconds, Joy swept into the lobby. She was younger than either of us. But she was already a respected businesswoman, a dynamo who had taken Amazon public just 12 months earlier, convincing skeptical investment bankers that a company that wasn't remotely profitable was worth $20 billion.

As Covey led us back into the warren of cubicles that made up the Amazon offices, it was hard for me to believe that this was the company inventing e-commerce. The carpeting was stained. There were multiple people per cubicle, desks under the stairs, desks pushed to the edges of hallways. Almost every horizontal surface was covered: by books, gaping Amazon boxes, printouts, coffee cups, plates and pizza boxes. It made the Netflix offices seem like the executive suite at IBM.

We could hear Jeff Bezos before we saw him. He-huh-huh-huh-huh. Jeff has a...distinctive laugh. If you've seen any video of him speaking, you'll have heard a version of it -- but not the true, untamed thing. Now it's polite, a little giggly. But back then, it was explosive, loud, hiccupping. He laughed the way that Barney Rubble laughs on "The Flintstones."

He was in his office, just hanging up the phone when we walked in. His desk, and the desks of the two other people he shared the office with, were made of doors mounted atop 4 × 4 wooden legs, braced with triangular metal pieces. I suddenly realized that every desk I'd seen in that office was the same.

Bezos was wearing pressed khaki pants and a crisp blue oxford shirt. Behind him, hanging from an exposed pipe in the ceiling, four or five identical pressed blue oxford shirts fluttered in the breeze from an oscillating fan.

After introductions, we filed into a corner of the building with a bigger table. This table, too, was made from recycled doors. I could clearly see where the holes that used to hold the doorknobs had been patched.

"OK, Jeff," I said, grinning. "What's with all the doors?"

"It's a deliberate message," he explained. "It's a way of saying that we spend money on things that affect our customers, not on things that don't."

Netflix was the same way, I told him. We didn't even provide chairs.

Bezos was notoriously frugal. He was famous for his "two-pizza meetings" -- the idea being that if it took more than two pizzas to feed a group of people working on a problem, then you had hired too many people. People worked long hours for him, and they didn't get paid a lot.

But Bezos inspired loyalty. He's one of those geniuses -- like Steve Jobs, or like Reed -- whose peculiarities only add to his legend. In Jeff's case, his legendary intelligence and notorious nerdiness mix into a kind of contagious enthusiasm.

He peppered me with questions about Netflix. How could I know that I had every DVD? What did I expect the ratio of sales to rentals to be? But he was most excited about the stories about launch day -- particularly, the story of the bell we had rigged up to mark each new order.

"We had the exact same thing!" he exclaimed. "A bell that rang every time an order came in. I had to stop everyone from rushing over to the computer screens to see if they knew the customers."

We traded beta names: he laughed at Kibble, the name we had used before Netflix's launch, and told me that Amazon had originally called itself Cadabra. "The problem is that Cadabra sounds a little too much like cadaver," Bezos said, barking out a laugh.

Although Amazon was still relatively small in 1998, it already had over 600 employees and was doing more than $150 million in revenue. But as Jeff and I chatted about our launch days, I could see in his face that in many ways he missed those simpler, more exciting times.

Reed, on the other hand, has never been someone who dwells, at all, on the past. He was impatiently jogging his leg up and down. He wanted, I knew, to direct the conversation to how Netflix could potentially fit with what Amazon was doing.

I was just about to brief Jeff and Joy on key members of our team, when Reed decided he'd had enough.

"We don't need to go through all this," he said, exasperated. "What does this have to do with Netflix and Amazon and possible ways we can work together?"

Everyone stopped. It was quiet.

"Reed," I said after a few seconds. "It's obvious that Amazon is considering using Netflix to jump-start their entry into video. Our people would be a huge part of any possible acquisition."

I was relieved when Joy jumped in to help. "Reed," she said, "can you help me understand a bit better how you're thinking about your unit economics?"

With obvious relief that we were finally on topic, Reed began running Joy through the numbers.

An hour later, after Bezos had headed back to his office, Joy lingered behind to wrap things up. "I'm very impressed with what you've accomplished," she started, "and I think there is lots of potential for a strong partnership to jump-start our entry into video. But..."

I'm not a "but" man. Nothing good ever comes of that word. This time was no exception.

"But," Joy continued, "if we elect to continue down this path, we're probably going to land somewhere in the low eight figures."

When someone uses "low eight figures," that means barely eight figures. That means probably something between $14 million and $16 million.

That would have been a pretty good outcome for me, since at the time, I owned about 30% of the company. Thirty percent of $15 million is a pretty nice return for 12 months of work -- particularly when your wife is broadly hinting that it might be time to pull the kids out of private school, sell the house, and move to Montana.

But for Reed, it wasn't enough. He owned the other 70% of the company, but he'd also invested $2 million in it. And he was fresh off the sale of Pure Atria, the company formed out of his first software venture. He was already an "eight-figure guy." A high-eight-figure guy.

On the plane ride home, we discussed the pros and cons. The pros? We'd find a solution for our biggest problems: We weren't making any money. We didn't have a repeatable, scalable or profitable business model. We were doing plenty of business, most of it through DVD sales, but our costs were high. It was expensive to buy DVDs, to ship them and to give away thousands of them in promotions, hoping that we'd convert one-time users into return customers.

And of course there was the bigger problem: If we didn't sell to Amazon, we would soon be competing with it. So long, DVD sales. So long, Netflix.

Selling now would solve all those problems -- or at least it would hand them off to a larger company with deeper pockets.

But...

We were also on the brink of something. We had a working website. We had a smart team. We had deals in place with a handful of DVD manufacturers. We had figured out how to source virtually every DVD currently available. We were unquestionably the best source on the internet for DVDs.

It didn't seem like the right moment to give up.

"Listen, Marc," Reed said as we watched Mount Rainier scroll by outside the window. "This business has real potential. I think we could make more on this than on the Pure Atria deal."

I nodded in agreement. Then I chose that moment to tell Reed we should abandon the only profitable part of our business.

"We just have to figure out some way to get out of selling DVDs," I said to him. "Doing rental and sales is confusing for our customers and unnecessarily complex for ops. And if we don't sell, Amazon will destroy us when they enter the field. I think we get out now. Focus on rental."

Reed arched his eyebrows.

"Kinda puts all our eggs in one basket," he said.

"That's the only way to make sure you don't break any," I replied.

One of the key lessons I learned at Netflix was the necessity of focus. At a startup, it's hard enough to get a single thing right, much less a whole bunch of things. Especially if the things you are trying to do are not only dissimilar but actively impede each other.

Reed agreed with me. "You're right," he said. "If we get funding this summer, that'll buy us some time. It's a difficult problem."

He frowned, but I could tell he was pleased to have something new to chew on.

"What percentage of revenue comes from rental right now?"

"Roughly 3%," I said, signaling to the flight attendant for a much-needed gin and tonic.

"That's horrible," Reed said. "But sales are a Band-Aid. If we rip it off..."

"Then we have to focus on the wound," I said, squeezing my lime into the drink.

We went back and forth like this for the rest of the plane ride, and it was only when we landed that I realized we hadn't actually formally decided not to take Bezos's offer. Without deciding, we'd decided: We weren't ready to sell.

We agreed that Reed would let Amazon down lightly -- and politely. In the future, we'd be better off having Amazon as a friend, not an enemy.

In the meantime, we needed to figure out a way to get people renting from us.

Adapted from "That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea" by Marc Randolph, the co-founder and first CEO of Netflix. Copyright (c) 2019 by Marc Randolph.

(END) Dow Jones Newswires

September 06, 2019 05:44 ET (09:44 GMT)

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