After a decade-plus of having the streaming field virtually to itself, Netflix now faces historic levels of competition. Disney and other media and tech rivals have narrowed the gap, making for a rocky 2022 marked by subscriber and stock price declines.
Yet Netflix has one thing its competitors will never have, and that’s the status of O.G. The company, which celebrates the 25th anniversary of its incorporation today, transformed the media business, consumer entertainment and culture at large. Not for nothing has the company’s name become a verb.
As it touts the anniversary, Netflix has released a commemorative trailer (watch it above) and blog post, and promises to share nostalgic photos and other memories from the company’s DVD-by-mail origins across social media throughout the day.
In that throwback spirit, Deadline offers the following excerpt about Netflix’s origins from Binge Times, a book co-written by this reporter and Dawn Chmielewski. It was published last April by William Morrow.
Before founding Netflix, Reed Hastings was CEO of a software company called Pure Atria, which bought a firm called Integrity QA, where Marc Randolph was a co-founder. Randolph then headed marketing at Pure Atria, which soon was sold in one of the flurry of tech deals during the 1990s boom. Hastings stood to leave the company with a rich payday once the deal cleared regulatory review, and Randolph was also on his way out. While waiting a few months for the merger to close, the two still drew a paycheck and showed up every day to Pure Atria’s office in Sunnyvale, working on various projects. With venture capital flowing and the bull market surging, Randolph had the itch to get a new start-up off the ground. Hastings was increasingly focused on education reform, but planned to keep his “toe in the water” as an investor or advisor. Hastings and Randolph both lived in Santa Cruz, so they soon developed a habit of carpooling on Highway 17 up and over the Santa Cruz Mountains, spitballing ideas along the way.
As Randolph observed, Silicon Valley loves a good origin story, a tale of inspiration or keen insight that distills the essence of a company. The best-loved of these creation stories involve disruptive change that holds the promise of rich rewards. Consider the alcohol-soaked genesis of Uber, an idea StumbleUpon founder Garrett Camp began incubating after he and his friends spent $800 to hire a private driver on New Year’s Eve. Or the voila moment when Airbnb founders Brian Chesky and Joe Gebba turned their loft into a bed and breakfast — renting out air mattresses at $80 a guest — as a way to cover their exorbitant San Francisco rent.
Netflix’s saga starts, at least according to popular legend, with a moon shot. Co-founder Hastings describes getting socked with a $40 late fee on Apollo 13 at Blockbuster, and wondering, “What if there were no late fees?” But the streaming giant’s origin story is more complicated than this convenient narrative, which neatly distilled the service’s initial consumer proposition of renting DVDs without worrying about return dates or late fees. The idea was hardly a bolt from the blue, says co-founder Randolph, but a concept arrived at over countless brainstorming sessions with Hastings as they logged miles together.
From behind the wheel of his beat-up Volvo, or as a passenger in Hastings’ immaculate Toyota, Randolph pitched various ideas for a startup that would sell personalized surfboards, dog food, shampoo, via the internet. The coolly analytical Hastings rejected each as unworkable. Finally, they landed on the idea with real potential: movies on video. VHS tapes proved too bulky to ship (and, at $75 to $80 a cassette, costly), but soon after the original inspiration struck Hastings read about the introduction of the compact-disc sized DVD in 1997. The discs were more affordably priced, and slender enough to travel by post. But would the DVDs survive intact if shipped through the mail? They bought a used Patsy Cline greatest hits compilation from a record store, stuffed the disc into a greeting card envelope, slapped on a 32-cent stamp and mailed it to Hastings’ home. It arrived two days later, intact — proof of concept.
With $1.9 million in start-up capital provided by Hastings, Randolph and a group of angel investors, the company hired a dozen people. In its first six months, its primary focus was building a simple e-commerce website to facilitate disc sales and rentals. “At the time, in 1998, there were not that many titles and there was almost no place that they were available,” said Randolph. “So we decided we could do the one stop shop.” The first Netflix office was a former bank branch in an office park in Scotts Valley, one of the towns they would drive through on Highway 17. It had “smelly green carpet,” Randolph recalled — the same color as the money the company planned to make, he and his colleagues liked to joke. Its initial supply of DVDs was kept in the former bank’s old vault. Because the cash-strapped company was moving too fast to fuss over office furniture, “people were bringing in beach chairs” to work in, Randolph remembered. When Netflix formally opened its doors on April 14, 1998, the first 150 orders landed all at once and crashed the company’s servers. The company would struggle during its first year in business. “At that time, we weren’t worrying about how we were going to fend off Blockbuster. We weren’t worrying about the future of streaming,” Randolph said. “We were worrying about this little website we built.”
Netflix wasn’t making any money. It was selling plenty of DVDs, but its costs were high. DVDs were expensive. Shipping them was expensive. It was expensive giving them away by the thousands in promotions. At a meeting with Amazon’s Jeff Bezos, to discuss a possible sale, one thing became clear: Netflix would soon be competing with the e-commerce giant, which clearly had ambitions to sell commodities other than books. “That drove one of the first really difficult decisions for an early company,” Randolph said. “Which is: Do you stick with the business which is 95% of your revenue, but is eventually going to go out of business, or do you bet everything on the business which is not working, but, if you can get it to work, could potentially be a big success?”
Netflix took the risk. Randolph says it took more than a year to arrive at a rental that the earliest Netflix customers would recognize, paying a fixed monthly subscription fee for up to three movies at a time. The discs would arrive by mail in red envelopes, like so many gifts on Chinese New Year. The open-ended rental model offered consumers greater convenience, even as it solved a more practical problem for Netflix.
“We had this warehouse, which at the time had several hundred thousand DVDs in it, and Reed and I began riffing, ‘It’s kind of a shame that we have all these DVDs sitting here in a warehouse doing no good. I wonder if there was some way to store them in our customers’ houses?” said Randolph. “Can we let them keep the DVDs? Can they just hold onto them as long as they want? And when they want another one, we’ll just mail it back and we’ll replace it. There’ll be no due dates and no late fees.”
The service Netflix introduced in 1999 changed the struggling startup’s fortunes, attracting 200,000 subscribers, winning loyalty from those who not only appreciated its novel approach to DVD rentals, but also its recommendation engine and the community created by its website. At the time, prior to the arrival of social media, chatrooms and message boards were the primary means of expression. Netflix subscribers could build “queues” of desired rental titles and trade reviews with other subscribers. Compared with Blockbuster, whose khaki-and-blue-shirt staff uniforms and regimented aisles were directly inspired by mass brands like McDonald’s, Netflix emphasized the individual. It encouraged customers to rate each movie, reflecting those ratings on its site. It was also beginning to gather data from each subscriber that would become a revolutionary tool.
Netflix’s subscribers weren’t the only ones who were enthusiastic. Silicon Valley investors had pumped $100 million into the startup, allowing it to grow to more than 350 employees. As the dot-com boom approached its frenzied apex, bankers sniffing another initial public stock offering in the air, began “circling us like vultures with briefcases.” When the tech bubble burst in March 2000 the easy money dried up. The company was on track to lose $57 million when Hastings and Randolph traveled to Dallas, Texas in early 2000, with an exit plan in mind: to convince Blockbuster CEO John Antioco to buy the startup for $50 million and let Netflix build its online presence. The head of the $6 billion home entertainment giant turned them down flat. The rebuff came as little surprise. “What did we possibly have to offer that they couldn’t do more effectively themselves?” Hastings reflected in his 2020 book, No Rules Rules.
Netflix soon hit a wall, forcing Hastings to lay off one-third of the company’s workforce, winnowing the staff to its highest performers — the “keepers” — in a wrenching period that crystallized a key element of the company’s performance culture. “This was my road to Damascus experience, a turning point in my understanding of the role of talent density in organizations,” Hastings wrote. The holidays delivered the struggling service an unexpected gift: DVD players were popular purchases, fueling a surge in DVD-by-mail subscriptions. That set the stage for the company to go public in 2002, raising $82.5 million on the strength of a subscriber number that now seems quaint: 600,000.
As Netflix grew, Hastings recruited key executives, including Ted Sarandos, the gregarious executive at video producer ETD and Video City/West Coast Video retail chain. The two men couldn’t be more different. Sarandos grew up in a poor neighborhood in Phoenix, Arizona. The fourth of five children, Sarandos’ paternal grandfather emigrated to the U.S. from the Greek island of Samos, changing his surname to Sarandos when he arrived as a teenager. His mother liked to keep the TV on all day while his father worked as an electrician. Both were high-school dropouts. “My parents were very young, so I was raised by wolves,” he liked to joke. Needing only about five hours of sleep a night, Sarandos grew up drinking thirstily from the cup of popular culture. New Hollywood films helped define his childhood, among them The Godfather, Mean Streets and Dog Day Afternoon. As a teenager, Sarandos got his parents to drop him off in downtown Phoenix to watch the filming of Clint Eastwood thriller The Gauntlet. “It was the hottest day in Arizona history,” he said. “I sat out all day and watched them shoot, and my tennis shoes literally melted on the street, it was so hot. It was just to get a glimpse of this magic that was happening. … I got close to the gods that day.” Later, working for his high school newspaper and dreaming of a journalism career, he interviewed Ed Asner (then starring on TV as irascible newsroom leader Lou Grant). He soon realized he sparked more to Asner’s show-business stories than to the craft of journalism.
While still in high school, Sarandos began hanging out at Arizona Video Cassettes West, where he became a regular, and cajoled the store owner to hire him. The store wasn’t too busy, so he’d drive his Ford F-150 pickup there and spend his days watching videos. Eventually, he viewed its entire collection of VHS tapes, developing an encyclopedic knowledge of film that would serve him well later in life, as Netflix’s head of content and eventually its co-CEO. Sarandos recalled how people would seek him out for recommendations, an experience that helped him appreciate the remarkably diversity of people’s tastes. He dropped out of college to manage the video store chain where he had worked in high school. This segment of the retail industry was taking off in the 1980s as VCRs became mainstream. Working at a series of chains that were smaller rivals to Blockbuster, he hit on DVDs as a growth area while helping lead Video City and West Coast Video, two mid-level chains that merged. Many of its stores were in medium-sized markets near U.S. military bases, where many families had disposable incomes and a zeal for the latest in electronics.
Sarandos struck a deal with Hollywood studios, who gave the stores an inventory of discs for free and then shared in rental revenue. He remembered first encountering Netflix via a card it had inserted into DVD player packaging, inviting customers to sign up and get 10 free rentals.
Joe Amodei, a film producer and executive who befriended Sarandos in the 1990s during his time working at Turner Broadcasting, recalls their shared taste in music and movies. Sarandos worshipped musical icons like Frank Sinatra, Tony Bennett and Bruce Springsteen and emulated their All-American irrepressibility. Compactly built, with wide-set eyes and dark, wavy hair, Sarandos always had a surplus of energy. When he met Amodei, Sarandos was working at East Texas Distribution, a major video wholesaler. “He would shotgun calls to stores around the country, pitching my movies,” Amodei says. “It was like he had made these movies himself, he was so passionate. We bonded almost immediately.”
Hastings, by contrast, was a child of privilege. His maternal great-grandfather, Alfred Lee Loomis, was a Yale- and Harvard-educated Wall Street tycoon who made a fortune financing electric utilities. He socked away cash on the eve of the 1929 stock market crash and lived through the Depression in high style, backing a yachting syndicate that competed in the America’s Cup and acquiring much of Hilton Head Island, S.C., for use as a personal playground. He then turned his attention to science, bankrolling an experimental physics lab in Tuxedo Park that attracted such luminaries as Albert Einstein, Enrico Fermi and Ernest Lawrence. Reed Hastings grew up in an affluent suburb of Boston with well-educated parents — his mother was a Wellesley grad, his father, magna cum laude at Harvard. Hastings attended private schools, then surprised the family by choosing Bowdoin College in Maine, which was a selective and rigorous school but outside of the Ivy League. He spent two years in the Peace Corps in Swaziland, teaching math to high school students, before returning to the U.S. to study artificial intelligence at Stanford.
The two executives would develop a successful left-brain/right-brain collaboration spanning more than 20 years at Netflix. Hastings held things down in the company’s Los Gatos technology nerve center and corporate base, while Sarandos fostered a creative hub in Los Angeles. Sarandos, who was living in the Southern California coastal enclave of Palos Verdes when Netflix hired him, persuaded Hastings to let him stay put. He felt it was a more natural way to establish ties with the creative community than being based at the company’s Silicon Valley home in Los Gatos. “It turned out to be a good strategic bet,” Sarandos later recalled. “You can respect the tech culture in the entertainment community, and the entertainment community can respect the tech culture. But they hardly ever get together, mostly because it’s just a tribal thing. Most of Hollywood was convinced that the tech guys would come down and clumsily write big checks and would be all gone pretty soon.” Unlike the new arrivals from up north, he added, Hollywood executives felt, “‘We’ll be here like we have been the last 100 years doing this. We’ve seen this come and go, come and go.’ And then the tech guys were convinced that all the studio guys were stupid and they were doing everything wrong. It wasn’t a great culture to work together. But because I was [in LA] and started building out the team there,” Netflix got traction. Ultimately, Sarandos concluded, “It’s a relationship business.”
From the book, Binge Times: Inside Hollywood’s Furious Billion-Dollar Battle to Take Down Netflix. Copyright ©2022 by Dade Hayes and Dawn Chmielewski. Reprinted by permission of William Morrow, an imprint of HarperCollins Publishers.
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