Two Stories From the Early Days of Netflix

I've read many business books written by people who started or ran incredible companies, but That Will Never Work by Marc Randolph is probably the most insightful one so far.

Marc was the co-founder and first CEO of Netflix, and his book shares many great lessons about business and life.

Here are two stories from the early days of Netflix that really stood out to me.

Many Bad Decisions Are Rooted in Short-Term Thinking

When Netflix just started, they wanted to become an online DVD rental business that could compete with Blockbuster.

The problem was that the DVD rentals were only making 3% of Netflix's revenue at the time, while their DVD sales were bringing over $100k per month. They wanted to be in the online DVD rental business, but it wasn't making any money.

There were two obvious choices in the situation:

1. They stop the rental business and focus all their energy on online DVD sales.

2. They keep the DVD sales going because it's making a lot of money and use the money to grow the online rental business.

Marc Randolph and his team picked none of the obvious choices. They decided to stop the online DVD sales completely and only focus on the DVD rental business instead.

It was an INSANELY bold move.

It was 1998, and Marc believed they were only profitable in the online DVD sales business because they were the only player in the game. He knew that it won't be long before Amazon and Walmart comes in and that Netflix won't really have a competitive advantage in the online DVD sales business in the long run.

The online DVD rental business on the other hand seems to be the future and it's not something their competitors can easily figure out because of the many operational difficulties.

Marc also noticed that offering both DVD sales and rental was confusing many of the customers and that they would have a much better chance of beating Blockbusters if they just focused on the online rental.

"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 are not only dissimilar but actively impede each other." - Marc Randolph, That Will Never Work

Takeaways from the story

Recently read a tweet that I really liked. It's about how a big portion of the bad decisions we make are caused by short-term thinking.

People often optimize for short-term pay-offs rather than long-term payoffs.

Marc Randolph stopping the DVD sales business to focus on the rental business is a good example of making good decisions based on long-term payoffs. Imagine how hard it was to walk away from something very profitable to work on something that was barely making any money, but had a higher potential upside.

Some areas in your own life that you might want to optimize for long-term pay-offs: where you choose to live, who you choose to marry, your health, and your career.

The other takeaway from this story is probably the power of focus, especially when you have limited time and resources.

The Spirit of Testing Things Out

The second story is about how Netflix tried to make their online rental business more profitable after abandoning DVD sales.

The Netflix startup team was burning through their investment capital at an incredible pace. Marc's wife even hinted to him about potentially selling their house, pulling their children out of private schools, and moving to a cheaper neighborhood.

Everyone at Netflix was "pulling ideas out of their asses" and running many different tests to find a way to make the online DVD rental a sustainable business.

The company was pretty close to shutting down.

In the end, they combined three ideas they didn't think were complete garbage and tested it with 10% of their user. It became the early version of their subscription service, and people loved it!

Turns out their hypothesis was correct. People prefer renting multiple DVDs at once for a set monthly rate instead of paying to rent one DVD at a time.

The subscription model was a MAJOR milestone in Netflix's success, but the funny thing was that Marc and many of his other team members didn't think the idea would work... they just didn't have any better ideas left to test.

Takeaways from the story

"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." - Marc Randolph, That Will Never Work

Having the spirit of testing and figuring things out is incredibly powerful because people usually do the opposite during times of uncertainty. They make decisions based on fear and they try to play it safe.

If Netflix played it safe, they would've still tried to focus most of their energy on online DVD sales. They would've also been acquired by Amazon for a solid 8-figure exit — Yes, Amazon had offered to buy them at one point!

But they didn't. The Netflix team just kept experimenting and testing to make their online rental business a success.

Sometimes playing it safe might be a good choice, but don’t play it safe because you are scared. Life's too short for that, so swing for the fences for things that really matter to you.

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Thanks for reading!

-George 🐙