Transcript

Paul Ford Oh, you know, that was—to hell with Blockbuster! They sucked! [Rich laughs] There have been a lot of corporate deaths in this—in our lifetime. I have no tears for Blockbuster. 

Rich Ziade No, it was just—It was—

PF Oh they just milked you with those late fees. 

RZ And the late fees and the—

PF Oh and it was—

RZ You had to know the guy if you wanted the movie the day it came out cuz there were only a certain number of copies. 

PF You could never the movie you wanted and then you’re just watching somethin’ with Harvey Kietel from 1983 where he—

RZ Yeah, yeah, exactly.

PF A cop in Las Vegas. And you’re like, “Ah, what am I doin’?” [Music plays alone for 18 seconds, ramps down.] Rich, what do you do when you go home at night? 

RZ [Heavy sigh] I read poetry. 

PF Ah, no you don’t. 

RZ I’m lying. 

PF You have like a 180 inch television. 

RZ It’s a big TV. I don’t know why you’re exaggerating. 

PF Literally the minute you bought it, you were like, “I need to get a bigger TV. [Music fades out] This is garbage.” 

RZ I’m ready to throw it in the garbage. 

PF You’re a big TV person. You don’t watch—I’m not saying that you watch a ton of TV. You’re just a big TV person. 

RZ It’s a large room, I wanna have a big TV in it. 

PF What’s on your TV? Is it cable news?

[1:13]

RZ No. I watch Netflix, Paul. I know where you’re taking me here. 

PF What a surprise that I would take us there. I mean, look, we all do. It’s part of our life. And we have an early leader from Netflix, on Skype, to tell us how Netflix became Netflix. 

RZ Are we taking CEO or what? 

PF I think we’re talking CEO. 

RZ [Laughing] Ok. 

PF Or what! 

RZ Yeah. 

PF We’re gonna find out! 

RZ And co-founder. 

PF Yeah, and co-founder. So let’s rope him into this conversation, he’s been quietly waiting. 

RZ [Chortling] Patiently waiting. 

PF Mark Randolph, welcome to Track Changes. 

Mark Randolph It’s a pleasure to be here, guys. 

PF So, tell us what was your role; when were you there. Netflix, a little company literally everyone has heard about at this point. 

MR Well I was really there from the very, very beginning, even before it was Netflix, in fact. I mean it all started, you know, in a car, brainstorming ideas. So, I was there when Netflix might’ve been personalized shampoo, or custom milled baseball bats. 

PF So you’re in this car, you’re driving along, “We gotta do something together.” Who was in the car? 

MR So this was myself and my business partner at the time, Reed Hastings [sure]. Both of us working together at a big geeky software company which was being acquired and we were being, as they euphemistically put it: “made redundant”. Or being fired, in other words, and both of us go, “Alright, what next?” And I wanted to start another company. Reed was gonna go off and get a higher degree in education but wanted to keep his finger in. So, we go, “Ok, let’s come up with an idea together. Reed’ll be the angel investor, and I’ll take off and start and run this new company.” But, of course, that begs the question: what? And that led to those months of carpooling from Santa Cruz, California up over the Santa Cruz mountains into Sunnyvale. And trying to figure out what is this next new venture gonna be. 

[3:09]

PF Now what had you been doing before that? What were you guys up to? 

MR So, my background is I’m a direct marketing geek. A junkmail king [chuckles], so my experience is all in how to mail things efficiently. The catalogue companies that I had started I was all about how do you do customer service well, how do you ship things to people. I had done magazine circulation, so I knew subscriptions . . . I was brain metrics focused. And you can kinda see all these things are kinda bubbling in my mind when I’m watching the internet come along [mm hmm]. And kinda realizing, “Wow. This ecommerce thing is really . . . perfect for what my background and skills are.” Reed was coming from a position of he had just founded a company called Pure Software. So, he was the technologist. His background’s a mathematician. So he shared this love of metrics with me . . . So, we kinda combined, as any good startup does, you take the skills and experiences and backgrounds of your two founders and combine them and mix them in a pot and . . . see what you come up with. 

PF So were you driving by Blockbusters on your way to Sunnyvale [Rich laughs]? 

MR Back in 1997, I think it was probably impossible to throw a stone and not hit a Blockbuster. 

PF This is true. Our younger listeners won’t remember as much but think Starbucks but filled with videos and that’s—that’s what the world looked like in 1997. 

RZ Well, clarify . . . hardware like actual physical DVDs and videotapes, at one point. 

PF That’s right. Just a whole shelf dedicated to the movie Titanic. 

RZ [Laughing] Yeah, that’s right. 

MR It was a distinctly unpleasant experience, very people would head to a Blockbuster and sit down and have a cup of coffee. I mean that—it was serving a need but Blockbuster was a hated experience by people. 

PF Oh I loved those late fees. Remember that? That was just—ah they liked to punish you. 

[5:05]

MR [Laughs] Yeah, that fact was one of the methodologies that Reed and I were using to brainstorm ideas was starting off from the point of, “What do we hate?” Not just about video rental . . . We are sharing all these bad experiences and saying, “Which of these is the ripest? Which can we fix?” And video rental was actually a pretty tempting target because it was a big category. I mean, back then Blockbuster had 9,000 stores or something like that, and it was an eight billion dollar category. But you have to think about it, it’s kind of a stupid idea, too. When we told people we were gonna try doing video rental by mail, everyone had that same response which is, “That’ll never work because why would I rent from you and have you mail me a movie when I can just go down the street and snag one from a Blockbuster?” And, in fact . . . as I researched, it did turn out to be a bad idea. In fact, back then video rental was on VHS . . . and we realized pretty quickly you just can’t ship VHS tapes back and forth to people. And so that idea got thrown under the scrap heap. But, anyway, so then a couple of months go by and all of a sudden, this new technology comes out called a DVD . . . And we go, “Wow. This DVD actually might change things because it’s small and it’s light and you can fit into a envelope [sic]. We can actually use the US Post Office for this.” So, we did this classic experiment where we, all of a sudden, turned the car around mid-commute, drove down to downtown Santa Cruz, went to a used record store, and bought a used music CD [ok]. A Patsy Cline CD, to be honest; went two doors down, bought a little gift envelope, the type you put a greeting card in; put the CD in the envelope; went to the Santa Cruz Post Office and mailed this CD to Reed’s house. And then the very next morning when Reed picked me up to go [chuckles] to work . . . he goes, “It made it.” And it made in one day, unbroken for the cost of a first class stamp and that simple experiment was the moment we said, “Wow, this might change things.” Cuz all of a sudden, now, we can do video rental for the price of a stamp. And that’s what started really the idea that maybe we could actually build a business out of video rental by mail. 

RZ That one stamp. 

PF One sta—

RZ—is to blame for endless episodes of cartoons that make me fight with my children.

PF [Chuckles] From little things, from little things. 

RZ From little things come bigger things. 

PF All I’m thinking is that this thing where you’re commoditizing your outrage at bad quality products . . . I’m looking at my—We could be doing that. We are completely filled with outrage most of the time, and what do we do? 

RZ Complain. 

PF We do podcasts. 

[7:50]

RZ [Laughing] We do podcasts! So, Mark, jump ahead for—I mean, ok, that’s a revelation. And then you guys had another revelation, now are you there for the transition as the idea of streaming content on the internet starts to take hold? Like that’s another transformational moment. 

MR Absolutely! And in fact it’s a transformational moment that took ten years to transform. So of course from day one we knew that people would be eventually downloading movies or streaming movies. And it was—once it was on a DVD, it was digital. 

RZ Ok, so draw the timeline for me. When you mailed that CD, that’s ‘97. Ok, so now you’re thinking in ‘97 and the internet, I mean just to draw it out, it’s a baby. 

PF There’s like four books on Amazon . . . at that time. 

RZ It’s tiny. It’s two, three years old in terms of—from a commercial perspective and so you’re thinking, “Ok, it’s coming.” Even at that point? 

MR Well, let’s talk about, again, what’s happening in 1997. In 1998 when we actually launched, Amazon was around. Amazon only sold books, if you can believe it. They were a bookstore. And even though a lot of pe—everyone said, “It’s just imminent before everyone is streaming movies; everyone is downloading movies.” Reed and I knew that, yes, eventually that was absolutely gonna be true but the big disagreement was when is eventually? Some people thought, of course, it’s gonna be six months but I think I was pretty cynical. I mean for one: all the content was owned by Hollywood, and after having seen how the music industry had been decimated by music downloading, they were completely panicked and paranoid about releasing any of their movies digitally. And the other one of course is that back then if you wanted to even try and watch something rudimentary video-like in your house, you were watching it on your computer. You were not watching it on Rich’s, you know, 220 inch television. So there was all kin—Of course even the bandwidth wasn’t there. I mean maybe you were starting to see high speed or relatively high speed stuff in businesses but no one had high speed internet to the home. So we thought, “This is gonna take a long time.” So the challenge for us was how do you build a business which is relevant in a day when people are getting their bits on DVDs but still have the company relevant when the world changes and you can get them by download. But that took, you know, ten years. But if I look back to one of the decisions that we made early, early, early was . . . we cannot position this company around DVDs. This cannot be the world’s fastest shipper of plastic. And have that be our calling card . . . We had a position—but at the same time if we had said, “We are the movie downloading guys,” we would’ve gone bankrupt in probably two or three hours because there was no content and no one could actually download anything. So you had to build something which was delivery agnostic and for us the positioning became, “We’re gonna become a place that always has entertainment that you like.” And that works either way. It’s a great positioning if you’re shipping people plastic DVDs; it’s great once they can download it or stream it; it’ll be great when they can beam it, I don’t know, telepathically into your fillings or something . . . but it was the way of being positioned so we could straddle that changing landscape. 

[11:21]

RZ Ok. Jump me to the time where like, “Ok, you know what?” One of the things—

PF I wanna hear about the hypergrowth. That was like a good hyper growth stage. 

RZ Well, no, I think I wanna ask—this could either be dumb luck or brilliant, right? Which is when they were ready to move over so that actual content could be streamed, a lot of the infrastructure in terms of the users and the data and sort of all the scaffolding was in place. Right? And I always thought it was unusual how much—remember they had that contest where I think they gave out a million bucks for the best algorithm to predict what people wanna watch next and all this stuff—

PF Yeah, I do, I remember all of this. 

RZ And, you know, but in hindsight I’m thinking, “Wow, they knew all along that this coming.” Like, they needed the scaffolding; they needed sort of the core infrastructure in place—

PF Why are you asking me? 

RZ Well, I wanna know! Were you guys lucky?!? I mean or was this—were you starting to think about this? 

MR Well, it was a combination of the two: of course we’re lucky . . . I mean part of building a company is preparation and opportunity but a huge amount of it is luck. For example, the fact that Reed and I went back and forth brainstorming video rental by mail, and VHS didn’t work, and then lo and behold, 45 days later, they released the DVD. If that hadn’t happened, that idea would’ve been gone and I’d be talking about custom dog food but no one would care about that. Another thing is we also bet on DVD back when DVD was in test market. DVD had gone the way that the laser disc went, that would’ve been the end of that. If Blockbuster had responded differently when all of a sudden they realized we were a threat. So, absolutely luck is in place but the question about were we smart about the positioning? No. That was just a good, smart business decision: realizing you could not be all about DVD cuz you knew the world was gonna change. 

RZ Let me ask you this, Mark. And if you can answer this, I mean, it will change many people’s lives. The history of business is littered with examples of businesses whose culture hardens and calcifies and is very oriented around a particular way of doing things and then a massive pivot is necessary and they just can’t do it. It’s too hard to pull it out by its roots and pivot. And what happens is you get eaten alive, right? And that happened to Blockbuster, in fact. I remember Blockbuster online came out like four years too late, and it was buggy, and they just couldn’t become that, right? So, now, you’re presented with this situation where you’re seeing streaming is coming; you probably had it nailed down with like logistics around mail order and the warehouses and all that stuff; and all of a sudden, you gotta become something you’re not. Right? Walk me through how—

[14:12]

PF Wait, wait, we need to—If you’re gonna ask this question, you have to say the word. The word is Quickster. 

RZ I don’t know what that is. 

PF Oh! That’s—we’ve all forgotten Quickster. [Chuckling] Mark hasn’t forgotten Quickster. 

MR Well there’s a couple of things that you need to be aware of here. The first thing is that I don’t work at Netflix anymore. And, in fact, I haven’t worked there for quite a while. I was the early—I was the first CEO. I was kinda the co-founder here . . . but I moved out of Netflix probably in 2004. Which was before Quickster. I can talk about Quickster briefly. Just for people who don’t know: Netflix, you know despite [chuckling] our early struggles and I talk a lot about these really struggles in That Will Never Work which is the book about the starting and growing of Netflix. But eventually you get some scale here. And you’re doing DVDs, you’re doing wonderfully, and then along comes this other business you need to be in which is streaming. And now you’re running two businesses simultaneously and then don’t neatly coexist. It’s confusing. The pricing is different. Some titles are available to stream, some are available on DVD. Some countries offer streaming, some only offer DVD. And you come down to this point where you go, “We really need to focus. We need to recognize that trying to do two things well is really hard.” And this was exactly the situation that was facing Reed and the rest of the company in those days leading up to their decision to split the company . . . And they were gonna spinoff, one: this DVD business, as a company called Quickster, and maintain the other company . . . doing streaming, called Netflix. 

PF That’s a product decision. It’s a sort of—

RZ A branding decision [yeah], branding strategy—

MR It’s more than—it’s not a branding decision, it’s an operational decision . . . It’s saying that, “If we’re gonna succeed in streaming, we have to do everything which is optimized for streaming. And if we have all these decisions to make we can do this, we’ve gotta remain some kind of reverse compatibility.” Anything you do which is slowing yourself down and achieving your main goal . . . is gonna hurt you. And what you alluded earlier to, all these companies having this problem, it’s because they’re always trying to hold on to the past at the expense of the future. And your future customers don’t give a crap about your past business. They don’t care if you have multi-level distribution; they don’t care if you have a super high priced salesperson who’ll be pissed if you go direct. They just go, “Wow, there is someone who is doing this more efficiently,” and they’re gonna leave and go to that person . . . And I’m so familiar with this because at the beginning, early on, I mean probably in the first year, Netflix was starting to take off. This was 1998 . . . ‘99 and we were crushin’ it! But the problem is we were crushing it because we were selling DVDs not renting them . . . In fact, 99 percent of our revenue is coming from selling DVDs. And don’t forget, this is a company that we had [chuckles] founded on the principle that we were gonna be a rental company. Not only was it really bad that all the revenue was coming from sales, we knew that Amazon was about to enter sales and that was gonna sink us. 

[17:32]

MR [Continued] And we faced the exact same problem the company faced many years later with Quickster, in that doing both at the same time was brutal! Some you could rent, some you could sell, the homepage was complicated, operations, shipping . . . and we made the decision early on that if we’re gonna succeed, we gotta pick one thing and do it really well, and the tempting thing of course was to say, “Let’s do sales. That’s paying 99 percent of our salaries,” but we also knew that if we picked sales, eventually it would be commodity business and eventually the margins would get down to zero, and eventually we’d be out of business. So we said, “It’s probably better to risk everything and focus everything we have in making this stupid rental business work and then try and preserve, against all odds, the sales business . . . And had the courage to walk away entirely from 99 percent of our revenue in a single day, in order to really commit ourselves to making rental work [music fades in, plays alone for eight seconds, ramps down]. 

PF Hey Rich? 

RZ Yes, Paul? 

PF What’s your favorite all time Netflix show? 

RZ Mmmmmmmmmmm—

PF The Queen. 

RZ Mmm. The Queen is good. I like The Queen. It’s not bad. It’s not bad. 

PF Yeah, I never got all the way through it but definitely like the parts I watched—

RZ God, it’s hard, it’s all jumbled up in there. 

[18:52]

PF It’s literally like, “Who is gonna be able to get the jewellery [yeah] across the hall in a timely manner?” [Rich laughs] As opposed to like D-Day. You know? But anyway The Queen’s really good. 

RZ Quick pitch: a docuseries, Last Chance U is very good. 

PF Ok. Good. 

RZ Yes, very good. 

PF Ok, what’s the thing you hate the most? 

RZ On Netflix? 

PF Yeah. 

RZ Ooh. 

PF You know what it is for me? Dinotrux. 

RZ We are a products studio, Paul. 

PF That’s right! 

RZ This is about product and about product—

PF No, I mean the thing that Netflix is on the digital side is a platform where you can search, explore, and have recommendations about videos that you might wanna watch . . . And we can build that for you. 

RZ Yup! We are a product studio here in New York City, we have designers, engineers, product leads. 

PF Yeah. 

RZ Crazy client list. Just go check us out at postlight.com. Very cool stuff. 

PF hello@postlight.com, if you need us. [Music fades in] Alright, let’s get back to the show [music plays alone for seven seconds, ramps down]. Well how big is the organization at that [music fades out] point? 

[19:52]

MR Well, back then we probably had 10,000 customers. 

PF Ok, and how many employees? 

MR 30. 

PF Ok, so moving 30 to a new model is better than moving 3,000. 

MR Oh! But the thing is: you’re running on fumes at that size of a company [hmm]. So it is true, it is easier to do but it is just as scary and just as terrifying. In fact—but the reason I tell that early story is that it is part of that Netflix DNA . . . which is this complete culture and courage that says, “You have to always do what’s right for the future. No matter what the cost to the past.” . . . And we had the courage to do it back then when we had customers in the tens of thousands and I wasn’t there at the time but Reed had the courage to do it with Quickster when they had millions of customers . . . And I have no doubt that if a similar situation comes up now, they’ll have all the cards to do it again even though they have 150 million customers. It’s a cultural imprint that is part of what it means being a startup. Being a startup is not how many employees you have; it’s not what your revenue level is; it’s how you act . . . and you can have a 30 person company who acts like a stodgy old corporation, and you can have a 7,000 employee company like Netflix which continues to think and act like a startup. 

PF Tell us about leaving. What was this like? You’re the CEO; you’ve built this thing up; then what happens? 

MR Well, one of the things you learn if you’re lucky as you get older is two things. One of them is what you’re good at, and [chuckles] one of them is what you like. And I was pretty fortunate that by the time I was in my mid-forties, I knew those things, and what I really enjoyed was early stage stuff. I loved those early struggles. Finding them as a repeatable scale of business model; recruiting people; that early fundraising; that rallying the team; and, if I can blow my own horn for a second, I was actually pretty good at it. But as a company gets success, ironically you’re working your way out of a job because the skills which make you a phenomenal early stage executive . . . are not the same skills once a company hits scale. And after Netflix had gone through its IPO, and had really nailed down the business model and was transitioning into streaming . . . it was a different company. And even though I loved that company, I really wanted to fight those battles and right those wrongs, you begin to realize that, “I don’t really love working there. These aren’t the types of day to day things that I enjoy doing,” and began realizing that I have choices. And began a period of working myself slowly but methodically out of a job. 

[22:43]

PF Who did you tell first? 

MR My wife [laughs]. 

PF Ok, that’s good. That’s a good place to start. 

MR It is a good place to start. But the thing is: one of the cultural norms at Netflix besides this courage piece . . . is brutal honesty. And it is the way Reed and I have treated ourselves from the very beginning and, you know, culture after all is not what you say or what you carve into your cornerstone at your building, it’s how you act. And it’s how you treat each other and how you treat your employees. And Reed and I have always been brutally honest with each other. And so at every moment Reed and I were able to say, me telling him, “You know, this isn’t as fun for me anymore.” And him telling me, “Well, quite frankly, you’re not as good at some of this stuff than some of the people that we can bring in are.” And both of us kind of realized it was time to begin thinking about a way to manage an exit. And so I began moving myself more into the areas of the company that I really still had a passion for, which was product and customer and in fact one of my final projects at Netflix was the early stages of doing the streaming research. Figuring out what are the right technologies we can use; figuring out what’s the right content we can develop. And actually, interestingly enough, my very final project was working with a gentleman named Mitch Lowe on a kiosk for Netflix. We had a little store—We were at a Smith’s supermarket in Las Vegas. And we were hacking it. We didn’t actually build the kiosk, we faked it. And had a model trying to figure out how customers would react to a kiosk, and I spent one summer in Las Vegas, Nevada in a supermarket, watching people emulate how they would use a Netflix rental kiosk. And that project was fantastically successful but when we came back, we decided for focus reasons not to make it part of Netflix. So instead, I said, “Ok, I think this is a good time to leave.” And then my partner, Mitch Lowe, he went on to found another little company with that idea called Redbox. 

RZ Oh Redbox Redbox. They’re still out there aren’t they? 

MR They sure are. Often those little kiosks—the fake kiosk in the Smith’s supermarket in Summerland, Nevada—

RZ This—the common thing, you know, these stories have to start somewhere. They don’t start grand, they start small. They’re just ideas that are getting tossed around and then they catch fire. 

MR And there’s so many more stories like this! You know in That Will Never Work which is my new book it really is the untold story about Netflix . . . And it is all these little tricks and turns and disappointments and failures and successes that show how we went from like a Patsy Cline CD to a publicly traded company. 

[25:17]

RZ Yeah so tell us about this book, Mark. 

MR Well, it’s partly a great story because there are so many interesting things here. I mean it’s about accidentally shipping porn to customers when we were trying to be the first to market with a Bill Cinton testimony DVD. It’s about how [chortles] again, how it could’ve been baseball bats and shampoo [Rich laughs]. It’s about all these times when people would tell you it would never work and you persevere through it. It’s about all the times you don’t take no for an answer . . . But at a different level it’s something different. It’s also trying to share with people all these things that I’ve learned from 40 years as an entrepreneur that other people can use trying to turn their ideas into something real. At it’s really most basic level That Will Never Work is really my attempt to show you how we took something that everyone said would never work and turned it into the company it is today. But how those exact same principles can be used for anybody, whether you’re a business person or not, anyone who has an idea, how you can try and make that idea real. 

PF Is this book available? 

MR Well, your timing is perfect because as a matter of a fact That Will Never Work is available this week, available on Amazon, Barnes & Noble, and of course at your local retailer. 

PF Alright, well everybody knows what to do now. 

RZ Long live the local retailer. 

PF What are you up to now? 

MR So after—I left Netflix probably almost 15 years ago now, and I was in my mid-forties and I—and Netflix was actually my sixth startup. So I wasn’t sure I had it in me to do another one, but, you know, once you’re an entrepreneur, you’re always an entrepreneur and so I couldn’t just walk away. So these days I get my fix by mentoring other early stage entrepreneurs as a CEO coach and it’s the perfect thing for me . . . because I get to get all the things I loved about Netflix and I get to sit around a table with super smart people solving really interesting problems but I then get to go home at five o’clock whereas they are the ones now staying up all night working on it. The most recent company that I was a mentor for, I was a mentor to the founders from day one was a company called Looker Data [mm hmm] which we just sold to Google. [Great] So sometimes these things work out phenomenally well but that isn’t even the point, it’s the fun of the struggle. 

[27:42]

PF Alright, The Fun of the Struggle. We have the title. 

RZ Well, no, he’s already got a title—

MR Believe me, you’ll hear, “That will never work,” way more than you hear, “The fun of the struggle.” 

RZ [Chuckles] True. True. Mark, thank you so much to open the box and see how it all came together. 

MR Oh, really a pleasure talking with you guys as well. It was a great time and I’m always happy to chat about it. 

RZ One of my favorite quotes in the world is by Winston Churchill and it goes like this, it goes, “When you’re going through hell, keep going.” 

PF Ok. 

RZ And I feel like that’s—cuz failure is gonna be in the mix. It’s just gonna be there. So I think that’s what was fun about this is hearing about you can’t mail a VHS [music fades in]—for those that know a VHS tape is the size of a shoebox, a small children’s shoebox. 

PF The thing that’s—In Christian theology, you can’t get out of hell, so he’s basically just saying—

RZ It’s hell! 

PF You’re just gonna continue in hell forever. 

RZ Honestly, professionally for me in my life and maybe this is out of whack for like this podcast and the flow of it but success is kind of just layers of hell. It’s like Dante. What’s Dante? He’s got seven floors or somethin’?

PF Yeah—

RZ It’s like a seven storey apartment building. 

PF I mean I definitely thought success would feel differently than it did. 

RZ It just gets harder, man. Like it just grinds harder. 

PF Well, and you get more and more isolated. 

RZ Yeah. 

PF Yeah. Anyway, people should really be out there feeling for us [Rich laughing], that’s what this is about. The two co-founders of Postlight with a successful agency, our pain is really what matters. 

RZ This is Track Changes by Postlight. We are a digital products studio here in New York City. Give us five stars on iTunes and if you’ve got anything you wanna talk about or need help with platforms and digital products, reach out: hello@postlight.com. Paul, have a wonderful week. 

PF You too! Let’s get back to it [music ramps up, plays alone for five seconds, fades out to end].